Hydro Annual Report 2011b

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92 FINANCIAL AND OPERATING PERFORMANCE Extruded Products Weak demand and increasing overcapacity in Southern Europe has resulted in significant pressure on margins in Europe. Measures implemented across our European general extrusion operations have reduced our operating cost per mt, partly offsetting margin declines. A substantial cost-improvement program has been implemented for our building systems business, targeting annual savings of Euro 40 million compared to 2010 by the end of 2012. This program has contributed to lower operating costs in 2011, and further measures are expected to improve our competitive position in this sector going forward. Underlying results for our precision tubing business were higher than in the previous year, driven by strong demand and the positive impact of our cost reduction measures. Underlying results for our extrusion operations in the Americas also improved, benefiting from higher volumes, continued strong cost control and efforts aimed at targeting higher value business. Energy Operational and financial information Year 2011 Year 2010 % change prior year Underlying EBIT (NOK million) 1 883 1 416 33 % Underlying EBITDA (NOK million) 2 018 1 540 31 % Direct production costs (NOK million) 1) 468 515 (9) % Power production (GWh) 9 582 8 144 18 % External power sourcing (GWh) 2) 8 675 8 539 2 % Internal contract sales (GWh) 3) 12 446 12 336 1 % External contract sales (GWh) 4) 1 187 1 968 (40) % Net spot sales (GWh) 5) 4 624 2 380 94 % 1) Includes maintenance and operational costs, transmission costs, property taxes and concession fees for Hydro as operator. 2) Includes long-term sourcing contracts and industrial sourcing in Germany. 3) Internal contract sales in Norway and Germany, including sales from own production and resale of externally sourced volumes. 4) External contract sales, mainly concession power deliveries and volumes to former Hydro businesses. 5) Spot sales volumes net of spot purchases. Underlying EBIT for Energy increased in 2011, mainly due to higher production and lower area price differences, partly offset by lower prices. In addition, strong results from commercial activities contributed positively to underlying EBIT for 2011. Direct production costs declined in 2011 due to lower transmission costs. The decline in external contracts sales volumes resulted from lower sales to former Hydro businesses. Other and eliminations Other and eliminations NOK million Year 2011 Year 2010 % change prior year Underlying EBIT (389) (945) 59 % of which eliminations 190 (221) >100 % Eliminations is mainly comprised of unrealized gains and losses on inventories purchased from group companies, which fluctuates with product flows, volumes and margin developments throughout Hydro's value chain. Underlying EBIT for 2010 included costs related to the acquisition of Vale's aluminium operations of about NOK 100 million.
Items excluded from underlying EBIT and net income FINANCIAL AND OPERATING PERFORMANCE Items excluded from underlying EBIT and net income Items excluded from underlying EBIT and net income To provide a better understanding of Hydro's underlying performance, the items in the table below have been excluded from underlying EBIT (earnings before financial items and tax) and net income. Items excluded from underlying EBIT are mainly comprised of unrealized gains and losses on certain 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. Items excluded from underlying net income 1) NOK million Unrealized derivative effects on LME related contracts 2) Derivative effects on LME related contracts (Vale Aluminium) 3) Unrealized derivative effects on power contracts 4) Unrealized derivative effects on currency contracts 5) Unrealized derivative effects on raw material contracts 6) Metal effect, Rolled Products 7) Significant rationalization charges and closure costs 8) Impairment charges (PP&E and equity accounted investments) 9) Pension 10) Insurance compensation 11) (Gains)/losses on divestments 12) Transaction related effects (Vale Aluminium) 13) Year 2011 Year 2010 431 489 (74) (166) (195) 609 (1) (50) 43 (156) 7 (560) 225 130 1 382 187 (151) (91) (1 184) (74) (4 328) Items excluded from underlying EBIT (3 694) 167 Net foreign exchange (gain)/loss 14) Calculated income tax effect 15) 971 (513) (78) 80 Items excluded from underlying net income (2 802) (266) 1) Negative figures indicate a gain and positive figures indicate a loss. 2) Unrealized derivative effects on LME contracts include unrealized gains and losses on contracts measured at market value, which are used for operational hedging purposes related to fixed-price customer and supplier contracts, but where hedge accounting is not applied. The amounts include net unrealized gains and losses on derivative contracts relating to our Primary Metal and Metal Markets operations and our downstream Rolled Products and Extruded Products operations. Certain internal aluminium contracts between Metal Markets and other units are measured at market value by Metal Markets but considered for Hydro's own use by consuming units. The valuation effects are eliminated as part of Other and eliminations, and excluded from underlying results. Unrealized gains and losses on derivative contracts relating to trading activities are not excluded from underlying EBIT, as these are considered to be a normal part of the trading business performance. 3) Linked to the agreement to acquire the majority of Vale's Aluminium business in Brazil (Vale Aluminium), Hydro decided to hedge the majority of the net aluminium price exposure in Vale Aluminium until the end of 2011. The hedges were aimed at mitigating the risk of a weaker aluminium price, securing a robust cash flow from the acquired assets in the transition phase. The significant part of the positions expiring after closing of the transaction are subject to hedge accounting and included in other comprehensive income. The effects of realized positions until February 28, 2011 and unrealized positions until the end of 2011, not subject to hedge accounting, are classified as items excluded from underlying EBIT. 4) Unrealized derivative effects on power contracts include unrealized gains and losses on embedded derivatives in power contracts for Hydro's own use, as well as financial power contracts used by Primary Metal, including Søral, and Energy for hedging of power prices. Hydro's Energy operations supply electricity for Hydro's own consumption, and have entered into long-term purchase contracts with external power suppliers. Energy accounts for embedded derivatives in certain sourcing contracts and for the corresponding internal supply contracts with consuming units at fair value. These internal purchase contracts are considered for Hydro's own use by the consuming units, while the embedded derivative is recognized at market value in Other and eliminations, and excluded from underlying results. Embedded derivatives include exposures to changes in forward prices on aluminium and coal, as well as currency and inflation adjustments. Reported periodic effects are also influenced by changes in the contract portfolio. The majority of physical powerpurchase contracts have a long duration and can result in significant unrealized gains and losses on embedded derivatives, impacting the reported results. 5) Unrealized derivative effects on currency contracts relate to currency effects in equity-accounted investments. The amounts include unrealized effects on long-term US dollar-denominated loans for Alunorte prior to February 28, 2011. 6) Unrealized derivative effects on raw-material contracts include unrealized gains and losses on embedded derivatives in raw-material contracts for own use. Embedded derivatives include exposures to changes in forward prices on aluminium and petroleum coke. 7) Metal effect: Rolled Products' sales prices are based on a margin over the metal price. The pricing, production and logistics process of Rolled Products normally lasts four to five months. As a result, margins are impacted by timing differences resulting from the FIFO (first in, first out) inventory valuation method, due to changing aluminium prices during the process. The effect of potential inventory write-downs is included. Decreasing aluminium prices in Euro results in a negative metal effect on margins, while increasing prices have a positive effect. 8) Rationalization charges and closure costs include costs that are typically non-recurring for individual plants or operations. Such costs involve termination benefits, dismantling of installations and buildings, clean-up activities that exceed legal liabilities, etc. 93
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Annual Report - 2011
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Annual Report - 2011 HyDRO’S REPO
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Aluminium market price weakens LME
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cost renewable energy production, w
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Corporate Management Board AnnuAl r
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• Secure stable production and fi
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Key financial information NOK milli
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for foundry alloys continued to be
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• Using viable energy sources •
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Share of non-Norwegian leaders Perc
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Capital employed - - upstream focus
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petitive supply of standard alumini
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Further improved bauxite and alumin
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Alumina production Million mt 7 6 5
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and Hydro - but both have also rest
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Operations Hydro’s primary alumin
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Plant Country Employees (per Dec. 3
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Active risk management We have deve
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Contribution margin to profit EUR p
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Flat rolled products consumption We
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Page 81 and 82: 81 FInAnCIAl AnD operAtInG perForMA
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Page 131 and 132: Description Developments and events
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F4 FINANCIAL STATEMENTS Consolidate
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F64 FINANCIAL STATEMENTS Financial
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F78 FINANCIAL STATEMENTS Auditor's
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PENDIX A2 Appendix A1 APPENDIX Term
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Hydro is a global supplier of alumi
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Hydro Annual Report 2011b

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