06Annual Report 2006 2 Main figures 2006 Highlights NOK million unless other unit indicated 2006 2005 2004 Hydro + Statoil In late 2006, a strategic decision was made to propose a merger Operating revenues 196,234 171,231 151,026 between Hydro’s oil and gas activities and Statoil, creating the world’s largest offshore operator with a strengthened platform for future Operating income Oil & Energy 46,253 43,451 31,144 growth. Hydro continues as a focused aluminium and power company. Operating income Aluminium Metal 6,362 2,694 785 Operating income Aluminium Products (83) (370) 1,072 Ormen Lange/Langeled on track Operating income Other Activities 1,277 (2) 312 The huge Ormen Lange/Langeled development project is proceeding Operating income Corporate and Eliminations (1,584) 464 (1,517) on time and budget. Gas exports started through the southern leg 52,224 Operating income Hydro 46,237 31,796 of the Langeled pipeline on 1 October 2006, and gas production is expected to start in 2007. Net income 17,224 15,542 11,394 Restructuring of Aluminium Products Return on average capital employed (RoaCE), percent 14.9 16.6 12.9 Restructuring of Aluminium Products continued with full force Investments 26,713 41,110 19,464 in 2006. We signed several agreements to divest parts of the Total assets 233,993 227,195 200,243 automotive business. Share price year-end, NOK 193.50 138.60 95.40 Further progress on safety Dividends per share, NOK 5.0 4.4 4.0 Total number of personal injuries per million hours worked was reduced by 25 percent from 2005, exceeding our goal of 20 percent reduction. Number of employees, average 33,218 33,695 36,938 Recordable injuries, per million hours worked 4.0 5.4 6.0 Record results in Aluminium Metal Greenhouse gas emissions, High aluminium prices and a more cost efficient smelter portfolio million tonnes CO e 7.5 8.2 8.9 2 contributed to the best ever financial results in Aluminium Metal. Letter to shareholders 4 Content 01: Business description 6 02: Operational review 20 Annual Report 03: Financial performance 64 04: Viability performance 106 2006 05: Risk review 132 06: Shareholder information 144 07: Corporate governance 154 Including Form 20-F 08: Financial statements 164 Appendix Terms and definitions T1 Cross reference to Form 20-F C1 Hydro’s reporting 2006 Our 2006 reporting has a different structure compared to previous years. This Hydro achieved record-high results report referred to as “Annual Report 2006” is our main report for 2006 and in 2006. So did our shareholders. includes detailed information about Hydro’s businesses, operational perfor- A strong operating performance and mance, financial performance, viability performance, corporate governance and continued high oil and gas prices financial statements. It incorporates the requirements of the annual report on together with a significant increase Form 20-F in order to meet the requirements of the US Securities and Exchange in aluminium prices, contributed to Commission (SEC), and is filed with SEC. The report is available in English. Hydro’s best financial result ever. And our strategic decision to merge Hydro’s For distribution to the shareholders, we have prepared two reports: “Financial oil and gas activities with Statoil sent Statements and Directors’ Report 2006”, and “2006 – in Brief”. The first one our share price to an all time high. fulfills the Norwegian requirements to annual reporting, while the latter one gives a short presentation of Hydro’s progress and main challenges in 2006. We celebrated a major milestone 06These reports are available in both6 English and Norwegian. for the Ormen Lange project with the opening of the southern leg of At www.hydro.com/reports the full content of the three reports are presented the Langeled pipeline. We made together, and with some supplementary information. Printed versions of good headway developing our all reports can be ordered from this site, and all parts of the reports can be aluminium businesses during the downloaded and printed, as demanded. year. 2006 brought encouraging results in important areas related Hydro’s main reporting on Viability Performance is included in the “Annual to viability, including safety and Report 2006” and on the web. environmental impact. 4 A strong start to a new chapter The trend continued in In 2006 we made a fundamental strategic decision for Hydro. In 2007 we will deliver 2006 – we delivered the results: our oil and gas division is to become part of a new, leading international off- shore company. Hydro will continue as one of the world’s largest aluminium companies, record results, yet again. and Hydro Polymers will be listed on the stock exchange or sold to become a leading The deal to merge our oil European plastics company in its own right. and gas business with Furthermore, we are leaving the magnesium business at the same time as parts of our Statoil sent Hydro’s share aluminium manufacturing business for the car industry are to find a new home outside price rocketing to historic Hydro. These are major changes, but they are part of a planned development of the levels. The prospect of a company. In 2007 we enter a new chapter in Hydro’s history – with a stronger founda- tion than ever before. We have been through significant changes before, and come out future concentrating fully strengthened. It’s been seven years since Saga Petroleum was acquired and integrated on aluminium and power into Hydro. It was a challenging, but successful process. Four years ago we took over is applauded by our the French aluminium company Technal and the major German aluminium company VAW. The year after, Hydro’s original enterprise, the fertilizer business, was divested. Our employees and the former colleagues brought with them our traditional Viking ship and a solid Hydro culture financial markets alike. into Yara International. With that as a starting point, they have developed a focused, listed fertilizer company enjoying great success. In the same way, I am confident that Statoil and Hydro together will create a new energy company with particular strengths in technology and expertise that will make it highly competitive in a tough international marketplace. 5 Letter to shareholders Why not? In our 101st year we delivered record results from our oil business and aluminium production. Returns from Oil & Energy in the form of RoaCE (Return on Average The coming years will be strong Capital Employed) were 17.4 percent, in spite of writedowns after disappointing ones for Hydro as a leading production results from the Front Runner field in the Gulf of Mexico and a strong aluminium and power company. increase in exploration for oil and gas. For Aluminium Metal, RoaCE was an impres- sive 18.7 percent, while RoaCE for Aluminium Products was negative 1.3 percent. The strong results from our aluminium operations make us particularly optimistic about Hydro’s future. The improvements in metal production and the restructuring of our down- stream activities have started to show results. Our international production of cast engine components has been sold with a profit of NOK 900 million, and in recent years we have turned Hydro Polymers around to become extremely profitable. Hydro employees deserve credit for constructive contributions, not only to increasing production, but also for having carried out challenging restructuring measures, not least in Becanour in Canada, where we decided to close production at the world’s most modern and environmentally friendly magnesium plant, because of tough competition from China. At the same time, Hydro is becoming a safer employer. In 2006, safety measured as total number of personal injuries per million hours worked, improved by 25 percent from 5.4 in 2005 to 4.0 in 2006. And indeed, so it should! The correlation between effective operation and a high degree of safety is clear. And we can still improve. In 2006 we lost a colleague in a work-related accident, illustrating that we cannot afford to relax in this area. We will do even more to ensure that each one of our employees leaves work unscathed every single day in 2007. In all areas and in all parts of the world we take great honor in acting with respect for people, society and the environment. In line with our values, we have endorsed the UN’s Global Compact initiative. The coming years will be strong ones for Hydro as a leading aluminium and power company. Our production is going well, we have control of our costs, and pro- duction of aluminium will increase significantly in 2010 when we intend to have a new and efficient aluminium plant in operation in Qatar – the largest ever built in a single operation. The world market demands more aluminium than ever before, and prices for supply several years forward were at historic high levels throughout 2006. These develop- We dared to ask the question ments give us reason to be optimistic, both in the short and long term. The reverse “Why not?” when skeptics side of the coin is that the costs of input factors are also on the rise, emphasizing dominated the arena. And we the importance of cost control. And in one of the largest construction projects in the intend to carry on doing so as Northern hemisphere, both progress and costs are reassuringly under control. The we concentrate on aluminium development of the giant gas field Ormen Lange in the Norwegian Sea was honored and power in the future. as the Global Energy Project of the Year 2006 by the American journal Platts. Praise recognizing to our ability to carry out major and demanding development projects makes us proud.