Financial results for 2007

EBIT was impacted by net unrealized derivative losses, mainly relating to LME and power contracts, amounting to NOK 934 million in 2007 and NOK 1,425 million in 2006. EBIT also included gains and losses on divestments and other cost and charges of a positive NOK 29 million in 2007 and a charge of NOK 1,540 in 2006. Results improved during the year, reflecting solid global demand and high aluminium prices.

Income from continuing operations amounted to NOK 9,158 million for 2007, compared with NOK 5,966 million in 2006. The amounts included net foreign exchange gains of NOK 2,254 million in 2007 and net foreign exchange losses of NOK 148 million in 2006. These amounts mainly relate to forward currency contracts used to hedge net future cash flows from operations, sales contracts and working capital, mainly by selling U.S. dollars and euro where hedge accounting is not applied.

Income tax expense amounted to NOK 3,075 million for the year 2007, which was approximately 25 percent of income from continuing operations before tax. The corresponding amount for the year 2006 was NOK 1,952 million, which also represented approximately 25 percent of income from continuing operations before tax.

Reported RoaCE 1) was 14.6 percent for 2007, compared with 10.7 percent for 2006.

Underlying operating results ²)

Key financial information

NOK million, except per share data	2007	2006	% change prior year
Revenue	94,316	98,752	(4)%
Earnings before financial items and tax (EBIT)	9,025	7,200	25%
Items excluded from underlying EBIT 1)	905	2,965	(69)%
Underlying earnings before financial items and tax (EBIT)	9,930	10,165	(2)%
Underlying earnings before financial items and tax (EBIT):
Aluminium Metal	8,041	8,127	(1)%
Aluminium Products	1,353	1,294	5%
Energy	1,184	1,464	(19)%
Corporate and other	(648)	(721)	(10)%
Underlying earnings before financial items and tax (EBIT)	9,930	10,165	(2)%
Income from continuing operations	9,158	5,966	53%
Items excluded from underlying income from continuing operations	(1,310)	1,845	>(100)%
Underlying income from continuing operations 1)	7,847	7,811	0%
Earnings per share from continuing operations 2)	7.20	4.60	57%
Underlying earnings per share from continuing operations 2)	6.10	6.10	-
Financial data:
Investments	5,206	4,526	15%
Adjusted net interest bearing debt (net cash)/Adjusted equity ratio 3)	(0.05)	0.10	>(100)%
1) See section later in this report “Items excluded from underlying EBIT and income from continuing operations” for more information on these items.
2) Earnings per share from continuing operations and Underlying earnings per share from continuing operations are computed using the weighted average number of ordinary shares outstanding. There were no diluting elements.
3) “Adjusted net interest-bearing debt”, defined as net interest-bearing debt, plus net unfunded pension obligations, after tax, the present value of operating lease obligations and Hydro`s share of long-term debt held by equity accounted investees, devided by equity, included minority intrests, adjusted for pensions.

Operating statistics

	2007	2006	% change prior year
Realized aluminium price LME (USD/mt) 1)	2,559	2,352	9%
Realized aluminium price LME (NOK/mt) 1)	15,522	15,371	1%
Primary aluminium production (kmt) 2)	1,742	1,799	(2)%
Rolled Products sales volumes to external market (kmt)	1,030	1,003	3%
Extrusion sales volumes to external market (kmt)	508	526	(3)%
Automotive sales volumes to external market (kmt) 3)	117	102	15%
Power production (GWh)	11,018	8,326	32%
1) Including effect of strategic hedges (hedge accounting applied).
2) Including Hydro`s share of Søral volumes (equity accounted investment).
3) Excluding divested businesses Casting, Magnesium and Worcester.

Underlying EBIT for Aluminium Metal amounted to NOK 8,041 million for 2007 as whole, down 1 percent from 2006. Our realized prices increased measured in U.S. dollars, but were relatively unchanged measured in Norwegian kroner due to the weak dollar. Production of primary metal in the full-year declined 3 percent from 2006 due to the closures of the Søderberg line in Årdal in June 2007 and the Stade smelter in the end of 2006. Underlying results for our bauxite and alumina operations were down compared with 2006, mainly due to high energy prices, local currency effects and higher bauxite prices. Underlying EBIT for our Commercial operations increased for the year. Our European remelters continued to deliver solid operating results in 2007, mainly due to higher sales volumes and higher premiums. However, losses from our North American remelt operations also increased compared to 2006 due to difficult market conditions.

Underlying EBIT for Aluminium Products increased by 5 percent compared to 2006. Underlying EBIT included operating profits from divested businesses of NOK 45 million in 2007 and NOK 175 million in 2006. Higher volumes and increased margins in Europe contributed substantially to the results of our Rolled Products business, but the positive effects were largely offset by higher energy costs and negative currency developments for shipments into U.S. dollar denominated markets. Our European general Extrusion and Building Systems operations delivered record results for the year due to improved margins and higher volumes. However, our U.S. extrusion operations incurred an operating loss for the year, mainly driven by a substantial market downturn, with our shipments falling by 19 percent. The depressed market conditions in the U.S. show no signs of recovery in the short-term. Our Automotive business incurred underlying losses for 2007 and 2006. Negative results from our Automotive structures operations were partly offset by improved results for our Precision Tubing business and lower overhead costs following the restructuring of our Automotive business portfolio.

Underlying EBIT for our Energy business amounted to NOK 1,184 million in 2007, down from NOK 1,464 million in 2006. The decrease resulted from higher development costs relating to our solar partnership companies, somewhat higher operating costs and lower prices realised on net spot sales, which more than offsets the positive effects of higher hydropower production. Hydro’s power production in Norway amounted to 11.0 TWh in 2007, up 32 percent from the 8.3 TWh produced in 2006. Annual power production in 2007 was more than 20 percent higher than normal and the second highest ever recorded.

Market outlook
For the full-year 2007, primary aluminium demand rose by 3.5 million tonnes, or 10 percent, from 2006, driven mainly by strong growth in China. After a decline in aluminium prices in late 2007, prices strengthened again in early 2008 following production curtailments in China, South Africa and South America. Hydro expects these disruptions to impact primary metal supply at least during the first half of the year.

Key economic indicators continue to signal somewhat slower growth in all major regions. European industrial production growth is expected to slow throughout 2008. The economic outlook for North America remains weak. China continues its rapid development, although growth in industrial production shows signs of moderate easing in recent months, with an expected annual growth rate of 16 percent in 2008, down from 18 percent in 2007.

Global primary aluminium consumption growth is expected to be around 9 percent in 2008. Global production growth is estimated to reach between 10 and 12 percent, depending on the development in China.

Hydro expects a moderate slowdown in market growth for semi-fabricated products in Europe in 2008 compared with 2007. In the United States, the market for semi-fabricated products declined during 2007. Overall, Hydro expects a fairly flat development in its core downstream markets in 2008 compared to 2007, depending on the direction of the global economy.

Nordic power prices are expected to be increasingly influenced by power prices and generation fuel costs on the European Continent. However, hydrological conditions and local supply and demand factors, such as temperature and weather conditions, will continue to have a strong influence on price formation in the Nordic region.

Net financial income/expense, liquidity and financial position
Net financial income for the year amounted to NOK 3,208 million, including a net foreign currency gain of NOK 2,254 million, mainly due to a decline in the U.S. dollar against the Norwegian kroner of 13.6 percent over the 12-month period. This significant gain resulted from Hydro’s currency hedge program - primarily currency derivatives - which covered about 9 months of the effects on our results of our currency exposure to the U.S. dollar.

Interest income increased to NOK 1,228 million in 2007, compared to 985 million in 2006. Earnings in 2007 reflected high amounts of cash and short-tem investments during the first nine months of the year prior to the payment of demerger debt to StatoilHydro on 1 October 2007. Interest expense was at the same level in 2007 as in 2006.

Cash and short-term investments exceeded adjusted interest bearing debt by NOK 2.7 billion at the end 2007. On 1 October, demerger debt to StatoilHydro of NOK 26.2 billion was paid. External long-term debt of NOK 16.8 billion was allocated to StatoilHydro as part of the demerger transaction, and included in Discontinued operations for prior periods.

Hydro’s adjusted debt/equity ratio, defined as net interestbearing debt (including net unfunded pension obligations after tax, the present value of operating lease obligations and Hydro’s portion of interest bearing debt in equity accounted investees) divided by adjusted equity, was close to zero at the end of the year.

In July 2007, Hydro signed a new USD 1.7 billion seven-year revolving credit facility with a syndicate of fifteen banks.

Cash flow from operations and investments
In 2007, net cash provided by operating activities amounted to NOK 14.3 billion compared to NOK 9.9 billion in 2006. In 2007, cash from operations included realized foreign currency gains on forward contracts of approximately NOK 3.4 billion.

Investments in 2007 amounted to NOK 5,206 million, compared with NOK 4,526 million in 2006. Approximately 70 percent of investments for 2007 related to Hydro’s aluminium metal business in 2007 and included investments related to the development of the Qatalum primary aluminium plant in Qatar and the ongoing third expansion of the alumina plant Alunorte in Brazil.

Items excluded from underlying EBIT and results
To provide a better understanding of the underlying performance of Hydro’s operating units the items in the table below have been excluded from EBIT (earnings before financial items and tax) and income from continuing operations.

Items excluded from underlying income from continuing operations

NOK million	2007	2006
Unrealized derivative effects on LME related contracts	(92)	157
Unrealized derivative effects on power contracts	928	1,605
Unrealized derivative effects on currency contracts	(137)	(76)
Metal effect, Rolled Products	235	(261)
Significant rationalization charges and closure costs	224	1,023
Impairment charges	144	728
Gains/(losses) on divestments	(641)	-
Correction of elimination of profit in inventory	291	-
Reversal insurance loss provision	-	(211)
Germany, change in tax rate	(47)	-
Items excluded from underlying EBIT	905	2,965
Net foreign exchange (gain)/loss	(2,254)	148
Calculated income tax effect	339	(767)
Germany, change in tax rate	(300)	-
Losses/(benefits) not previously recognized	-	(500)
Items excluded from underlying income from continuing operations	(1,310)	1,846

Unrealized derivative effects on LME and power contracts include unrealized gains and losses on contracts evaluated at market value where hedge accounting is not applied. The magnitude of these recurring effects depends on changes in market values which can be significant. Unrealized derivative effects on currency contracts include unrealized gains and losses on certain foreign denominated contracts relating to our equity accounted investments.

The remainder of items excluded from underlying EBIT comprised mainly of gains/losses on divestments and other cost and charges that are typically non-recurring for individual plants or operations.

Calculated income tax effect of items excluded from underlying EBIT is based on Hydro’s effective tax rate for the corresponding periods presented. Net foreign exchange gains/losses include unrealized gains and losses on all foreign denominated contracts and balances included in our balance sheet for the periods presented. Such amounts mainly relate to forward currency contracts used to hedge net future cash flows from operations, sales contracts and working capital mainly by selling U.S. dollars and euro where hedge accounting is not applied. The tax credits excluded from income from continuing operations relate to items which are deemed to be non-recurring in nature.

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