Risk
Risk management deals with all aspects of value creation, including strategy, finance, commercial matters, organization, HSE, reputation, corporate responsibility, regulatory and legal matters. Hydro faces many risks and uncertainties within the global marketplace. Changes in competitive and market conditions affect margin and volume developments. Reported operating results and our competitive position are influenced by the declining U.S. dollar. China is encouraging the production of more labour intensive semi-fabricated and fabricated products, increasing the exposure of our downstream businesses. Our primary smelting operations are highly dependent on securing substantial amounts of energy and adequate supplies of alumina at competitive prices. We are exposed to increasing legislation on CO2 emissions. Repositioning and restructuring activities are important in determining the viability of our future aluminium operations. It is challenging to complete large upstream projects on time and within budgets. Our business expansion is expected to take place increasingly in emerging and transitioning market areas, heightening the risk related to unforeseen changes in the overall operating framework.
Risk management in Hydro is based on the principle that risk evaluation is an integral part of all business activities. The main responsibility for risk management is therefore placed with the business areas and coordinated by staff units at the corporate level. Policies and procedures have been established to manage risk.
Hydro’s main strategy for mitigating risk related to volatility in cash flows is to maintain a solid financial position and strong credit-worthiness, as expressed by the company’s adjusted net interest bearing debt/equity target of not exceeding a ratio of 0.55 and to maintain a ratio of funds from operations to adjusted net interest bearing debt above a level of 0.40.
Hydro maintains guidelines for liquidity reserves and for the instalment payment profile on its debt portfolio. The company’s financial position at the end of 2007 was well within the established guidelines.
Hydro’s operating results are primarily affected by price developments of its main products, aluminium and power, in addition to foreign currency fluctuation of the most significant currencies, the U.S. dollar and the euro, against the Norwegian Krone. Hydro’s main risk management strategy for its upstream operations is to accept exposure to price movements of aluminium and energy. Downstream and other marginbased operations are to a certain extent hedged to protect processing and manufacturing margins against raw material price fluctuations.
In order to mitigate the company’s exposure to U.S. dollar currency fluctuations, Hydro has established currency forward contracts selling U.S. dollar mainly against Norwegian Kroner. Hydro has also entered into forward contracts in other currencies to hedge revenue and cost positions.
Controls and procedures
Hydro’s internal control framework provides sound controls, built on a foundation of integrity, ethical values and appropriate organizational attitudes. Throughout 2007, we have continued to follow the internal control over financial reporting framework developed under the section 404 of the U.S. Sarbanes- Oxley Act, 2002. The primary exception is that our external auditors will not be required to issue a separate audit opinion on our internal control over financial reporting as this was a specific SEC requirement.
Our management has continued to be guided by the “Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control - integrated framework” principles in evaluating the effectiveness of our financial controls and procedures. The COSO framework is widely recognised as the most comprehensive control framework and consists of the five interrelated components; 1) Control Environment, 2) Risk Assessment, 3) Control Activities, 4) Information and Communication, and 5) Monitoring.
