The strong operating results reflected the sustained high oil and gas prices and improved aluminum prices, together with continued strong operational performance. However, high energy prices and fierce competition continue to challenge Hydro’s aluminium business.

Operating income in the fourth quarter of 2005 amounted to NOK 10,450 million, compared with NOK 12,973 million in the third quarter of 2005 and NOK 6, 234 million in the fourth quarter of 2004. The fourth quarter operating results for 2005 included a non-cash charge of about NOK 1.8 billion including impairment losses in Hydro’s aluminium business of NOK 1.2 billion. In addition, the fourth quarter of 2005 included approximately NOK 1.4 billion of unrealized losses on derivative contracts relating to operational hedges due to a significant rise in the forward prices for aluminium, oil, gas and power at the end of the year. Operating income in the fourth quarter of 2004 included impairment losses and rationalization costs totaling approximately NOK 2.6 billion.
 
The Hydro Board of Directors proposes to the Annual General Assembly of shareholders a dividend of NOK 22 per share for 2005, compared with NOK 20 per share for 2004.

"Hydro’s results in the fourth quarter were our best quarterly results ever, and 2005 was our strongest year in history, mainly due to high oil and gas and improved aluminium prices. Operational improvements continued, but market conditions, particularly for downstream aluminium, have continued to worsen and we need to increase our efforts to restructure the business," says Eivind Reiten, Hydro President and CEO. "2005 represented an international breakthrough for our oil and gas business, both in terms of exploration and business development. Capturing value from Hydro’s enlarged portfolio as well as the continued strengthening of our resource base are at the top of our agenda going forward," Reiten says.

"The establishment of a new, separate business area, Aluminium Products, represents an important step to deliver increased profitability. Cash generation from the Rolled Products, Automotive, and Extrusion sectors will have priority," Reiten says. "At the same time, the repositioning of upstream aluminium will continue, with the planning of one of the world’s largest smelters, to be located in Qatar, as the single-most important project."

Oil & Energy

Operating income for Oil & Energy in the fourth quarter of 2005 amounted to NOK 11,537 million, another strong quarter result that contributed to record-high operating income for the year as a whole. Operating income in the fourth quarter included the expensing of seismic databases included in the Spinnaker acquisition amounting to NOK 320 million and previously capitalized development costs of the Telemark field in the Gulf of Mexico (GoM) of NOK 210 million. The quarter also included unrealized losses on hedges relating to Spinnaker operations amounting to NOK 440 million.
 
Operating income for 2005 reached NOK 43,451 million, an increase of 40 percent compared with 2004, mainly as a result of high oil and gas prices.

Hydro realized an average oil price of US dollar 55.6 per barrel in the fourth quarter of 2005, a decrease of 8 percent compared with the third quarter of 2005, and 33 percent higher than in the fourth quarter of 2004. Oil and gas production averaged 589,000 barrels of oil equivalents (boe) per day during the fourth quarter of 2005, an increase of 48,000 boe per day compared with the third quarter of 2005 and a decrease of 2,000 boe per day compared with the fourth quarter of 2004. For the year as a whole, average oil and gas production declined about 2 percent compared with 2004 to 563,000 boe per day.

Hydro consistently demonstrated good project execution and cost control. The Ormen Lange/Langeled project has proceeded according to schedule and on budget, and was 60 percent completed by the end of December. In December 2005, the acquisition of Spinnaker Exploration Company was completed. Spinnaker is mainly engaged in exploration, development and production of oil and gas in the US Gulf of Mexico (GoM). Spinnaker’s portfolio includes interesting exploration acreage, comprising deepwater and shelf prospects, as well as an extensive seismic database covering most of the GoM.

Hydro’s overall exploration results for the year were encouraging. In 2005, Hydro participated in 14 discoveries, half of them as operator. Seven of the discoveries were located on the Norwegian Continental Shelf (NCS).

Aluminium

Increased volumes from primary aluminium production and higher realized aluminium prices had a positive impact on Hydro’s aluminium operating income during 2005. However, the fourth quarter operating loss of NOK 1,009 million was heavily influenced by impairment losses of NOK 1,238 million relating to magnesium and rolled products operations due to challenging market conditions. In addition, London Metal Exchange (LME) prices increased substantially during the quarter to US dollar 2,277 at the end of December (23 percent). This resulted in unrealized losses on LME contracts of NOK 997 million for the quarter.
 
Hydro’s primary aluminium production increased to 464,000 metric tons (mt) in the fourth quarter, up four percent, compared with the fourth quarter of 2004. In 2005, primary aluminium production increased by six percent to 1,826,000 mt mainly due to the expansion of the Alouette and Sunndal plants. Compared with the fourth quarter of 2004, Hydro’s realized aluminium price in US dollars and Norwegian kroner increased about 10 and 11 percent, respectively. For 2005, realized aluminium prices increased 5 percent measured in Norwegian kroner. Hydro’s downstream operations in Europe faced challenging market conditions with continued pressure on margins.

Other issues

Net financial expense in the fourth quarter of 2005 amounted to NOK 579 million, compared with net financial income of NOK 900 million in the fourth quarter of 2004. The current quarter included a net foreign currency loss of NOK 601 million, while the fourth quarter of 2004 included a net currency gain amounting to NOK 1,606 million. The currency loss was mainly due to the strengthening of the US dollar and Euro during the quarter resulting in losses on Hydro’s US dollar denominated debt and foreign currency contracts.

Cash flow from operations in 2005 amounted to NOK 27.4 billion, compared to NOK 27.7 billion in 2004. Positive effects of increased operating cash flows was offset by increased working capital requirements and tax payments.

Return on average Capital Employed (RoaCE) was 16.8 percent for 2005 compared with 13.0 percent for 2004.

Investments amounted to NOK 41.1 billion for 2005. Roughly 88 percent of the amount invested related to oil and gas operations including NOK 21.9 billion relating to the Spinnaker acquisition.

Income tax expense for 2005 amounted to NOK 30,317 million, compared with NOK 21,197 million for 2004. This represents 66 percent and 65 percent of income from continuing operations before tax, respectively.

Outlook

Oil and gas prices are expected to remain high in the medium term. The oil market is expected to remain relatively tight in 2006. In the beginning of 2006, increased political risk related to oil supply has driven prices upward. The price development is expected to be more volatile going forward, resulting in greater uncertainty and increased risk. Hydro has targeted oil and gas production of 615,000 boe per day for 2006, an increase of around 9 percent compared with realized production in 2005. During 2005, Hydro strengthened its exploration portfolio, and intends to stepup exploration activities in 2006 and beyond.

The average aluminium prices experienced in the fourth quarter of 2005 reflected substantial increases in short-term alumina prices as well as the significant rise in power costs for the major producing regions. At the beginning of February 2006, primary aluminium (three-month LME price) was trading at around US dollar 2,500 per mt. Trading by financial investors on the LME increased significantly during 2005. This situation presents the risk of a significant correction in the market if investor sentiment changes. The significant rise in power costs is expected to result in a cost increase for Hydro’s aluminium business estimated at NOK 1.4 billion for 2006 compared to the total cost of power in 2005. Approximately NOK 1.1 billion of the increase relates to upstream activities, with a large part relating to operations in Germany. Economic indicators signal continued global growth in 2006. Hydro expects global consumption and production of primary aluminium to show an increase in 2006 of approximately six and four percent, respectively, both highly dependent upon developments in China. Pressure on margins for standardized products in the downstream aluminium markets are expected to continue during 2006.

Volatility in the oil, gas, power and aluminium markets is expected to continue and could result in substantial unrealized gains and losses on derivatives in future quarters.