Key financial information

The merger of Hydro's petroleum activities into the combined oil and gas company StatoilHydro was finalized on 1 October 2007. The following discussion is a summary of results of operations for Hydro's ongoing business, which includes the Aluminium Metal, Aluminium Products and Energy operations. Comparisons to periods prior to 1 October 2007 exclude the demerged oil and gas activities.

To provide a better understanding of Hydro's underlying performance, the following discussion of operating performance excludes certain items from EBIT (earnings before financial items and tax) and Income from continuing operations

Operating statistics

Hydro's underlying income from continuing operations amounted to NOK 1,442 million in the first quarter of 2008, up from NOK 1,402 million in the previous quarter and down from NOK 2,345 million in the first quarter last year. Solid operational performance in all business areas combined with higher sales volumes and margins for Hydro's downstream business lifted results, while weaker realized aluminium prices in Norwegian kroner had a negative impact.
 
Global aluminium prices remained strong, but Hydro realized lower prices in Norwegian kroner during the quarter compared with the previous quarter and the same period last year, due to a weaker US dollar against the NOK.
 
"Hydro's performance during the first quarter underpins our operational and financial strength, and we are continuously evaluating a range of growth opportunities," says Hydro President and CEO Eivind Reiten.
 
"Aluminium Metal is posting satisfactory results after a dynamic first quarter, marked by a significant upward shift in aluminium prices which will start to impact our results from the second quarter," Reiten says, adding: "I'm also pleased to see our Aluminium Products area showing strong performance, demonstrating that recent restructuring efforts are taking effect."
 
During the first quarter, Hydro completed the sale of its polymer business to UK-based Ineos. Hydro also signed an agreement to sell its maintenance, project and service providers Hydro Production Partner and Hydro Production Services to German Bilfinger Berger Industrial Services AG.
 
Underlying EBIT in the first quarter was NOK 2,032 million, up from NOK 1,697 million in the previous quarter but lower than the strong performance in the first quarter of 2007.
 
Underlying results for Aluminium Metal, Hydro's upstream aluminium business, declined from the previous three-month period and the first quarter of 2007, mainly due to lower realized aluminium prices measured in Norwegian kroner. Hydro's joint venture with Qatar Petroleum on the 585,000-tonne Qatalum smelter project, in which Hydro owns 50 percent, was about 17 percent complete by the end of the first quarter and on track for start-up around the end of 2009.
 
For Aluminium Products, Hydro's downstream operations, underlying results rose in the first quarter from a seasonally weak fourth quarter, along with higher volumes and improved margins. First-quarter results for Aluminium Products were somewhat weaker than the same year-earlier period, which benefited from favorable market conditions. Hydro's European Extrusion operations continued to deliver strong results.
 
Hydro's Energy business, which includes power production and solar power investments, delivered higher underlying results in the first quarter than both the first and fourth quarters of 2007, mainly due to higher power production in Norway. Hydro increased its investment in US-based thin-film company Ascent Solar Technologies Inc. and Norwegian wafer producer NorSun AS, contributing to an enhanced position in the solar industry and confirming Hydro's commitment in the area. 
 

Reported EBIT and income from continuing operations

EBIT for Hydro amounted to NOK 1,179 million in the first quarter, up from NOK 338 million in the previous quarter.  EBIT was impacted by significant net unrealized losses on power and LME derivative contracts as a result of a significant upward shift in LME forward prices during the quarter, combined with developments in the forward prices for coal and power. EBIT in the fourth quarter of 2007 was also impacted by significant unrealized losses on derivative contracts, as well as higher negative metal effects and other negative non-recurring effects.  
 
Income from continuing operations amounted to NOK 1,443 million in the first quarter, up from NOK 527 million in the previous quarter. Income from continuing operations included net foreign exchange gains amounting to NOK 854 million compa red to net foreign exchange gains of NOK 74 million in the previous quarter.  

Summary market developments and outlook

Aluminium prices on the LME increased significantly throughout the quarter in a volatile market impacted by production curtailments in China and South Africa, the weakening US dollar and increased activity from financial investors. Aluminium inventories are currently low compared to consumption, reflecting a favorable market balance. Hydro expects the production disruptions to reduce supply by about 600,000 mt in 2008.
 
Continued cost pressures on primary production relating to higher energy and raw material prices, together with the expectation of a potential tighter market balance in 2009 and a continued weak US dollar, are expected to support high LME price levels throughout 2008. Total demand for primary aluminium in 2008 is expected to grow by 8-9 percent, driven mainly by strong growth in China.
 
Hydro expects a moderate market slowdown for semi-fabricated products in Europe, mainly impacting business in the second half of the year. In the US, Hydro expects the market for semi-fabricated products to remain at the current depressed levels. The development of the US economy and its potential global impact represents a major uncertainty in Hydro's market outlook.

Aluminium Metal

Underlying EBIT for Aluminium Metal amounted to NOK 1,255 million in the first quarter of 2008, down 6 percent compared with fourth quarter of 2007 and 47 percent from the very strong first quarter of 2007. Developments for the quarter were mainly driven by lower realized aluminium prices measured in Norwegian kroner. Primary aluminium production volume was relatively stable compared to previous quarters.
 
Results from our Bauxite and Alumina operations declined somewhat compared with fourth quarter and were substantially lower than the first quarter of 2007. Lower volumes due to planned maintenance impacted results compared with the fourth quarter, while higher LME linked bauxite prices influenced the decline compared with the first quarter of 2007. Higher energy costs contributed to the weak results compared to both the fourth and first quarters of 2007. Underlying EBIT for our Commercial operations increased substantially in the quarter, compared with the fourth quarter of 2007 which was negatively impacted by losses in our North American remelt operations. 

Aluminium Products

Underlying EBIT for Aluminium Products amounted to NOK 370 million for the first quarter, up by NOK 300 million from the seasonally weak fourth quarter results in 2007. Shipments increased mainly in the high added-value foil and lithographic segments, also contributing to improved margins for our rolled products operations, while our extrusion volumes increased 11 percent mainly driven by a 15 percent increase from our European extrusion business. Margins remained strong within our extrusion market segment. Results for our US extrusion operations improved but the market remains at depressed levels. Operating results for our automotive structures activities improved but remain challenging.
 
Underlying EBIT declined by NOK 128 million or 26 percent compared to the first quarter of 2007 which included net operating profits from divested operations of around NOK 50 million. Volumes for our rolled products business declined somewhat in the first quarter of 2008. Slightly higher operating costs had a negative impact on the underlying results for our European extrusion operations. Lower costs from measures implemented at our US operations combined with improved results from our South American business more than offset a volume decline of 15 percent for our North American operations.

Energy

Underlying EBIT for Energy amounted to NOK 399 million in the first quarter, up NOK 58 million from the fourth quarter of 2007 and up NOK 133 million from the same quarter last year. The increase from the fourth quarter is primarily due to higher production, increased spot sales and increased revenues from contract sales, which have more than offset the effects of lower spot prices. Compared with the first quarter of 2007, the results are positively impacted by increased spot prices, higher production and lower production costs.
 
Hydro's power production in Norway was 2.9 TWh in the first quarter of 2008, 23 percent up from the fourth quarter of 2007 and 7 percent higher than in the first quarter of 2007. Net spot sales, representing the net of volumes sold and purchased, amounted to 1.0 TWh, up 30 percent from the previous quarter and 19 percent higher than in the same quarter last year.
 
Hydro's Solar business incurred a loss of NOK 22 million in the first quarter of 2008 compared with a loss of NOK 49 million in the fourth quarter of 2007. Results for Solar activities include our share of profit/loss in equity accounted investments, and the losses reflect that our partnership companies are in a developing phase and have not yet started production.
 

Items excluded from underlying EBIT and income from continuing operations

To provide a better understanding of Hydro's underlying performance, 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 EBIT are comprised mainly 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. Derivative contracts include various financial contracts entered into for operational hedging purposes as well as derivatives embedded in commercial contracts. Unrealized gains and losses on derivatives can be substantial and highly volatile depending on open positions and market price developments.
 
In order to present Income from continuing operations on a basis comparable with our underlying operating performance, we have calculated the income tax effect of items excluded from underlying EBIT based on Hydro's effective tax rate for the corresponding periods presented. We have also excluded unrealized gains and losses on all foreign denominated contracts included in our balance sheet for the periods presented. The amounts included in the table below mainly relate to forward currency contracts used to hedge net future cash flows from operations, sales contracts and working capital mainly by selling US dollars and Euro where hedge accounting is not applied. We have also excluded certain tax credits which are deemed to be non-recurring in nature.

Items excluded from underlying income from continuing operations

The main developments impacting items excluded from underlying EBIT for the first quarter of 2008 reflect a significant upward shift in LME forward prices resulting in substantial unrealized gains on LME derivatives relating to operational hedges.
 
The LME forward developments, together with developments in the forward prices for coal and power, also resulted in substantial unrealized losses on derivatives which are embedded in power contracts.  

Finance

Net financial income for the first quarter of 2008 amounted to NOK 998 million, including a net foreign currency gain of NOK 854 million. The currency gain was mainly due to a weakening of the US dollar against the Norwegian kroner during the quarter, resulting in gains on Hydro's foreign currency contracts. Net currency gains amounted to NOK 74 million in fourth quarter 2007 and NOK 464 million in first quarter 2007, also mainly due to weakening of the US dollar. The currency gains result mainly from Hydro’s currency hedge program, primarily related to currency derivatives.

Tax

Income tax expense amounted to NOK 734 million in the first quarter of 2008 compared to a positive amount of NOK 58 million in the fourth quarter and NOK 1,225 million in the first quarter of 2007. The fourth quarter of 2007 included positive effects from a reduction of statutory tax rates in Germany amounting to about NOK 50 million. Income tax expense was 34 percent of Income from continuing operations before tax in the first quarter of 2008 compared with 27 percent in the first quarter of the previous year. The main reason for the change in the tax percent relates to lower levels of income from equity accounted investments in the first quarter, compared with the first quarter of 2007.

Outlook
Aluminium Metal

Several factors indicate a positive outlook for aluminium price developments in US dollars in the coming quarters. There are uncertainties, however, linked to the developments of the US economy and the potential global impact.
 
China's apparent consumption of primary metal is forecast to increase by 22 percent for the full year of 2008, down from an annual growth of 38 percent in 2007, due to lower growth in the production of semi-finished products for export. Growth in Chinese production of primary metal is expected to reach 18 percent in 2008, compared with a growth rate of 35 percent last year.
 
Primary aluminium consumption and production in the rest of the world is expected to grow by about 2 percent and 6 percent, respectively, from 2007 to 2008.
 
Market conditions for extrusion ingot in Europe are expected to remain at the same level in the coming months, with a slightly weaker demand especially from the building and construction sector. The US market for extrusion ingot in 2008 is expected to be slightly below the 2007 level mainly due to a continued weak demand from the residential building and construction sector. For sheet ingot in Europe the expected demand outlook remains positive with some slowing possible in the second half of 2008. Demand for foundry alloys in Europe is expected to stabilize for the rest of the year with a slight trend towards increased  market demand.

Aluminium Products

Market demand for flat rolled products in Europe is expected to be stable for the coming months. US market demand is expected to remain depressed. Combined with a weak US dollar, this could lead to increased imports and put pressure on European margins for rolled products.
 
The overall outlook for the European extrusion market indicates a softer demand in 2008, driven by the weakening construction market segment in Europe. The market outlook in Germany continues to be strong, in particular within the engineering and transportation market segments. The general softer demand combined with a volatile LME could put further downward pressure on margins in the months to come.
 
The outlook for the US extrusion market shows no signs of recovery. South American markets are expected to post another strong year, with consumption in Brazil and Argentina expected to grow around 6-7 percent.
 
The outlook for the automotive market is mixed with a stable to strong European market while the North American market is expected to remain weak for 2008. Automotive markets in Asia and South America are expected to continue growing.

Energy

By the end of the first quarter, the total water and snow balance in Norway was estimated to be approximately 15 percent higher than normal. High reservoir inflows from melting snow are expected to put pressure on spot prices during the summer months. In addition, reduced export/import capacity from Norway due to outages in central grid transmission lines could have a negative impact on the Southern Norway area prices in the second quarter.

Press contact
Contact     Inger Sethov
Telephone   +47 22532036
Cellular    +47 95022359
E-mail      Inger.Sethov@hydro.com

Investor contact
Contact     Stefan Solberg
Telephone   +47 22539280
Cellular    +47 91727528
E-mail      Stefan.Solberg@hydro.com

Norsk Hydro ASA
Drammensveien 264
N-0240 Oslo
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Telephone: +47 22538100
Fax: +47 22532725
www.hydro.com

Certain statements included within this announcement contain forward-looking information, including, without limitation, those relating to (a) forecasts, projections and estimates, (b) statements of management’s plans, objectives and strategies for Hydro, such as planned expansions, investments or other projects, (c) targeted production volumes and costs, capacities or rates, start-up costs, cost reductions and profit objectives, (d) various expectations about future developments in Hydro’s markets, particularly prices, supply and demand and competition, (e) results of operations, (f) margins, (g) growth rates, (h) risk management, as well as (i) statements preceded by “expected”, “scheduled”, “targeted”, “planned”, “proposed”, “intended” or similar statements.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, these forward-looking statements are based on a number of assumptions and forecasts that, by their nature, involve risk and uncertainty.  Various factors could cause our actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized.  Factors that could cause these differences include, but are not limited to: our continued ability to reposition and restructure our upstream and downstream aluminium business; changes in availability and cost of energy and raw materials; global supply and demand for aluminium and aluminium products; world economic growth, including rates of inflation and industrial production; changes in the relative value of currencies and the value of commodity contracts; trends in Hydro’s key markets and competition; and legislative, regulatory and political factors.

No assurance can be given that such expectations will prove to have been correct.  Hydro disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.