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Hydro Capital Markets Day

Jan 08, 2002
Norsk Hydro ASA announces the following on its Capital Markets Day, 8 January 2002:
During the last year, Norsk Hydro has consolidated its position as a result of the successful implementation of several significant strategic measures. The acquisition of the German company VAW Aluminium, announced on Monday, will make Hydro Aluminium one of the world's leading aluminium companies. Hydro's improved financial position during the last couple of years has been an important factor in enabling the acquisition to be carried out. Hydro Agri has carried out a highly successful turnaround program and more than met the improvement targets set. In Oil and Energy, the company has secured several very attractive licences, outside of the Norwegian continental shelf, which have significant potential.

The attainment of the profitability targets set for 2002 will nevertheless represent a considerable challenge. The expected Cash Return on Gross Investments (CROGI) for 2002 (based on an oil price of USD 18 per barrel, a USD/NOK exchange rate of 8.00, an LME three months aluminium price of USD 1,500/tonne and a CAN 27 fertilizer price of USD 113/tonne) has now been adjusted to 8-9%. This downscaling from the 10 % previously set is primarily due to weaker market conditions for aluminium and investments for new growth in Light Metals and Oil and Energy that have not yet come on stream.

In 2002, Hydro is planning an investment level of about NOK 19 billion. The investments are expected to be spread among the business areas as follows: Oil and Energy approximately 45%, Light Metals approximately 40%, Agri approximately 10%, with the remaining roughly 5% invested in the company's other activities. The investment figure includes this year's anticipated capital expenditure related to the newly acquired VAW, but does not reflect the actual acquisition itself nor a possible purchase of SDFI shares.

In addition, Oil and Energy exploration activity in 2002 is expected to amount to approximately NOK 2.4 billion, of which some NOK 1.8 billion will relate to exploration outside of the Norwegian continental shelf. The total exploration level represents a 20% increase from 2001, reflecting Hydro's high levels of exploration activity during the current year, especially in the recently acquired international licences.

Hydro confirms that its oil and gas production target for 2001 of 415,000 boe per day was achieved. Average total production in 2002 is expected to be approximately 430,000 boe per day. This reduced estimate is largely due to delayed start-ups on the Terra Nova and Girassol fields, production cuts imposed by the Norwegian authorities and a downwards adjustment in anticipated sales of gas. Hydro's revised production profile until 2005 represents an annual production growth of 5-6%. In contrast with previous profiles, expected production resulting from exploration activity (new discoveries) is not now included. This change does not mean expectations of positive exploration results have been reduced, or a lower level of ambition within the company, but simply reflects the desire for greater stringency in connection with the official production profile.

Hydro reports a preliminary reserve replacement level for 2001 of roughly 120%. Reserves in the Snøhvit field, which is currently awaiting development, are not included. On the Ormen Lange field, the development plan still is expected to be completed in 2003 which means that Hydro is on target to attain its goal of exploration and development costs of 5 USD/boe in 2003.

The purchase of VAW will add a whole new dimension to Hydro's aluminium activities. The former Hydro Light Metals and VAW complement each other well, and the new Hydro Aluminium will be Europe's leading aluminium company. The new company has considerable added value potential, realized by means of traditional cost synergies, but also to a large extent by exploiting competitive advantages and new market positions. Prior to the acquisition, Hydro has already identified considerable potential for greater efficiency in the original Hydro Light Metals. As a result of this, and inclusive of the synergies generated by the VAW acquisition, a reduction in staff and support functions is estimated to affect roughly 1,100 employees. The costs in connection with such a restructuring will be charged to the accounts in 2002.

The turnaround operation in Agri has been completed with results that exceed both the original and revised plans. Annual fixed costs have been reduced by NOK 2.3 billion compared to 1998, while the corresponding workforce reduction comprised some 3,600 persons. Both the cost and workforce reductions make up 30% of the 1998 cost level. The turnaround in the European fertilizer operation, combined with stronger positions outside Europe, have given Hydro Agri a new platform for sustainable value creation. Hydro Agri is implementing further cost saving and efficiency measures.

After the VAW acquisition is closed, Hydro's debt to equity ratio is expected to stand at 0.7. The company will through improved earnings, strict capital discipline and divestments have as a key target to bring this ratio back to the 0.5 level by the end of 2003.

In order to further sharpen the focus of its operations, Hydro is introducing a new program for divestments, in which the goal will be to sell off activities in the order of NOK 10 billion by the end of 2003. Candidates for divestment include Petrochemicals, the company's ownership stake in KFK and VAW Flexible Packaging.

As part of this divestment program, Hydro has entered into sales agreements covering the company's interests in the Norwegian production licences (PL) 038, 072B, 150 and 203, in addition to part of its share in PL 252. These agreements require the approval of the Norwegian authorities. The licences sold include discoveries which are outside Hydro's core areas or which do not fit the company's strategy for other reasons. Together with the previously announced sales of Hydro's interests in PL 025 and PL 187, as well as the shareholding in Pelican, this represents an after tax gain estimated at approximately NOK 500 million. All these transactions are expected to be entered into the accounts in 2002.

Hydro furthermore announces that discussions have been held with the Norwegian state regarding how the latter as shareholder will act in the event of a future re-purchase of shares with the aim of cancelling them. Hydro has now received confirmation that the state, in its capacity as owner, and in connection with such a re-purchase, will act in a manner which will not lead to any increase of the state's shareholding.

Hydro now has a solid platform for further value creation. The Oil and Energy area has established interesting positions, especially in exploration, which provide a firm basis for making the most of the company's competitive advantages. The Aluminium area will figure as one of the world's three leading aluminium companies. Agri will be the world's leading fertilizer company. The new positions will provide increased strategic flexibility in all three business areas. Norsk Hydro will proactively develop industrial solutions which can generate greater added value and will also be open for changes in the company's structure should these changes assist in achieving such industrial solutions.
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