As filed with the Securities and Exchange Commission on 27 April 2006

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F/A
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005
Commission file number 1-9159

NORSK HYDRO ASA
(Exact Name of Registrant as Specified in its Charter)

Kingdom of Norway
(Jurisdiction of Incorporation or Organization)

Drammensveien 264, Vækerø
N-0240 Oslo
Norway
(Address of Principal Executive Offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class American Depositary Shares		Name of Each Exchange on Which Registered New York Stock Exchange

Ordinary Shares, par value NOK 18.30 per share		New York Stock Exchange*

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Ordinary Shares, par value NOK 18.30 per share

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

250,138,464 Ordinary Shares, par value NOK 18.30 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   X   No       

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes        No   X  

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X   No       

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   X   Accelerated Filer        Non-Accelerated Filer       

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17        Item 18   X  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes        No   X  

 

 

EXPLANATORY NOTE

With this Form 20-F/A, Hydro is amending the following items:

	(i)		note 5 to the consolidated financial statements included as Item 18 of its Annual Report on Form 20-F for the fiscal year ended December 31, 2005 (the “20-F”) to correct certain intersegment revenues and expenses for the years 2005, 2004 and 2003, none of which effects Hydro’s total operating revenues and other operating expenses for those years as previously reported;
	(ii)		the related auditors’ report dated 7 March 2006 filed with the financial statements included as Item 18 of the 20-F; and
	(iii)		Item 16D of the 20-F to disclose, in respect of a non-management employee member of Hydro’s audit committee, Hydro’s reliance on an exemption provided by Rule 10A-3(b)(1)(iv)(C) under the U.S. Securities Exchange Act of 1934, as amended, as well as Hydro’s assessment of the impact of such reliance.

This Form 20-F/A does not reflect events occurring after the filing of the original Form 20-F filed on March 24, 2006, and does not modify or update the disclosures therein in any way, except as described above.

ITEM 16D.		EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
		As a non-management employee of Hydro elected to the Hydro board of directors pursuant to Norwegian law, Mr. Terje Friedstad is exempt from the requirements of Rule 10A-3(b)(1)(iv)(C) promulgated by the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Hydro’s board of directors has assessed whether reliance on this exemption in the case of Mr. Friedstad would materially affect the ability of its audit committee to act independently and satisfy the requirements of Rule 10A-3(b)(1)(iv)(C) under the Exchange Act, and has concluded that it would not.
ITEM 18.		FINANCIAL STATEMENTS
		REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
		To the Board of Directors and shareholders of Norsk Hydro ASA Oslo, Norway
		We have audited the consolidated balance sheets of Norsk Hydro ASA and subsidiaries as of 31 December 2005 and 2004, and the related consolidated income statements, statements of comprehensive income, and cash flows for each of the three years in the period ended 31 December 2005. Our audits also included the financial statement schedule included at Item 15(a). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
		We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
		In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Norsk Hydro ASA and subsidiaries as of 31 December 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended 31 December 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
		As discussed in Note 5, the accompanying segment measures to the consolidated financial statements have been restated.
		As discussed in Note 1 to the financial statements, the Company changed its method of accounting for contingent asset retirement obligations in 2005, variable interest entities in 2004 and asset retirement obligations in 2003 to conform to newly adopted accounting principles.
		/s/ Deloitte Statsautoriserte Revisorer AS Oslo, Norway
		7 March 2006 (26 April 2006 as to the effects of the restatement discussed in Note 5)

Consolidated financial statements				F 3
Norsk Hydro ASA and subsidiaries

Consolidated income statements US GAAP
Consolidated statements of comprehensive income
 

Year ended 31 December						2005				2005				2004				2003
Amounts in million (except per share amounts)		Notes				NOK				EUR 1)				NOK				NOK
Operating revenues			5				174,201				21,795				153,891				131,778
Raw materials and energy costs							88,665				11,093				81,477				72,459
Payroll and related costs			7,20				18,366				2,298				18,830				18,569
Depreciation, depletion and amortization			5,15,16				16,086				2,013				16,898				13,947
Other			7,25				4,652				582				4,861				5,177
Restructuring costs (income)			6				—				—				(22	)			—
Operating costs and expenses							127,768				15,986				122,044				110,153
Operating income			5				46,432				5,809				31,847				21,625
Equity in net income of non-consolidated investees			5,13				619				78				629				620
Financial income (expense), net			8,11,24				(1,890	)			(236	)			137				155
Other income (expense), net			5,9				990				124				169				(1,253	)
Income from continuing operations before taxes and minority interest							46,152				5,774				32,781				21,146
Income tax expense			10				(30,317	)			(3,793	)			(21,197	)			(12,923	)
Minority interest							(118	)			(15	)			(106	)			151
Income from continuing operations before cumulative effects of changes in accounting principles							15,716				1,966				11,477				8,375
Income from discontinued operations			2				—				—				1,083				2,312
Income before cumulative effects of changes in accounting principles							15,716				1,966				12,560				10,687
Cumulative effects of changes in accounting principles			1,21				(78	)			(10	)			—				281
Net income			28				15,638				1,957				12,560				10,968
Basic and diluted earnings per share from continuing operations before cumulative effects of changes in accounting principles			3				62.70				7.84				45.10				32.50
Basic and diluted earnings per share from discontinued operations			3				—				—				4.20				9.00
Basic and diluted earnings per share before cumulative effects of changes in accounting principles			3				62.70				7.84				49.40				41.50
Basic and diluted earnings per share			3				62.40				7.80				49.40				42.60
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2)
Net income							15,638				1,957				12,560				10,968
Net unrealized loss on securities available-for-sale			3				(9	)			(1	)			(2	)			—
Minimum pension liability adjustment			3				(510	)			(64	)			(132	)			(113	)
Net investment hedge			3				33				4				320				(333	)
Cash flow hedges			3				(751	)			(94	)			(339	)			35
Net foreign currency translation adjustments			3				711				89				(1,628	)			4,856
Total other comprehensive income (loss), net of tax			3				(526	)			(66	)			(1,781	)			4,445
Comprehensive income, net of tax							15,112				1,891				10,779				15,413

	1)		Presentation in euro is a convenience translation based on the exchange rate at 31.12.2005, which was 7.9927 (unaudited).
	2)		Changes in shareholders’ equity include net income together with other changes not related to investments by and distribution to shareholders (see Note 3).

   The accompanying notes are an integral part of the consolidated financial statements.

F 4				Consolidated financial statements
				Norsk Hydro ASA and subsidiaries

Consolidated balance sheets US GAAP
 

31 December						2005				2005				2004
Amounts in million		Notes				NOK				EUR 1)				NOK
ASSETS
Cash and cash equivalents							10,463				1,309				14,366
Short-term investments			11				3,865				484				10,970
Accounts receivable, less allowances of NOK 784 and NOK 891							23,333				2,919				20,671
Inventories			12				14,553				1,821				12,851
Prepaid expenses and other current assets			12				15,912				1,991				10,478
Current deferred tax assets			10				2,166				271				1,070
Total current assets			5				70,293				8,795				70,406
Non-consolidated investees			13				10,814				1,353				10,017
Property, plant and equipment, less accumulated depreciation, depletion and amortization			15				128,191				16,038				106,117
Intangible assets			14,16				5,153				645				2,325
Prepaid pension, investments and other non-current assets			14,20				11,910				1,490				10,713
Deferred tax assets			10				833				104				664
Total non-current assets			5				156,902				19,631				129,836
Total assets			5				227,195				28,425				200,243
LIABILITIES AND SHAREHOLDERS’ EQUITY
Bank loans and other interest-bearing short-term debt			17				4,658				583				3,785
Current portion of long-term debt			19				379				47				568
Other current liabilities			18				47,239				5,910				41,340
Current deferred tax liabilities			10				980				123				384
Total current liabilities							53,256				6,663				46,077
Long-term debt			19				21,387				2,676				19,487
Accrued pension liabilities			20				9,939				1,244				8,569
Other long-term liabilities			21				12,424				1,554				9,134
Deferred tax liabilities			10				33,713				4,218				29,515
Total long-term liabilities							77,462				9,692				66,705
Minority shareholders’ interest in consolidated subsidiaries							981				123				1,571
Share capital			3				4,739				593				4,739
Additional paid-in capital			3				10,501				1,314				10,468
Retained earnings			3				85,927				10,751				75,310
- Treasury shares at cost			3				(3,589	)			(449	)			(3,069	)
Accumulated other comprehensive income (loss)			3				(2,083	)			(261	)			(1,557	)
Shareholders’ equity			3				95,495				11,948				85,890
Total liabilities and shareholders’ equity							227,195				28,425				200,243
Total number of outstanding shares							250,138,464				250,138,464				250,839,230
Nominal value per share							18.30				2.29				18.30

1)

Presentation in euro is a convenience translation based on the exchange rate at 31.12.2005, which was 7.9927 (unaudited).

   The accompanying notes are an integral part of the consolidated financial statements.

Consolidated financial statements				F 5
Norsk Hydro ASA and subsidiaries

US GAAP
Consolidated statements of cash flows
 

Year ended 31 December						2005				2005				2004				2003
Amounts in million		Notes				NOK				EUR *)				NOK				NOK
Operting activities:
Net income							15,638				1,957				12,560				10,968
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations			2				—				—				(1,083	)			(2,312	)
Depreciation, depletion and amortization			5				16,086				2,013				16,898				13,947
Restructuring income			6				—				—				(22	)			—
Equity in net income of non-consolidated investees			5,13				(619	)			(77	)			(628	)			(620	)
Dividends received from non-consolidated investees							323				40				326				258
Deferred taxes			10				(519	)			(65	)			(2,945	)			(1,585	)
Loss (gain) on sale of non-current assets							(937	)			(117	)			39				(726	)
Loss (gain) on foreign currency transactions			8				2,159				270				(1,350	)			(1,035	)
Net sales (purchases) of trading securities							(49	)			(6	)			(177	)			245
Other							782				98				779				2,150	4)
Working capital changes that provided (used) cash:
Receivables							(2,156	)			(270	)			(1,117	)			(576	)
Inventories							(1,940	)			(243	)			(1,040	)			453
Prepaid expenses and other current assets							(7,951	)			(995	)			1,798				2,251
Other current liabilities							6,568				822				3,686				(645	)
Net cash provided by continuing operating activities							27,385				3,426				27,724				22,773
Investing activities:
Purchases of property, plant and equipment							(17,562	)			(2,197	)			(16,187	)			(14,537	)
Purchases of other long-term investments							(17,263	)			(2,160	)			(858	)			(684	)
Purchases of short-term investments							(15,162	)			(1,897	)			(9,166	)			(702	)
Proceeds from sales of property, plant and equipment							1,362	2)			170				837				647
Proceeds from sales of other long-term investments							1,862				233				1,400				6,384
Proceeds from sales of short-term investments							22,445				2,808				12				1,838
Net cash used in continuing investing activities							(24,318	)			(3,043	)			(23,962	)			(7,054	)
Financing activities:
Loan proceeds							1,844				231				143				264
Principal repayments							(2,102	)			(263	)			(9,271	)			(5,167	)
Ordinary shares purchased			3				(1,589	)			(199	)			(1,684	)			(555	)
Ordinary shares issued							71				9				44				77
Dividends paid			3				(5,021	)			(628	)			(2,811	)			(2,711	)
Net cash used in continuing financing activities							(6,797	)			(850	)			(13,579	)			(8,092	)
Foreign currency effects on cash							(173	)			(22	)			(264	)			702
Discontinued operations:
Net cash provided by operating activities			2				—				—				838				1,805
Net cash provided by (used in) investing activities			2				—				—				8,840				(744	)
Net cash used in financing activities			2				—				—				(109	)			(141	)
Foreign currency effects on cash			2				—				—				5				77
Net cash provided by discontinued operations							—				—				9,574				997
Net increase (decrease) in cash and cash equivalents							(3,903	)			(488	)			(507	)			9,326
Cash and cash equivalents at beginning of year							14,366				1,797				14,873				5,547
Cash and cash equivalents at end of year							10,463				1,309				14,366				14,873
Cash disbursements (receipts) regarding:
Interest (net of amount capitalized) 3)							(48	)			(6	)			1,701				1,190
Income taxes							29,612				3,705				19,758				16,011

	*)		Presentation in euro is a convenience translation based on the exchange rate at 31 December, 2005, which was 7.9927 (unaudited).
	2)		In January 2005, Hydro received approximately NOK 1.1 billion relating to the sale of its 10% ownership interest in Snøhvit in 2004, and that was reported as a short term receivable within Other current assets as of 31 December, 2004.
	3)		Includes cash disbursements relating to early repayment of long term debt (“breaking costs”) of NOK 6 million in 2005 and NOK 938 million in 2004 (Note 8).
	4)		Includes non-cash charge relating to an expected state grant pertaining to an asset retirement obligation of NOK 2,207 million.

The accompanying notes are an integral part of the consolidated financial statements.

F 8				Notes to the consolidated financial statements
				Norsk Hydro ASA and subsidiaries

Notes to the consolidated financial statements
 

 

Note 1

Summary of Significant Accounting Policies

 

Norsk Hydro ASA is an offshore producer of oil and gas and an integrated aluminium supplier with operations in nearly 40 countries. The consolidated financial statements of Norsk Hydro ASA and its subsidiaries (Hydro) prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) are included on pages F3 to F5. Financial statement preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as disclosures of contingencies. Actual results may differ from estimates. The accompanying notes include disclosures required by US GAAP and are an integral part of financial statements.

Consolidation

The consolidated financial statements include Norsk Hydro ASA and subsidiary companies. The majority of Hydro’s consolidated subsidiaries are companies where Hydro controls directly or indirectly more than 50 percent of the voting interests. In certain circumstances, Hydro may control an entity through contractual arrangements or other means. Variable Interest Entities (VIEs) are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Entities for which Hydro is determined to be the primary beneficiary, are consolidated. Hydro currently consolidates one company based on the Variable Interest Model. All significant intercompany transactions and balances have been eliminated.

     Investments in companies (non-consolidated investees) in which Hydro exercises significant influence are accounted for using the equity method. The equity method involves showing the investment at Hydro’s share of the equity in the investee, including any excess values or goodwill. Hydro’s share of net income, including depreciation and amortization of excess values, is included in Equity in net income from non-consolidated investees. Material unrealized profits resulting from transactions with an investee are eliminated.

     Significant influence normally exists when Hydro has a substantial ownership interest of 20 to 50 percent of the voting shares. Hydro uses the equity method for a limited number of investees where Hydro owns less than 20 percent of the voting rights, based on an evaluation of the governance structure in each investee. In corporate joint ventures, special voting rights in some companies give each of the partners decision rights that exceed what normally would follow from the ownership share. This may be in the form of a specified number of board representatives, in the form of a right of refusal on important decisions, or by requiring a qualified majority for all or most of the important decisions. Participation in joint ventures is accounted for using the equity method, except for jointly controlled assets where the partners have an undivided interest. These and other participations in joint ventures in the upstream oil and gas business are accounted for using the pro-rata method.

     Hydro reviews non-consolidated investees for impairment when indicators of a possible loss in value are identified. As Hydro’s non- consolidated investees generally are not listed on a stock exchange or regularly traded, our impairment review for such investees can only in rare cases be based on market prices. Impairment indicators include such items as operating losses or adverse market conditions. The fair value of the investment is estimated based on valuation model techniques. If the estimated fair value of the investee is below Hydro’s carrying value and the impairment is considered to be other than temporary, the investment is written down as impaired.

Business Combinations

All business combinations are accounted for as acquisitions (purchase accounting). Purchase accounting involves recording assets and liabilities of the acquired company at their fair value as of the time of the acquisition. Any excess of the purchase price over the fair value is recorded as goodwill. When the ownership interest in a subsidiary is less than 100 percent, the recorded amount of assets and liabilities acquired reflect only Hydro’s relative share of excess values. However, for VIEs, the total fair value of assets and liabilities are recognized and any excess value attributable to non-controlling interests affects minority interests. See note 2 for a description of significant acquisitions and disposals during the past three years.

Foreign Currency Translation

The financial statements, including any excess values, of foreign operations are translated using the exchange rate at year-end for the balance sheet, and average exchange rates for the income statement. Translation gains and losses, including the effects of exchange rate changes on transactions designated as hedges of net foreign investments, are included in other comprehensive income.

Foreign Currency Transactions

Realized and unrealized currency gains or losses on transactions are included in net income. Similarly, unrealized currency gains or losses on assets and liabilities denominated in a currency other than the functional currency not qualifying for hedge accounting treatment are also included in net income.

Revenue Recognition

Revenue from sales of products, including products sold in international commodity markets, is recognized when ownership passes to the customer. Generally, this is when products are delivered. Certain contracts specify price determination in a later period. In these cases, the revenue is recognized in the period prices are determinable. Rebates and incentive allowances are deferred and recognized in income upon the realization or at the closing of the rebate period. In arrangements where Hydro acts as an agent, such as commission sales, only the net commission fee is recognized as revenue.

     Revenues from the production of oil and gas are recognized on the basis of the Company’s net working interest, regardless of whether the production is sold (entitlement method). The difference between Hydro’s share of produced volumes and sold volumes is not material.

     Activities related to the trading of derivative commodity instruments, or related to the purchase or delivery of physical commodities on a widely recognized commodity exchange or delivery hub, as well as physical commodity swaps with a single counterparty, are presented on a net

Notes to the consolidated financial statements				F 9
Norsk Hydro ASA and subsidiaries

basis in the income statement, with the margin from trading recognized in operating revenues.

Cash and Cash Equivalents

Cash and cash equivalents includes cash, bank deposits and all other monetary instruments with a maturity of less than three months at the date of purchase.

Short-term Investments

Short-term investments include bank deposits and all other monetary instruments with a maturity between three and twelve months at the date of purchase and Hydro’s current portfolio of marketable equity and debt securities. The securities in this portfolio are considered trading securities and are valued at fair value. The resulting unrealized holding gains and losses are included in financial income and expense. Investment income is recognized when earned.

Inventories

Inventories are valued at the lower of cost, using the first-in, first-out method (FIFO), or net realizable value. Cost includes direct materials, direct labor and the appropriate portion of production overhead or the purchase price of the inventory. Abnormal amounts of idle facility expense, freight, handling costs, and wasted materials are recognized as expense in the current period.

Investments

Investments include Hydro’s portfolio of long-term marketable equity securities that are not consolidated or accounted for using the equity method. The portfolio is considered available-for-sale securities and is measured at fair value. The resulting unrealized holding gains and losses, net of applicable taxes, are credited or charged to Other Comprehensive Income. Other investment income is recognized when earned.

     Investments where a market value is not readily observable are recognized at cost. Investments are reviewed for impairment if indications of a loss in value are identified. Fair value of the investment is estimated based on valuation model techniques for non-marketable securities. When the estimated fair value of the investee is below Hydro’s carrying value and the impairment is considered to be other than temporary, the investment is written down as impaired.

Exchanges of Nonmonetary Assets

As of 1 January 2005 Hydro adopted SFAS No. 153 “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”. Nonmonetary transactions that have commercial substance are accounted for at fair value and any resulting gain or loss on the exchange is recognized in the income statement. A nonmonetary exchange has commercial substance if Hydro’s future cash flows are expected to change significantly as a result of the exchange. Hydro accounts for certain non-monetary exchanges of assets at fair value and accounts for certain other nonmonetary exchanges of assets where Hydro has substantial continuing involvement without recognizing a gain or loss on the exchange.

Property, Plant and Equipment

Property, plant and equipment is carried at historical cost less accumulated depreciation, depletion and amortization. If a legal obligation for the retirement of a tangible long-lived asset is incurred, the carrying value of the related asset is increased by the estimated fair value of the asset retirement obligation upon initial recognition of the liability.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, as described in FASB Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and disposition of the asset or group of assets working together to create identifiable, relatively independent cash flows. If the carrying amount is not recoverable, a write-down (impairment) to fair value is recorded.

Periodic maintenance and repairs applicable to production facilities are accounted for on an accrual basis. Normal maintenance and repairs for all other properties are expensed as incurred. Major replacements and renewals that materially extend the life of properties are capitalized and any assets replaced are retired.

Capitalized Interest Interest is capitalized as part of the historical cost of qualifying assets, which is amortized over the estimated useful life of the asset.

Leased Assets Leases which provide Hydro with substantially all the rights and obligations of ownership are accounted for as capital leases. Such leases are valued at the present value of the minimum lease payments or the fair value, if lower, and recorded as assets under Property, plant and equipment. The liability is included in Long-term debt. The capital leases are depreciated and the related liability reduced by the amount of the lease payment less the effective interest expense. All other leases are classified as operating leases and the lease payments are recognized as an expense over the term of the lease.

Exploration and Development Costs of Oil and Gas Reserves Hydro uses the successful efforts method of accounting for oil and gas exploration and development costs. Exploratory costs, excluding the cost of exploratory wells and acquired exploration rights, are charged to expense as incurred. Drilling costs for exploratory wells are capitalized pending the determination of the existence of proved reserves. If reserves are not found, the drilling costs are charged to operating expense.

     Cost relating to acquired exploration rights are allocated to the relevant areas and capitalized, pending the determination of the existence of proved reserves. The acquired exploration rights are charged to operating expense when a determination is made that proved reserves will not be found in the area. Each block or area is assessed separately. All development costs for wells, platforms, equipment and related interest are capitalized. Capitalized exploration and development costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that Hydro uses future net cash flows to evaluate unproved properties for impairment, the improved reserves are risk adjusted before estimating future cash flows associated with those resources. Preproduction costs are expensed as incurred. For further information see note 27.

Depreciation, Depletion and Amortization Depreciation is determined using the straight-line method with the following rates:

Machinery and equipment		5 — 25 percent
Buildings		2 — 5 percent
Other		10 — 20 percent

F 10				Notes to the consolidated financial statements
				Norsk Hydro ASA and subsidiaries

Oil and gas producing properties are depreciated individually using the unit-of-production method as proved developed reserves are produced. Unit-of-production depreciation rates are reviewed and revised whenever there is an indication of the need for a change in the rates and at a minimum all producing fields are reviewed at least once a year. Any revisions in the rates are accounted for prospectively.

     Depreciation and depletion expense includes the accretion of discounted asset retirement obligations.

Asset Retirement Obligations

Hydro recognizes the estimated fair value of asset retirement obligations in the period in which it is incurred. Obligations for oil and gas installations are recognized when the assets are constructed and ready for production. Related asset retirement costs are capitalized as part of the carrying value of the long-lived asset and the liability is accreted for the change in its present value each reporting period. Liabilities that are conditional on a future event (e.g. the timing or method of settlement), whether under the control of Hydro or not, are recognized if the fair value of the liability can be reasonably estimated. Asset retirement costs are depreciated over the useful life of the related long-lived asset.

Intangible Assets

Intangible assets acquired individually or as a group are recorded at fair value when acquired. Intangible assets acquired in a business combination are recognized at fair value separately from goodwill when they arise from contractual or legal rights or can be separated from the acquired entity and sold or transferred. Intangible assets with finite useful lives are amortized on a straight-line basis over their benefit period. Intangible assets determined to have an indefinite useful life are not amortized but are subject to impairment testing on an annual basis.

Goodwill

When a business is acquired, the purchase price in excess of the identified fair value of assets and liabilities is accounted for as goodwill. Goodwill is not amortized, but is reviewed for impairment at a minimum on an annual basis and whenever indicators of possible impairment are observed. Goodwill is recorded at the reporting unit level, which is one level below the operating segments. For Hydro this is the sector level in Aluminium, and the Exploration & Production sub-segment level in Oil & Energy; see note 5 for a description of segments. The impairment test requires that the fair value of the reporting unit be compared to the carrying value of the reporting unit. For this purpose, the fair value of the reporting unit is estimated by management using valuation techniques.

Contingencies and Guarantees

Hydro recognizes a liability for the the fair value of obligations it has undertaken in issuing guarantees, including Hydro’s ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. Contingencies are recognized in the financial statements when probable of occurrence and can be estimated reliably.

Oil and Gas Royalty

Oil and gas revenue is recorded net of royalties payable in kind.

Shipping costs

Shipping and handling costs are included in Other operating expenses. Shipping and handling costs invoiced to customers are included in Operating revenues.

Research and Development

Research and development costs are expensed as incurred.

Emission Rights

Hydro accounts for government granted and purchased CO₂ emission allowances at nominal value (cost) as an intangible asset. The emission rights are not amortized as they are either settled on an annual basis before year-end (matched specifically against actual CO₂ emissions) or rolled over to cover the next year’s emissions; impairment testing is done on an annual basis. Actual CO₂ emissions over the 95 percent level granted by the government are recognized as a liability at the point in time when emissions exceed the 95 percent level. Any sale of government granted CO₂ emission rights is recognized at the time of sale at the transaction price. See note 16 for additional information.

Other Income (Expense), net

Transactions resulting in income or expense which are material in nature and from sources other than normal production and sales operations are classified as Other income and expense.

Income Taxes

Deferred income tax expense is calculated using the liability method in accordance with SFAS 109. Under this method, deferred tax assets and liabilities are measured based on the difference between the carrying value of assets and liabilities for financial reporting and their tax basis when such differences are considered temporary in nature. Deferred tax assets are reviewed for recoverability, and a valuation allowance is recorded against deferred tax assets to the extent that it is more likely than not that the deferred tax asset will not be realized. Deferred income tax expense represents the change in deferred tax asset and liability balances during the year except for the deferred tax related to items charged directly to equity. Changes resulting from amendments and revisions in tax laws and tax rates are recognized when the new tax laws or rates become effective.

     Hydro recognizes the effect of uplift, a special deduction for petroleum surtax in Norway, at the investment date. Deferred taxes are not provided on undistributed earnings of most subsidiaries, as such earnings are deemed to be indefinitely reinvested.

Derivative Instruments

Hydro applies FASB Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities, as amended”, when accounting for derivatives, as well as when determining whether contracts are derivatives. Derivative financial instruments are marked-to-market with the resulting gain or loss reflected in net financial expense, except when the instruments meet the criteria for hedge accounting. Derivatives are classified as short-term if their final maturity date is within 12 months of the balance sheet date. If Hydro has master netting agreements, or the intention and ability to settle two

		Notes to the consolidated financial statements				F 11
		Norsk Hydro ASA and subsidiaries

or more derivatives net, they are presented net on the face of the balance sheet. Otherwise derivative contracts are presented gross at their fair value.

     Forward currency contracts and currency options are recognized in the financial statements and measured at fair value at each balance sheet date with the resulting unrealized gain or loss recorded in interest expense and foreign exchange gain (loss).

     Interest income and expense relating to swaps are netted and recognized as income or expense over the life of the contract. Foreign currency swaps are translated into Norwegian kroner at applicable exchange rates as of the balance sheet date with the resulting unrealized exchange gain or loss recorded in Financial income (expense), net. Swaption contracts are marked to their market value at each balance sheet date with the resulting unrealized gain or loss reflected in Financial income (expense), net.

     Derivative commodity instruments are marked-to-market with their fair value recorded in the balance sheet as either assets or liabilities. Adjustments for changes in the fair value of the instruments are reflected in the current period’s revenue and/or operating cost, unless the instrument is designated as a hedge instrument and qualifies for hedge accounting.

     Hedge accounting is applied when specific hedge criteria are met. The changes in fair value of the qualifying hedging instruments are offset in part or in whole by the corresponding changes in the fair value or cash flows of the underlying exposures being hedged. For cash flow hedges, gains and losses on the hedging instruments are deferred in Other Comprehensive Income (OCI) until the underlying transaction is recognized in earnings. When it is determined that a forecasted hedged transaction is not probable to occur, all the corresponding gains and losses deferred in OCI are immediately recognized in earnings. Any amounts resulting from hedge ineffectiveness for both fair value and cash flow hedges are recognized in current period’s earnings. For fair value hedges, both the changes in the fair value of the designated derivative instrument and the changes in the fair value of the hedged item are recognized currently in earnings.

     Energy contracts are accounted for according to EITF 02-3 “Issues involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities”, and are recorded in the balance sheet at fair value unless those contracts qualify for the normal purchase or normal sale exemption. Energy contracts that do not meet the criteria of EITF 02-3 are treated as executory contracts with no gain or loss recognized prior to realization.

Share-Based Compensation

Hydro accounts for share-based compensation in accordance with Accounting Principles Board (APB) Opinion 25 as interpreted by FIN 28, and provides disclosures as required under the FASB Statement of Financial Accounting Standards No. 123 “Share-Based Payments”. For variable stock option awards and awards settled in cash, compensation cost is measured at the end of each period using the intrinsic method. For variable and cash settled awards where vesting depends on achieving a specified target share price increase, compensation cost is recognized when it is probable the performance criteria will be met. Compensation is charged to expense pro-rata over the vesting period.

     Hydro offers treasury shares to employees at discounted prices to encourage share ownership. Issuance of treasury shares at a discount to employees results in a charge to compensation expense based on the difference between the market value of the share at the date of issuance and the price paid by employees. For further information see note 4.

Pro Forma Information

The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS 123 to share appreciation rights.

In NOK millions,
except for earnings per share		2005				2004				2003
Net income, as reported			15,638				12,560				10,968
Add: share-based employee compensation expense included in reported net income, net of tax			48				8				—
Less: Total share-based compensation expense determined under the fair value method, net of tax			29				11				3
Pro-forma net income			15,657				12,557				10,965
Earnings per share:
Basic and diluted as reported			62.40				49.40				42.60
Basic and diluted, pro-forma			62.50				49.40				42.60

Employee Retirement Plans

Pension costs are calculated in accordance with FASB Statement of Accounting Standards No. 87 “Employers’ Accounting for Pensions” and FASB Statement of Accounting Standards No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”. Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Accumulated gains and losses in excess of 10 percent of the greater of the benefit obligation or the fair value of assets are amortized over the remaining service period of active plan participants.

Discontinued operations

When an asset or a group of assets are decided to be sold, they are reported as Assets held for sale in accordance with FASB Statement of Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, provided that certain criteria are met, including that it is probable that the sale will be completed within one year. When a component of the entity is sold or decided to be sold, it is reported as a Discontinued operation, provided that certain criteria are met. A component of the entity can be a reportable segment or a smaller unit which can be clearly distinguished, and for which separate financial information is available. Assets, liabilities, cash flows, results of operations and any gain or loss from disposal are excluded from Continuing operations and reported separately. Components to be disposed of other

F 12				Notes to the consolidated financial statements
				Norsk Hydro ASA and subsidiaries

than by sale are reclassified to Discontinued operations as of the date of disposal. Prior period’s assets, liabilities, cash flows and results of operations are reclassified to be comparable. Immaterial disposal groups are not classified as discontinued operations.

As a result of rounding adjustments, the figures in columns included in the financial statements may not add up to the total for that column.

Changes in Accounting Principles

Asset Retirement Obligations

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47 “Accounting for Conditional Asset Retirement Obligations”. This Interpretation is a clarification of the term “Conditional Asset Retirement Obligation” as used in Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” and requires an entity to recognize a liability for a legal obligation to perform asset retirement activities even though the retirement of the asset is conditional on a future event. Hydro has adopted FIN 47 as of 31 December 2005. The cumulative effect of the change in accounting principle related to FIN 47 is an after-tax decrease in net income of NOK 78 million.

     Effective 1 January 2003, Hydro adopted FASB Statement of Accounting Standards No. 143 “Accounting for Asset Retirement Obligations”. As a result of the new accounting standard, a positive after-tax effect of NOK 310 million was recorded as the cumulative effect of change in accounting principle in the Company’s 2003 results of 2003. For further information see note 21.

Inventory Cost

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 “Inventory Cost, an amendment of ARB 43, Chapter 4”. The standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be recognized as current period charges rather than as a portion of the inventory cost. Hydro adopted the standard effective as of 1 July 2005. The impact of adopting SFAS 151 on Hydro’s financial statements has not been material.

Exchanges of Nonmonetary Assets

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”. The statement amends APB 29 “Accounting for Nonmonetary Transactions”, FASB Statement of Financial Accounting Standards No. 19 “Financial Accounting and Reporting by Oil and Gas Producing Companies” and certain other standards. Hydro has implemented the provisions of SFAS 153 for nonmonetary exchange transactions as of 1 January 2005 with no material effect.

Suspended well cost

Effective for reporting periods beginning after the issuance date of 4 April 2005, the FASB Staff Position No. FAS 19-1 “Accounting for Suspended Well Costs” provides guidance in the accounting for exploratory well costs. Paragraph 19 of FASB Financial Accounting Standards Statement No. 19 “Financial Accounting and Reporting by Oil and Gas Producing Companies” (SFAS 19) requires the cost of drilling exploratory wells to be capitalized pending determination of whether the well has found proved reserves. FSP FAS 19-1 amended SFAS 19 to allow suspended well costs to remain capitalized beyond one year from drilling if certain specific criteria are met and additional disclosures provided. Hydro has not recognized any changes to the amounts previously capitalized. For further information see note 27.

Consolidation of Variable Interest Entities

Effective 1 January 2004, Hydro adopted FASB Interpretation 46 (revised December 2003) “Consolidation of Variable Interest Entities” (FIN 46R), which is an interpretation of Accounting Research Bulletin No. 51 “Consolidated Financial Statements”, relating to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. These entities are referred to as variable interest entities or VIEs. FIN 46R provides guidance for determining which party retains the controlling financial interest in VIEs when such interest is achieved through arrangements other than voting rights. Implementation of the new requirements depended on when a company became involved with such entities. Because Hydro did not become involved with any new VIEs during the period 31 January to 31 December 2003 or have any interests in Special Purpose Entities (SPEs) as of 31 December 2003, implementation of the Interpretation was required as of 31 March 2004. See note 26 for additional information.

Contractual Mineral Rights

The FASB issued FSP FAS 142-2 “Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil- and Gas-Producing Entities” on 2 September 2004. This FSP is effective for the first reporting period beginning after the issuance date and clarifies that the costs for acquiring contractual mineral rights in oil and gas properties would continue to be recorded as those for tangible assets. It also addresses whether the scope exception within SFAS 142 for the accounting as pre-scribed in SFAS 19 extends to the balance sheet classification and disclosures for drilling and mineral rights of oil- and gas-producing entities. The FSP concluded that the scope exception in SFAS 142 extends to the balance sheet classification and disclosure provisions for such assets. The FSP confirms Hydro’s current practice.

		Notes to the consolidated financial statements				F 13
		Norsk Hydro ASA and subsidiaries

Energy contracts

Effective 1 January 2003, Hydro adopted EITF 02-3 “Issues involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities”. This standard requires only energy contracts that meet the definition of a derivative according to FASB Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” and are held for trading, be recorded in the balance sheet at fair value. Other energy contracts are recorded at the lower of historical cost and fair market value. This change applies to contracts entered into before 25 October 2002. For contracts entered after 25 October 2002, the regulation applied from initial recognition. As a result of the new regulation, a negative after-tax effect of NOK 29 million was recorded as a cumulative effect of a change in accounting principle in the Company’s 2003 result.

Exit costs

Effective 1 January 2003 Hydro adopted FASB Financial Accounting Standards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. The standard supersedes EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and changed accounting for costs related to closing and restructuring an activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an entity’s commitment to an exit plan. Termination benefits for involuntary termination of employees that are not required to render services beyond a minimum retention period are expensed as of the date of employee notification.

New Pronouncements

Share-Based payment

In December 2004 the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment”. The revised standard requires all share-based payment plans to be recognized in the financial statements at fair value. Hydro will adopt SFAS 123 (R) as of 1 January 2006. The impact of the revised standard is not expected to be material for Hydro’s current share-based payment plans.

Accounting Changes and Error Corrections

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”. The standard applies to all voluntary changes in accounting principle, error corrections and required changes due to new accounting pronouncements which do not specify a certain transition method. It generally requires retrospective application to prior periods’ financial statements for changes in accounting principles. The Standard is effective for accounting changes and error corrections occurring in periods beginning after 15 December 2005.

Inventory Counterparty Purchases and Sales

During 2005 the FASB ratified the consensus reached by the EITF on Issue No. 04-13 “Accounting for Purchases and Sales of Inventory with the Same Counterparty”. The EITF concluded that inventory purchase and sale transactions with the same counterparty that are entered into in contemplation of one another should be combined for purposes of applying Opinion 29 (nonmonetary exchanges). The EITF also concluded that exchanges of inventory should be recognized at carryover basis except for exchanges of finished goods for either raw materials or work-in-process, which would be recognized at fair value. Issue No. 04-13 is effective for new arrangements entered into in the first interim period beginning after March 15, 2006. Hydro will implement EITF 04-13 no later than second quarter of 2006 with no material impact expected.

Altersteilzeit (ATZ) Early Retirement Programs

In June 2005 the EITF reached a consensus on Issue No. 05-05 “Accounting for the Altersteilzeit Early Retirement Programs and Similar Type Arrangements”. An Altersteilzeit Type II program is an early retirement program supported by the German government. This Issue addresses the accounting treatment of the annual bonus and additional pension contributions. The EITF consensus is that employee benefits provided under a Type II ATZ arrangement should be accounted for as a termination benefit under the FASB Statement of Financial Accounting Standards No. 112 “Employers’ Accounting for Postemployment Benefits”. Recognition of the cost of the benefits begins at the time individual employees enroll in the ATZ arrangements (e.g., sign a contract). The German government provides a subsidy to an employer related to the early retirement benefit payments if the employer has hired replacement employees. The EITF concluded that subsidies received under the ATZ arrangements should be accounted for when the employer meets the criteria necessary to receive the subsidy. The consensus is effective for plans within its scope in the first fiscal year that begins after 15 December 2005. Hydro has operations in Germany and is currently evaluating the accounting impact but does not expect the adoption of EITF 05-05 to materially impact the results of operations or financial position.

Recognition of buy/sell arrangements

In February 2005, the SEC issued guidance requiring companies to provide disclosures about their buy/sell arrangements. A buy/sell arrangement is one in which a company buys and sells a commodity with the

F 14				Notes to the consolidated financial statements
				Norsk Hydro ASA and subsidiaries

same counterparty under a single contract or separate contracts entered into concurrently. The first issue, recently discussed by the EITF and now addressed by EITF 04-13, concerns whether such buy/sell arrangements should be considered non-monetary exchanges accounted for at historical cost in accordance with APB Opinion No. 29, and, if so, when, if at all, could such arrangements be accounted for at fair value. A second issue is whether buy/sell arrangements should be presented gross as revenue and expense in the income statement, or whether such arrangements should be presented net.

     Hydro currently presents the trading of derivative commodity instruments and physical commodities where net settlement occurs on a net basis, with the margin included in operating revenues. Trading of physical commodities, which are not net settled, are generally presented on a gross basis in the income statement. Hydro has reviewed its presentation of certain buy/sell arrangements whereby commodities are sold and bought with the same counterparty. Hydro has concluded that net presentation on the income statement is a better representation of the underlying business purpose of certain contracts. As a result, effective 1 January 2005, these arrangements have been presented net in the income statement. These arrangements were previously presented gross in the income statement, and have been reclassified for comparison purposes. Total revenue under these contracts was NOK 1,534 million for 2004 and NOK 1,983 for 2003.

 

Note 2

 

During the three years ended 31 December 2005, Hydro entered into the following significant business combinations and dispositions.

2005 Acquisitions

In September 2005 Hydro issued an offer to acquire Spinnaker Exploration Company (Spinnaker), a US based public company. The acquisition substantially increased Hydro’s presence and growth potential in the US Golf of Mexico. The transaction was completed 13 December after approval of Spinnakers shareholders and US authorities, and is reflected in Hydro’s consolidated results from that date. Spinnaker was engaged in exploration, development and production of oil and gas, mainly in the Gulf of Mexico. The consideration for all outstanding shares, including direct acquisition costs, amounted to NOK 16,534 million (USD 2,458 million).

     Assets acquired and liabilities assumed have been recognized at estimated fair value. The majority of the fair values are allocated to developed and undeveloped oil and gas properties. Seismic database licenses controlled by Spinnaker, and rights to acquire such licenses by paying a change of control fee have been allocated a combined value of around NOK 500 million, of which NOK 320 million relates to database licenses that Hydro gained control of upon the acquisition. As Hydro uses the successful effort method of accounting for oil and gas exploration, this part of the purchase price was expensed as Exploration expense at acquisition. The remaining net value of NOK 180 million will be expensed as the rights to acquire the seismic database licenses are exercised or expire during 2006. The allocation results in recognition of goodwill. The main contributors to goodwill are the difference between nominal deferred tax and the present value of deferred tax, and certain seismic information not qualifying for separate recognition as intangible assets. The allocation of purchase price is provisional, and may be changed as further information about the acquired assets and liabilities assumed becomes known through remaining planned analyses of expected reserves in oil and gas properties and intangible assets.

 

 

PRELIMINARY ALLOCATION OF PURCHASE PRICE:

 

Amounts in NOK million
Cash and cash equivalents			89
Other current assets			1,094
Property, plant and equipment			18,869
Goodwill			2,991
Short-term liabilities			(886	)
Long-term liabilities			(5,622	)
Estimated fair value of the net assets of Spinnaker			16,534

 

2005 Dispositions

In November 2005 Hydro agreed to sell its 68.8 percent ownership share in BioMar Holding A/S for a total consideration of NOK 947 million. The transaction was completed in December after approval of the relevant authorities, and resulted in a gain of NOK 693 million. BioMar was included in Other activities.

2004 Acquisitions

No major acquisition were agreed or completed during 2004.

2004 Dispositions

In June 2004, Hydro sold its German based alumina activities consisting of the 50 percent stake in the non-consolidated investee Aluminium Oxid Stade GmbH, the related chemical grade alumina business and the dedicated bauxite supply source represented by Hydro’s 10 percent share in Halco (Mining) Inc. The total consideration was NOK 677 million. The dispositions resulted in a total gain of NOK 35 million. In December 2003, Hydro entered into an agreement to sell 80.1 percent of Pronova Biocare for NOK 165 million. The sale was completed in January 2004, resulting in a gain of NOK 110 million.

2003 Acquisitions

No major acquisition were agreed or completed during 2003.

2003 Dispositions

During 2003, Hydro sold non-core subsidiaries and ownership interests for a total consideration of NOK 7.0 billion. The dispositions resulted in a total gain of NOK 995 million. In September 2002, KFK (later renamed BioMar Holding AS) entered into agreements to sell its Swedish feed and grain activities for approximately NOK 450 million. The sale was completed in January 2003 after approval from competition authorities. In December 2002, Hydro entered into an agreement for the sale of the Flexible Packaging unit for a total consideration of approximately NOK 3 billion. Flexible Packaging was acquired as part of the VAW acquisition in first quarter 2002, and is part of Other activities. The transaction was completed in April 2003, and did not result in any significant gain or loss. In June, Hydro transferred its interest in Sundsfjord Kraft ANS in exchange for 20.2 percent of the shares of SKS Produksjon AS resulting in a gain of NOK 326 million. In July, Hydro entered into an agreement for the sale of Carmeda AB, for approximately NOK 180 million, resulting in a gain of NOK 139 million. In September, Hydro entered into an agreement to sell its stake in Skandinaviska Raffinaderi AB (Scanraff) for approximately NOK 1.3 billion. The sale was completed in December, resulting in a gain of NOK 490 million. The agreement included the possibility of a price adjustment depending on the development in refinery

		Notes to the consolidated financial statements				F 15
		Norsk Hydro ASA and subsidiaries

margins during 2004 and 2005. High refinery margins during 2004 and 2005 have resulted in additional gain of NOK 59 million recognized in 2004 and NOK 65 million recognized in 2005.

Pro forma Information (Unaudited)

The following unaudited pro forma information has been prepared assuming Spinnaker Exploration Company was acquired as of the beginning of the periods presented.

Amounts in NOK million		2005				2004
Operating revenue			176,357				155,726
Operating income			45,121				29,621
Income before cumulative effect of change in accounting principles.			14,589				10,832
Net income			14,511				10,832
Earnings per share			57,90				42,60

 

The pro forma information has been prepared for comparability purposes only, and does not purport to be indicative of what the results of operations would have been had the transaction occurred on the dates described above. The pro forma information is based on Hydro’s reported results for 2005 and 2004. For Spinnaker, the pro forma information is based on their financial statements for 2004, and management accounts for 2005. Spinnaker’s results have been adjusted for the major effects of differences between full cost accounting and successful effort accounting for exploration for oil and gas.

     Spinnaker’s results have been translated into Norwegian kroner at average exchange rates for the periods. Pro forma adjustments are made for depreciation of fair value adjustments, mainly related to producing oil and gas fields which are depreciated according to the unit-of-production method based on proved reserves. Such depreciations are high as the acquisition took place during a period with substantially higher oil and gas prices than prices experienced in the period covered by the pro forma information. In addition, finance cost for the acquisition cost and deferred tax related to the above is included.

     The effect of the remaining acquisitions and dispositions for 2005 and 2004 is not significant.

Demerger 2004

In November 2003, Hydro’s Board of Directors concluded a plan to demerge the Company’s Agri activities and transfer the operations to a newly formed company, Yara International ASA. The plan was approved by the an Extraordinary General Meeting on 15 January 2004. The demerger was completed on 24 March 2004 and Yara was listed on the Oslo Stock Exchange with effect from 25 March 2004. Under the demerger plan, the demerger had financial effect from 1 October 2004. From this date, Yara International ASA assumed the risk of the agri activities. The demerger was reflected in the accounts as of the completion date, 24 March 2004. In the demerger process, substantial assets and liabilities, including subsidiaries and non-consolidated investees, were transferred to Yara. As a result of the demerger, Hydro’s share capital was reduced by 8.5 percent, representing the estimated relative value of the transferred Agri activities compared to the business activity retained by Hydro. The total equity reduction amounted to NOK 7,614 million. In accordance with the demerger plan, adjustments to the equity reduction may occur relating to the allocation of certain costs and liabilities where amounts are not fully determinable. Revisions are possible through the end of 2009. Possible related adjustments are not expected to be material.

     At the completion date, Hydro’s shareholders received shares in Yara International ASA equal to 80 percent of the to total value of Yara, based on a valuation completed at the time of the demerger plan (November 2003). The remaining shares in Yara International ASA were owned by Norsk Hydro ASA. The Company has subsequently sold its share holdings in Yara in connection with the demerger transaction. The demerger was reflected in the Company’s accounts based on historical values of the transferred assets and liabilities. Hydro did not recognize any gain or loss, or received any proceeds, as a result of the demerger transaction. Hydro received proceeds of NOK 2,619 million, and recognized a gain of NOK 533 million, from sale of its 20 percent ownership in Yara in March 2004. The gain is included in “Income from discontinued operations”.

     Under the Norwegian public limited companies act section 14-11, Hydro and Yara are jointly liable for liabilities accrued before the demerger date. This statutory liability is unlimited in time, but is limited in amount to the net value allocated to the non-defaulting party in the demerger.

Income from discontinued operations

Income from discontinued operations includes operating results from activities which, according to the demerger plan, have been transferred to Yara International ASA. Effects directly related to Yara activities, the demerger process and Hydro’s sale of Yara shares are included. Results from Yara activities includes net income from subsidiaries transferred in the demerger. In addition income and expenses in Norsk Hydro ASA and certain holding companies abroad directly related to the Yara activities are included to the extent these activities are transferred to Yara or are terminated as a direct consequence of the demerger of Yara. Income from discontinued operations also includes financial expense related to loans in companies transferred to Yara. No financial expenses related to loans retained in Hydro are allocated to discontinued operations. External fees and similar expenses related to the waiving of Yara’s joint liabilities for certain of Hydro’s loans, and expenses directly related to the demerger process and Hydro’s sale of Yara shares are included. Hydro’s gain on sale of its shares in Yara International ASA, after direct sales expenses and tax, amounted to NOK 385 million. Tax is allocated to the sales gain based on tax rules enacted at the time of sale.

     For prior periods, assets and liabilities transferred to Yara in the demerger process are included in “Assets of discontinued operations” and “Liabilities of discontinued operations”, respectively. This includes assets and liabilities in subsidiaries transferred to Yara, assets and liabilities in business units separated from Hydro’s other activities for which separate accounts exists in addition to other identified assets transferred to Yara.

     Cash flows from discontinued operations includes cash flows from activities transferred to Yara and expenses directly related to the demerger. In addition, cash flows include Hydro’s sale of its shares in Yara immediately after the demerger in the amount of NOK 2,619 million, and Yara’s repayment of debt to Hydro in the amount of NOK 7.1 billion.

     The major part of discontinued activities relates to the Agri business area within Hydro’s segment reporting. Minor amounts also relate to Pronova which is included within Other businesses. In addition, Corporate and eliminations reflect the transfer to Yara of certain activities previously reported as part of Corporate, and demerger costs included in Corporate for 2003.

     Prior periods are restated to be presented on a comparable basis. The following table summarize financial information for the discontinued operations for the periods they are included in Hydro’s financial statements.

F 16				Notes to the consolidated financial statements
				Norsk Hydro ASA and subsidiaries

 

 

SUMMARY OF FINANCIAL DATA FOR DISCONTINUED OPERATIONS

 

NOK million		2005				2004				2003
Operating revenues			—				10,036				38,334
Operating income			—				936				2,633
Non-consolidated investees			—				131				610
Financial income (expense), net			—				(88	)			47
Other income, net			—				—				40
Income before taxes and minority interest			—				979				3,330
Income tax expense			—				(307	)			(1,015	)
Minority interest			—				26				(3	)
Income before sale of shares			—				698				2,312
Gain from sale of shares			—				533				—
Tax on gain from sale of shares			—				(148	)			—
Net income US GAAP			—				1,083				2,312

31 December
NOK million		2005				2004
Current assets			—				—
Non-current assets			—				—
Total assets			—				—
Current liabilities			—				—
Long-term liabilities			—				—
Minority interest			—				—
Discontinued operations, net US GAAP			—				—

NOK million		2005				2004
Net cash provided by operating activities			—				838
Net cash provided by (used in) investing activities1)			—				8,840
Net cash used in financing activities			—				(109	)
Foreign currency effects on cash flows			—				5
Net cash provided by discontinued operations			—				9,574

 

Note 3

Consolidated shareholders’ equity

 

Norsk Hydro ASA had authorized and issued 258,954,428 ordinary shares having a nominal value of NOK 18.30 per share as of 31 December 2005 and 2004. As of 31 December 2003 Norsk Hydro ASA had authorized and issued 266,596,650 ordinary shares having a nominal value of NOK 20 per share. As of 31 December 2005, 8,815,964 shares were treasury stock resulting in 250,138,464 outstanding ordinary shares, and as of 31 December 2004, outstanding ordinary shares were 250,839,230. Remaining treasury stock may be used as consideration in connection with commercial transactions or share schemes for the employees and representatives of the Corporate Assembly and the Board of Directors. The weighted average number of outstanding shares used for calculating basic and diluted earnings per share was 250,807,304 for the year 2005, 254,411,433 for 2004 and 257,528,511 for 2003.

     In December 2004, an extraordinary General Meeting approved a capital reduction by cancellation of 2,808,810 treasury shares acquired in 2004 in a buyback program approved by the 2004 Annual General Meeting. These shares were acquired at a market price of NOK 1,239 million. The extraordinary General Meeting also authorized the redemption of 2,191,190 shares owned by the Norwegian State. As compensation, the State received NOK 981 million. The cancellation and redemption were completed in February 2005. In addition, the General Meeting authorized a new buyback program limited to 5,617,621 shares. As part of this program, a total of 10 million shares may be cancelled, including shares owned by the Norwegian State. A decision to cancel any of the shares repurchased requires approval by a minimum of two-thirds of the shares represented at a future General Meeting.

     In January 2004, an extraordinary General Meeting approved a capital reduction by cancellation of 1,484,300 treasury shares acquired in 2003 for a market price of NOK 555 million. The General Meeting also authorized the redemption of 1,157,922 shares owned by the Norwegian State. As compensation, the State received NOK 445 million. The cancellation and redemption were completed on 17 March 2004. In addition, the General Meeting approved the demerger of Norsk Hydro ASA, resulting in reduction of the nominal value of each Hydro share from NOK 20 to NOK 18.30. Each shareholder received one share in the newly established Yara International ASA, with a nominal value of 1.70 for each Hydro share. The demerger was completed on 24 March 2004.

     In 2005, Hydro sold 233,634 shares of its treasury stock to employees for a price of NOK 122 million.

		Notes to the consolidated financial statements				F 17
		Norsk Hydro ASA and subsidiaries

 

 

CONSOLIDATED SHAREHOLDERS’ EQUITY

 

Amounts in NOK million		Ordinary Shares issued								Additional				Total								Treasury Stock								Accumulated				Total
except number of shares		Norsk Hydro ASA								paid-in				paid-in				Retained				Norsk Hydro ASA								other compre-				shareholders’
in thousands		Number				Amount				capital				capital				earnings				Number				Amount				hensive income				equity
Balance 31 December 2002			266,597				5,332				15,088				20,420				63,260				(8,636	)			(3,052	)			(4,761	)			75,867
Net income 2003																			10,968																10,968
Dividend declared and paid (NOK 10.50 per share)																			(2,711	)															(2,711	)
Minimum pension liability																															(113	)			(113	)
Hedge of net investment																															(333	)			(333	)
Cash flow hedges																															35				35
Purchase of treasury stock																							(1,484	)			(555	)							(555	)
Treasury stock reissued to employees											(17	)			(17	)							235				83								66
Foreign currency translation																															4,856				4,856
Balance 31 December 2003			266,597				5,332				15,071				20,403				71,517				(9,885	)			(3,524	)			(316	)			88,080
Net income 2004																			12,560																12,560
Dividend declared and paid (NOK 11.00 per share)																			(2,811	)															(2,811	)
Net unrealized gain on securities																															(2	)			(2	)
Minimum pension liability																															(132	)			(132	)
Hedge of net investment																															320				320
Cash flow hedges																															(339	)			(339	)
Purchase of treasury stock																							(2,809	)			(1,239	)							(1,239	)
Treasury stock reissued to employees											19				19								285				102								121
Cancellation treasury stock			(4,294	)			(82	)			(1,511	)			(1,593	)			2				4,294				1,591								—
Redeemed shares, the Norwegian State			(3,349	)			(63	)			(1,363	)			(1,426	)																			(1,426	)
Demerger Yara International ASA							(448	)			(1,749	)			(2,197	)			(5,957	)											540				(7,614	)
Foreign currency translation																															(1,628	)			(1,628	)
Balance 31 December 2004			258,954				4,739				10,467				15,206				75,311				(8,115	)			(3,070	)			(1,557	)			85,890
Net income 2005																			15,638																15,638
Dividend declared and paid (NOK 20.00 per share)																			(5,021	)															(5,021	)
Net unrealized gain on securities																															(9	)			(9	)
Minimum pension liability																															(510	)			(510	)
Hedge of net investment																															33				33
Cash flow hedges																															(751	)			(751	)
Purchase of treasury stock																							(934	)			(608	)							(608	)
Treasury stock reissued to employees											33				33								234				88								122
Foreign currency translation																															711				711
Balance 31 December 2005			258,954				4,739				10,500				15,239				85,928				(8,816	)			(3,590	)			(2,083	)			95,495

F 18				Notes to the consolidated financial statements
				Norsk Hydro ASA and subsidiaries

 

 

COMPONENTS OF TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME

 

		Net unrealized				Net unrealized				Net gain				Minimum				Net foreign				Total accumulated
		gain				gain (loss)				cash				pension liability				currency translation				other comprehen-
Amounts in NOK million		on securities				investment hedge				flow hedge				adjustment				loss				sive income (loss)
Balance 31 December 2002			11				81				1,114				(883	)			(5,084	)			(4,761	)
Balance 31 December 2003			11				(252	)			1,149				(996	)			(228	)			(316	)
Balance 31 December 2004			9				102				810				(814	)			(1,664	)			(1,557	)
Balance 31 December 2005			—				135				59				(1,324	)			(953	)			(2,083	)

 

 

 

 

CHANGES IN OTHER COMPREHENSIVE INCOME AND RELATED TAX EFFECTS

 

		31 December 2005												31 December 2004 1)												31 December 2003
Amounts in NOK million		Pretax				Tax				Net				Pretax				Tax				Net				Pretax				Tax				Net
Net unrealized gain on securities			(12	)			3				(9	)			(3	)			1				(3	)			—				—				—
Net investment hedge			—				—				—				445				(125	)			320				(462	)			129				(333	)
Companies sold			33				—				33				—				—				—				—				—				—
Net investment hedge			33				—				33				445				(125	)			320				(462	)			129				(333	)
Cash flow hedge			(782	)			219				(563	)			(214	)			60				(154	)			385				(112	)			272
Less: Reclassification of hedging gain			(261	)			73				(188	)			(256	)			71				(185	)			(331	)			94				(237	)
Net cash flow hedge			(1,043	)			292				(751	)			(470	)			131				(339	)			54				(18	)			35
Minimum pension liability adjustment			(744	)			234				(510	)			(189	)			57				(132	)			(182	)			69				(113	)
Foreign currency translation			1,081				—				1,081				(1,625	)			—				(1,625	)			4,650				—				4,650
Companies sold			(370	)			—				(370	)			(3	)			—				(3	)			206				—				206
Net foreign currency translation			711				—				711				(1,628	)			—				(1,628	)			4,856				—				4,856
Total change in other comprehensive income			(1,055	)			529				(526	)			(1,845	)			64				(1,781	)			4,266				180				4,445

Notes to the consolidated financial statements				F 19
Norsk Hydro ASA and subsidiaries

 

Note 4

Remuneration and Share-Based Compensation

 

Members of the board of directors are elected for two-year terms. Remuneration to the Board of Directors consists of the payment of fees, and is based on the position of the board member and specific board committee appointments. Board fees for 2005 as well as any outstanding loans and share ownership as of 31 December 2005 are shown in the table below. Hydro did not have any guarantees made on the behalf of any of the board members during 2005.

		Board				Outstanding				Number
Board Member		Fees 1)				Loans 1) 2)				of Shares 3)
Jan Reinås			470				—				—
Borger A. Lenth			420				—				144
Elisabeth Grieg			280				—				6,080
Håkan Mogren			245				—				—
Ingvild Myhre			245				—				—
Kurt Anker Nielsen			280				—				—
Geir Nilsen 4)			230				300				78
Terje Friestad 4)			280				50				259
Odd Semstrøm 4) 5)			84				—				152
Sten Roar Martinsen 4) 6)			146				—				—
Total Board fees – 2005			2,680