YARA INTERNATIONAL ASA

Transcription

1 2004 Annual Report STAYING CLOSE TO THE FARM GATE RESPONSIBILITY THROUGHOUT THE VALUE CHAIN LEADERSHIP MUST BE DEMONSTRATED EVERY DAY HARVESTING THE VALUE OF A GLOBAL PRESENCE

2 CONTENTS: 02 IN ITS FIRST YEAR as a separate company, Yara achieved its best ever results highlights also include production start at Qafco-4 in Qatar, making Qafco the world s largest fertilizer producing site. 06 SUCCESS IN THE FUTURE will take more than new products. We also have to be well-informed and proactive consultants, says Thorleif Enger, Yara s CEO. 08 YARA S BUSINESS MODEL combines a unique global market presence with a focused involvement in the entire industry value chain. 12 A UNIQUE DOWNSTREAM NET- WORK, with sales to more than 120 countries, is central to Yara s leadership position. 16 YARA S INDUSTRIAL SEGMENT plays an increasingly important role in the company s business portfolio, with leadership positions in several high-growth markets. 20 THE UPSTREAM PLANTS form the backbone of Yara s production system and provide a competitive advantage through a best-in-class cost position. 24 AN EMERGING NEED for new types of fertilizer presents Yara with challenges as well as opportunities, says Daniel Clauw, Yara s Chief Operating Officer. 26 GOOD PRODUCT STEWARDSHIP is essential to ensure that Yara meets its obligations related to safety and care for the environment. 29 YARA S ACCOUNTS FOR 2004 show record financial performance, with a net income of NOK 3,761 million, up from NOK 2,186 million in GLOBAL MARKET PRESENCE A CORNERSTONE OF YARA S BUSINESS MODEL 12 THE RIGHT PRODUCTS, AT THE RIGHT PLACE, AT THE RIGHT TIME. 06 WE MUST UNDER- STAND THE NEW NEEDS OF THE FARMER. THORLEIF ENGER, CEO 16 HIGH GROWTH IN INDUSTRIAL APPLICATIONS 26 RESPONSIBLE CONDUCT THROUGHOUT THE FERTILIZER VALUE CHAIN

3 INTRODUCTION THE WORLD'S LEADING FERTILIZER COMPANY AS YARA CELEBRATES ITS CENTENNIAL, THE COMPANY ENJOYS A LEADING POSITION IN THE FERTILIZER INDUSTRY A POSITION BASED ON MARKET SHARE, GLOBAL REACH, COST LEADERSHIP AND THE ABILITY TO MANAGE CYCLICALITY. THESE WILL REMAIN THE CORNERSTONES AS YARA EMBARKS ON A NEW CENTURY OF DEVELOPMENT AND GROWTH. In 1905, Norsk Hydro was established to utilize Norway's large hydroelectric energy resources for the industrial production of mineral fertilizer. To position it for further growth, the fertilizer business formerly Hydro Agri was demerged from Norsk Hydro in 2004 and established as an independent company under the name Yara International ASA. The company was listed on the Oslo Stock Exchange on March 25th, Yara is a chemical company with fertilizer applications as its biggest market. Yara s mission is to strive for better yield. The word yield reflects two key dimensions of Yara s ambition as an industrial company. First, Yara is dedicated to helping provide food to the world s growing population in the most effective and sustainable way. Second, Yara is commited to delivering financial results from our operations that are among the best in our industry. Yara aspires to shape the fertilizer industry in a way that creates new potential for the company, its customers and the industry as a whole. 3,000 2,750 2,500 2,250 2, The global challenge to feed people when arable land per person decreases Arable land (in m 2 per person) (left axis) World Population (billions) (right axis) Source: FAO With a growing world population and limited availability of new farmland, soil productivity must be continuously increased to meet the demand for food. Mineral fertilizers are the only major sustainable source of the plant nutrients required to ensure production of enough food of good quality. As the world's leading supplier of mineral fertilizers, Yara plays an important part in these efforts. GLOBAL SIZE AND REACH With sales to more than 120 countries, Yara is the most international player in the fertilizer industry. The core business is the production and marketing of NPK complex fertilizer and nitrogen fertilizer such as nitrates and urea. Yara also produces and sells ammonia, the key raw material for all nitrogen fertilizers. To complement its product offerings, Yara also markets third-party sourced fertilizers. This enables Yara, through its global downstream network, to offer customers a balanced nutrient portfolio, including valueadded speciality fertilizers. Through its Industrial segment, Yara has also built a substantial business based on co-products of the fertilizer operations. Products include industrial gases, nitrogen chemicals and technical nitrates, with environmental applications making up a key market segment. DOWNSTREAM: Includes Yara s global sales and distribution activities, as well as production plants that upgrade fertilizer products for local consumption. INDUSTRIAL: Markets products and co-products from the Upstream segment for industrial applications. UPSTREAM: Contains Yara s large ammoniaintegrated fertilizer plants and the trade and shipping of ammonia. INTEGRATED BUSINESS MODEL All of Yara s activities are integrated into a proven business model based on our involvement in the entire industry value chain. Yara s three business segments Downstream, Industrial and Upstream have complementary strengths and risk profiles, allowing for valuable arbitrage opportunities and other synergies. Downstream and Industrial are margin businesses with stable cash flows. In combination with a global market presence they mitigate the cyclical swings of the Upstream business. Extensive sourcing of volume from third-party suppliers, the diversified product portfolio and a balanced geographical and seasonal exposure, is central to the business model. INDUSTRY LEADERSHIP Focusing on cost reductions and productivity improvements, Yara has positioned itself as the lowest-cost fertilizer producer in Europe. Since 2001, Yara has been within the top 25 percent of its industry peers in terms of gross return on assets (defined as EBITDA, excluding non-recurring items, divided by total assets). Since 1999, Yara has grown both organically and through well-timed acquisitions in key growth markets. The combination of a strong financial position and a global network is expected to give Yara the opportunity to take an active part in the further development of the fertilizer industry. YARA ANNUAL REPORT

4 ANNUAL REVIEW KEY FIGURES & HIGHLIGHTS 2004 PRO FORMA PRO FORMA KEY FIGURES EBITDA for years 2002 to 2004 (NOK million) Operating Revenues 43,252 38,481 Operating Income 3,584 2,751 EBITDA 1) 5,765 4,671 Net Income after minority interest 3,761 2, Financial data Investments 2) NOK million 1,250 1,188 Net interest-bearing debt/equity 3) Cash flow from operations NOK million 3,772 1,628 Rate of return CROGI % 4) Per share information (NOK) Earnings per share Majority shareholders equity (NOK million) 10,714 9,595 Share price Oslo Stock Exchange na Number of permanent employees (end of the year) 7,067 7,434 Health, Safety and Environment LTI 5) Absence due to sickness % Growth in EBITDA in 2004 was 23% compared with 2003 and 51% compared with NOK BN 2004 REVENUE FIGURE We are the global market leader in fertilizers measured by revenues. With our gross return on assets of 21.2%, we are also in the top quartile of our defined chemicals peer group. Net interest-bearing debt/equity ratio 04 1) EBITDA: Earnings before Interest, Tax, Depreciation, and Amortization. See non-gaap measures section for details. 2) Investment in property, plant and equipment, long-term securities, intangibles, long-term advances and investments 1,06 in non-consolidated investees. 0,86 3) Net interest-bearing debt devided by shareholder s equity and minority interests. 4) CROGI: Cash Return on Gross Investment. See non-gaap measures section for details. 0,65 5) Lost time injuries per million hours worked (includes contractors). 0,43 0,44 0,39 12% REVENUES 23% EBITDA 72% NET INCOME 3kv 03 4kv 03 1kv 04 2kv 04 3kv 04 4kv 04 Strong cash generation in 2004 has helped us to reduce our net interest-bearing debt by NOK 3,385 million to NOK 4,199 million. 2 YARA ANNUAL REPORT 2004

5 ANNUAL REVIEW MAR: Yara was listed on the Oslo Stock exchange as a separate company on 25 March. The listing was a success with the initial offering being oversubscribed substantially. The initial offering price for the Yara s share was NOK 41. Yara also secured long-term financing at attractive rates. APR: Inauguration of Qafco-4, making Qafco the world s largest fertilizer producing site. By this expansion, Qafco s annual production capacity will be 2 million tonnes of ammonia and 2.8 million tonnes of urea. Yara owns 25% of Qafco. MAY: First quarter results announced as an independent company. Best first quarter in the company s history, with strong cash flow generation and a reduction of debt, resulting in a significant improvement of debt/equity ratio. JUNE: Qafco-4 plant starts producing fertilizer. Yara Board receives authorization from the shareholders at the General Meeting to buy back shares. Fertilizer markets continue to improve. Urea prices rose to historically high levels towards the end of the month. JUL: Second quarter results announced. Strong results and cash flow generation continues into the second quarter. Net debt reduced by an additional NOK 1.7 billion leading to added financial stability. Upstream plants set production records during this quarter. Fire at Köping plant with no injuries. AUG: Köping plant back in operation. SEP: Yara signs a new gas contract with Gasunie for Sluiskil plant. OCT: Third quarter results announced. Best third quarter ever for the business. Yara s growth in Brazil continued to show a positive trend. Yara starts the share buy-back programme. NOV: Yara hosted its first Capital Markets Day as an independent company. By the end of the month, Yara had completed the purchase of approximately 3 million own shares. DEC: Yara successfully completes its rating and bond issue. Reflecting Yara s strong market position and market leadership, the company was rated investment grade Baa2 from Moody s and BBB from Standard & Poor s, both with a stable outlook. Yara also successfully launched a much pursued USD 500 million bond offer pursuant to rule 144A / regulation S. The company ended the year on a high note by registering the best-ever closing price of NOK on the last trading day of the year. JAN-FEB 2005: Yara presented its best ever quarterly and yearly results. The company also launched strategic growth initiatives, which included signing a letter of intent for Qafco-5, buying 30% minority stake in the Russian fertilizer producer Rossosh and increasing its shareholding in the Chilean speciality fertilizer producer SQM. YARA IS A CHEMICAL COMPANY WITH FERTILIZER APPLICATION AS ITS BIGGEST MARKET. WE CONVERT ENERGY AND NITROGEN FROM THE AIR INTO USEFUL PRODUCTS FOR FARMERS AND INDUSTRIAL CUSTOMERS. Well-balanced fertilizer product portfolio Ammonia 1.1% Other 8.7% YARA IS A TRULY GLOBAL FERTILIZER COMPANY, WITH A MARKETING AND DISTRIBUTION NETWORK CONSISTING OF MORE THAN 160 INFRASTRUCTURE POINTS. OUR BUSINESS MODEL CREATES A STRONG PLATFORM FOR PROFITABLE GROWTH WITH REDUCED CYCLICALITY AND RISK. Urea 18% UAN 5.3% NPK 36% COMPETENCE AND BRAND VALUE We combine a century of experience and expertise with the latest knowledge to deliver outstanding products of high value to our end customers. Nitrates 31% Yara is the most diversified nitrogen fertilizer company in the world. In 2004, Yara sold million tonnes of fertilizer products and 2.05 million tonnes of other Industrial products. More than 2/3 of Yara s product portfolio is comprised of differentiated products like nitrates and NPK, which command higher margins as they deliver superior customer benefits. YARA ANNUAL REPORT

6 YARA CENTENNIAL A HUNDRED YEARS OF PROGRESS NORSK HYDRO WAS FOUNDED ON 2 DECEMBER 1905 TO PROVIDE A SOLUTION TO ONE OF THE MOST PRESSING PROBLEMS OF THE DAY A GROWING NEED FOR INCREASED FOOD PRODUCTION. THE SOLUTION, INDUSTRIAL MANUFACTURE OF NITROGEN-BASED PLANT NUTRIENTS, HAS SINCE REVOLUTIONIZED AGRICULTURE AROUND THE WORLD Sam Eyde ( ) Kristian Birkeland ( ) Visit by Kong Chulalongkorn of Siam at Notodden (July 1907) Herøya production plant (October 1935) Harvesting of tomatoes, Woodland, USA Joint venture with Qatar Industries The world's first production of Nitrogen fertilizer "Norgessalpeter" (calcium nitrate) at a test facility in Notodden, Norway. Production based on the Birkeland Eyde invention using hydroelectric power to extract nitrogen from air. Norsk Hydro founded on 2 December A new large scale production plant including power supply completed at Notodden and construction of the plant at Rjukan. King Chulalongkorn of Siam visited both sites. Ammonia production began at Rjukan (1928). Plants established at Porsgrunn (1929). New industrial products like heavy water and CO2 developed. Yara Sluiskil (NSM) opened (1929). Sales office opened in Stockholm. Sales began in the USA focusing on calcium nitrate for fruit and vegetable cash crops. Agency established in San Francisco, California. The Glomfjord plant opened using hydroelectric power to upgrade ammonia to calcium nitrate and NPK (1949). Ammonia production established at Porsgrunn one plant based on partial oxidation of heavy fuel oil and one based on steam reforming of naphta. The Qafco joint venture with Qatar Industries was established in YARA ANNUAL REPORT 2004

7 YARA CENTENNIAL FROM THE FOUNDERS OF HYDRO, YARA INTERNATIONAL HAS INHERITED A PROUD LEGACY AND IMPLEMENTED IT ON A GLOBAL SCALE. OUR WORLDWIDE OPERA- TIONS PLAY A KEY ROLE IN THE GLOBAL FOOD CHAIN. SOME 40 PERCENT OF THE WORLD S POPULATION NOW DEPEND ON MINERAL FERTILIZER TO OBTAIN AND SUSTAIN THEIR FOOD SUPPLY Opening up business in Asia Acquisitions in Europe (Sluiskil) Acquisitions and joint venture in Trinidad Strengthening our position in Brazil Listing of Yara on the Oslo Stock Exchange, March 25 Sales to Thailand via a local partner in Sales gradually extended to other Asian countries. Hong Kong office opened in Qafco-1 plant started production of ammonia and urea in Established sales office for South America in Rio de Janeiro, Acquisition of NSM (Netherlands), Supra (Sweden), Fisons (UK), Ruhr Stickstof (Germany), Windmill (Netherland), Cofaz (France). Terminal established in Chiwan, China in Office established in Harare, Zimbabwe Acquisitions in Germany and Trinidad. Joint ventures in Florida and Trinidad. New offices and bulk blending units in Africa, Asia and Latin America. Acquisition of ENI Chem's fertilizer operations in Italy. Further growth and establishment of an extensive marketing network outside Europe. Agri acquired Adubos Trevo in Brazil and a controlling stake in Kynoch, South Africa. Turnaround and consolidation of the company. Hydro decided to list Agri on the Oslo Stock Exchange. Listing on the Oslo Stock Exchange; 25 March, Yara focuses on a future as the high-performance leader of the fertilizer industry. YARA ANNUAL REPORT

8 FROM THE CEO LEADERSHIP MUST BE DEMONSTRATED EVERY DAY A LETTER from THORLEIF ENGER, CHIEF EXECUTIVE OFFICER YARA S STRONG POSITION IN THE FERTILIZER INDUSTRY IS VERY MUCH BUILT ON LEADERSHIP AND COMPETENCE. OUR ABILITY TO FURTHER DEVELOP THIS POSI- TION WILL BE A KEY REQUIREMENT FOR STAYING ON TOP AS THE BUSINESS GROWS MORE SOPHISTICATED. In 2005, Yara embarks on its second century as a leading supplier of mineral fertilizer. As we pursue new and higher ambitions, our efforts will be based on an established set of key strengths. We are present in all major markets where mineral fertilizer is sold and we are present with a strong product range supported by a powerful brand. We have the technology to provide unique products. This includes the increasingly important market of speciality fertilizers, as well as our industrial segment, which fills a critical role in our business portfolio. We have the ability to attract partners and build partnerships. In addition, we have a competitive cost position. To make the most of these strengths, however, we need to match them with a keen understanding of the key developments affecting our industry and have a proactive approach to change was a good year for Yara. We continued making progress in our internal improvement program and market conditions were very favourable. The separation of Yara into an independent company provided a big boost and we are now in a better position on all accounts to develop the full potential of the company. At the end of the year, we launched a strategy for the coming years signalling stronger growth coupled with continued focus on productivity and financial discipline. We need to match our strength with a keen understanding of the key developments affecting our industry. Our strong position in ammonia is a good basis for growth both in fertilizer applications as well as products and services for industrial applications. Basically, we are a chemical company converting energy and nitrogen from the air into useful products for farmers and industrial customers. The opportunities to grow the company based on our global strength and our scope will not be a limiting factor ahead. Our challenge will be to continue developing our competence base and strengthen our ability to innovate and stimulate creativity. MEETING THE NEED FOR BETTER NUTRITION. The basics of producing mineral fertilizers have not changed in any fundamental way over the last fifty years. To succeed in the upstream part of the business is and will continue to be a question of operational excellence and having the right products. After the turnaround, Yara has attained a cost leadership position in our industry that we work hard every day to fortify. At the user s end, however, there are fundamental changes going on that challenge us to evaluate and improve the way we conduct our business. Farming and the development of fertilizers has gone through three phases, each introducing a higher level of sophistication. In phase one, success relied on the ability to increase the farmer s output (food security). This is still the challenge in many parts of the world. Phase two introduced an added requirement of enhancing the safety and quality of the food. Today, the question is being asked how farming can contribute to better health for people and where fertilizers are increasingly expected to contribute to improved health through better plant nutrition. This requirement represents a science in itself, where we want to be at the forefront. We are right at the beginning of this development, and to stay abreast we need to monitor the development actively. Success will take more than new and better product formulas. We also have to be well-informed and proactive consultants to our customers as well as the end user the farmer. Yara has over the years established an extensive presence far down in the value chain a capacity none of our competitors can match. This presence at the farm gate will be an even more important asset in the years ahead. In a broad sense our mission is to improve the yield for both our fertilizer and industrial users. AMBITION TO SHAPE THE INDUSTRY. Yara is already the largest fertilizer producer in the world and holds a number of unique positions. It is therefore a natural ambition to want to influence key developments in our industry. Competitive forces will strengthen the need for larger, more focused and highly professional companies, indicating a thrust towards further consolidation. Pulling in the same direction is a trend towards privatization in countries where fertilizer production has been a public responsibility. As it affects the huge markets in China and India, this development will have a significant impact on our industry. 6 YARA ANNUAL REPORT 2004

9 FROM THE CEO All our 7,100 employees should have a fundamental understanding of our position and how we intend to grow our business. The industry shaper ambition implies a more explicit growth strategy than we have previously practised. However, we will only grow when we see good strategic reasons for doing so. The growth will have to fit in with our business model and core strengths, and we also have to consider the consequences for the industry structure. Ultimately, we have to steadfastly make sure that our day-to-day operation is meeting the highest standards of quality, efficiency and safety, and that we deliver leading financial performance based on organic growth. Only a consistent top performer has the ability to be a shaper of our industry. THE NEED FOR INTERNAL ALIGNMENT. This level of performance can only be sustained if the organization is aligned around our key priorities. Looking ahead and setting new targets is not enough. All our 7,100 employees should have a fundamental understanding of our position and how we intend to grow our business. We have a strong platform and a strong financial position. To make the most of our assets, we all need to pull in the same direction, armed with the right competence and the right mindset. We have a lot of local competence. Increasingly, this will have to be coupled with an overall understanding of how our total operation can be optimised. As a part Success in the future will take more than new products. We also have to be well-informed and proactive consultants. of last year s de-merger from Norsk Hydro and the stock exchange listing, we have established a new level of management s attention to external communication. Going forward, I believe it will be even more important to ensure effective internal communication. We will not otherwise be able to deliver on the expectations we are establishing in the financial markets. As chief executive, I therefore intend to continue to spend a significant amount of time with the organisation. I have also emphasised internal communication as a core responsibility of all managers in Yara. NEW TARGETS TIMELESS PRINCIPLES. While Yara is faced with new challenges and opportunities, I believe that they best can be met by the same set of management principles that have brought us where we are today. First of all we will set high ambitions. This means that we intend to be among the best in our peer group and achieve at least a 10 percent return on investment over the business cycle. Today we have a 6 percent global market share in mineral fertilizers. Over the coming years, we want to grow this share to 10 percent. Our ambition also includes a clear intent to continue the positive development in our Industrial segment. Second, we are realistic and realize that there is always room for improvement. Today the gap is bigger than ever, not at all because our performance is deteriorating, but because our ambitions are higher. Like a successful athlete, we need to be hungry for new achievements. Third, we have the confidence to do it our own way. We will therefore foster a climate where there is room for creativity and the exploration of new ideas and opportunities. Fourth, I will emphasize diversity in the management teams with members that continually challenge each other. I don t believe in too much harmony. We need strong and productive discussions. A strong team recognizes that there is a time for discussion and a time for decision and alignment for implementation. Finally, we will promote a culture and a code of conduct that permeates the organisation and replaces excessive and unproductive guidelines and bureaucracy. A set of four values will guide us in this effort: Ambition, trust, accountability and teamwork. I believe these values are right for Yara. What matters most, is our ability to communicate the values, be persistent in conveying them and consistent in living by them. It s not by chance that ambition is first in line among the values. We must shun complacency. If we feel too comfortable, something is wrong. The role of industry shaper must be earned every day. Thorleif Enger President and CEO YARA ANNUAL REPORT

10 BUSINESS MODEL HARVESTING THE VALUE OF A GLOBAL PRESENCE YARA S STRONG POSITION IS BASED ON A PROVEN BUSINESS MODEL THAT COMBINES A UNIQUE GLOBAL MARKET PRESENCE WITH A FOCUSED INVOLVEMENT IN THE ENTIRE INDUSTRY VALUE CHAIN FROM THE FACTORY TO THE FARM GATE. Over the past ten years, Yara has achieved a 4.2% compound annual growth rate (CAGR) of 4.2 percent in terms of volumes, twice the market growth of 2.1 percent. 8 YARA ANNUAL REPORT 2004

11 BUSINESS MODEL YARA ANNUAL REPORT

12 BUSINESS MODEL BALANCE: BUSINESS SEGMENTS WITH COMPLEMENTARY STRENGTHS FLEXIBILITY: EXTENSIVE USE OF THIRD-PARTY VOLUMES ADDED VALUE: DIVERSIFIED PRODUCT PORTFOLIO Y ara s three business segments Downstream, Industrial and Upstream have complementary strengths and risk profiles, allowing for valuable arbitrage opportunities and other synergies. Downstream and Industrial are margin businesses and have shown stable cash flows over the past four years. In combination with a global market presence they mitigate the cyclical swings of the Upstream business. This enables Yara to achieve a healthy margin even at the bottom of the fertilizer cycle. Central to the business model are also an extensive sourcing of volume from third-party suppliers, a diversified product portfolio and a balanced geographical and seasonal exposure. ACTIVELY MANAGING CYCLICALITY. The Downstream segment represents approximately 40 percent of assets (non-depreciated) and cash flow in Yara. The operation includes sales and distribution units, as well as production plants that upgrade intermediate fertilizer products for local consumption. These products can be sold with stable margins, as input cost and output price tend to be highly correlated. The segment supplies Yara with a strong regional and global market presence. Supported by a strong brand, a valuable base of loyal customers has been built over several decades. Through the Downstream segment, Yara also enjoys an integrated distribution system and access to growth markets. Industrial, which represents approximately 10 percent of Yara s assets (non-depreciated) and 10 percent of cash flow, markets Upstream products and co-products for industrial applications. The Industrial segment is the no. 1 supplier of CO2 in Europe and is also the largest European producer of industrial nitrogen chemicals and technical nitrates. As in Downstream, the products from the Industrial segment are generally sold with stable margins. In three out of the four previous years, the Downstream and Industrial segments have provided more than half of Yara s cash flow. The Upstream segment, which represents approximately 50 percent of Yara s assets (nondepreciated) and cash flow, contains the large ammonia-integrated fertilizer plants and the trade and shipping of ammonia. With the exception of trading ammonia, Upstream sells all its production to Downstream and Industrial. The Upstream plants use natural gas as feedstock, making profits volatile to developments in the energy markets. The segment is also exposed to fluctuations in fertilizer prices and performance will thus follow the fertilizer cycle. However, Yara has managed to build a strong competitive position for Upstream through cost leadership, access to cheaper gas in Qatar, Trinidad and recently in Russia, and via high capacity utilization of its plants. Activities within trade, storage and shipping of ammonia provide additional value to the Upstream segment. In combination, this unique business portfolio limits volatility for the Yara group by providing for a managed downside and a substantial upside. THIRD-PARTY VOLUMES ENABLE MAXI- MUM CAPACITY UTILIZATION. Over the years, an increasing proportion of Yara s sales volumes have come from joint ventures and third-party suppliers, contributing to roughly 30 percent of the total. This element is consciously built into the business model as a vital supplement to own production, contributing to full capacity utilization in own plants. Third-party volumes make up significant elements in nearly all Yara product categories. The use of thirdparty products provides flexibility as they can be reduced if conditions turn unfavourable in one area, and increased in regions with better fundamentals. Through this process, Yara has the ability to change its product offering in different local markets according to the prevailing supplydemand situation. This flexibility is further supported by a conscious decision to dedicate no more than 60 percent of Yara s production volume to key account customers. DIVERSIFIED PRODUCT PORTFOLIO. Integral to the business model is also a deliberate effort to extend the product portfolio with upgraded products. Sourcing of phosphate (P) and potash (K) from third-party suppliers is a critical element in this strategy. Compared to other export-oriented nitrogen producers Yara s product portfolio is significantly more diversified. More than two thirds of Yara s net sales of nitrogen products are upgraded products, with NPKs accounting for 36 percent and nitrates 30% percent of sales volumes. Among the competitors, two thirds of sales will typically be standard nitrogen products like ammonia, urea and UAN. On the other Balanced portfolio by product and geography BALANCED EUROPEAN AND GLOBAL SALES (Million tonnes) Europe Outside Europe 14 YARA SALES IN LINE WITH GLOBAL CONSUMPTION Nitrogen (N) Phosphate (P) Potash (K) 100% 143,9 mill tonn* 8,0 mill tonn* Third-party volumes supplement own production to maximize capacity utilization YARA PRODUCED PRODUCTS IS APPROXIMATELY 70% OF TOTAL Key suppliers/ Yara produced JV products products % 20 60% % % % Globalt gjødselforbruk Yaras omsetning Source: Yara estimates * Nutrient tonnes Source: Yara, IFA Source: Yara, IFA 10 YARA ANNUAL REPORT 2004

13 BUSINESS MODEL hand, nitrates and NPK are more differentiated products that on average command higher margins as they provide superior customer benefits. A BALANCED GEOGRAPHICAL AND SEA- SONAL EXPOSURE. Yara is the only fertilizer company with a presence on all six continents. This allows for a balanced exposure both geographically and seasonally. Combined with a balanced product portfolio, this approach enables Yara to offer products that meet specific demands across regions, on a global basis. Yara s global presence also allows for a balancing out of the systematic volume difference between the quarters. When there is low season in one region, there is always high season in another region. For example, while Q1 is the seasonal peak in Europe, Q3 is the seasonal peak in Brazil. MODELLED FOR GROWTH. Through focused initiatives governed by the business model, Yara has built a leadership position within its industry. Over the past ten years, Yara has achieved a compound annual growth rate (CAGR) of 4.2 percent in terms of volumes, which is more than twice the market growth of 2.1%. The growth has been particularly strong overseas, but has recently also been significant in Europe despite a mature market. Since 2001, Yara has been within the top quartile of its industry peers in terms of gross return on assets (defined as EBITDA, excluding non-recurring items, divided by total assets). Since 1999, Yara has grown both organically and through well-timed acquisitions in key growth markets. A notable example is our involvement in Qafco in Qatar, which dates back to the late 1960s. Qafco, which is owned 75% by Industries of Qatar and 25% by Yara, became the world's largest producer of urea when Qafco-4 went onstream in In February 2005, a letter of intent (LOI) was signed with Qatar Petroleum that paves the way for phase-5 growth at what has become one of the world s largest fertilizer plants. In Brazil, the world s fourth largest fertilizer market, the acquisition of the local fertilizer company Adubos Trevo in 2000 marked a breakthrough. Since the acquisition, Yara s market share in Brazil has doubled. In 2002 Yara took an ownership position in the Chilean speciality fertilizer company SQM. The ownership stake has THE GLOBAL OPTIMIZATION UNIT: later been increased, confirming Yara s longterm commitment to SQM and speciality fertilizers. The most recent example is the acquisition of a minority stake in the Russian fertilizer plant Rossosh. The plant will be of particular importance for the development of Yara s market positions in key Asian markets like China, Thailand and Indonesia. All these step-growth initiatives have put Yara on the path for achieving above average market growth. The continued focus on capital discipline, while making acquisitions based on right timing, synergies and economies of scale will help Yara to further develop its position as a leader in the fertilizer industry. To extract the full potential of Yara s business model, a dedicated unit for Global Optimization has been set up as part of the Downstream segment. The unit optimizes the sourcing of products from Yara production facilities, the joint ventures in which Yara has an interest, and from third parties. All these products are sold and distributed through the segment s global distribution network. The unit supervises on a continuous basis the flow of raw materials, the volume and type of production and product allocations. It also organizes internal logistical services and defines the volume positions that Yara should take. Through a focused and continual exchange of information with the business segments, the unit helps create a shared view of market conditions, based on local, regional and global market intelligence. This ensures smooth operations, good risk management and stable cash flows. Yara s value chain PRODUCT SOURCE* GLOBAL OPTIMIZATION MARKETING AND SALES Yara production Europe 12.9 Yara production outside Europe Purchased from JV companies Sourcing Allocation Logistics 21.9 Business units & Front offices Key accounts Smaller customers Purchased from third parties fertilizer and nitrogen chemicals volumes in million tonnes. * Including bulk blends YARA ANNUAL REPORT

14 BUSINESS SEGMENT: DOWNSTREAM STAYING CLOSE TO THE FARM GATE WITH SALES IN MORE THAN 120 COUNTRIES, YARA ENJOYS AN UNRIVALLED GLOBAL PRESENCE IN THE FERTILIZER INDUSTRY. THE COMPANY S UNIQUE DOWNSTREAM NETWORK IS KEY TO THIS LEADERSHIP POSITION. The right products, at the right place, at the right time these are the keys to success in the international fertilizer industry. Through a dedicated effort over several decades, Yara has built a global downstream business that meets these criteria better than any competitor. The downstream operation consists of sales and distribution units, as well as production plants for local markets. These plants upgrade intermediate products like ammonia into more sophisticated fertilizer products. Yara is physically present in approximately 50 countries around the world, and sells to more than 120 countries through an extensive marketing and distribution network consisting of more than 160 plants, terminals and warehouses. Increasingly, the sales activity has the form of organizing meetings to educate growers on optimal use of fertilizers. The approach of staying close to the farm gate builds customer loyalty and enables Yara to extract added value from its operations. In 2004, we further strengthened our position and platform for profitable growth. In Brazil, two new local production and storage facilities were set up. Our Brazilian operation also saw an encouraging growth in earnings during the year, thus reducing our overall seasonality of earnings (see below). Our position within speciality fertilizer was further strengthened through increased ownership in the Chilean company SQM (January 2005) and further integration of Yara and SQM sales activities in several markets. In Europe, the Downstream segment achieved increased sales and a recovery of market share. STRATEGIC STRENGTHS. Our global presence provides us with a number of strategic strengths. Being margin-based, the downstream business enjoys lower volatility in earnings as input cost and output price tend to be highly correlated. Global presence also limits seasonality challenges related to earnings as well as supply. As an example, the lull in Europe in Q3 can be outweighed by high activity in Latin America in the same period. Our global presence in sales and distribution also facilitates high utilization of the global production plants in the Upstream segment. In addition, this presence makes Yara an attractive partner for jointventure and third-party producers seeking a commercial arm with global reach. The use of third-party producers gives us flexibility as we can reduce volumes if conditions turn unfavourable in one area, while increasing it in regions with better fundamentals. This flexibility is also the result of a conscious decision to dedicate no more than 60 percent of Yara s production volume to key account customers. The upgrading of intermediate fertilizer products at our local plants is also a strategic strength, as it makes us able to offer more sophisticated products that can be sold with stable margins. OVER THREE DECADES OF EXPANSION. Yara s global presence has mainly been built over the last three decades. Our presence in Europe originates from participation in the industry consolidation process that started in the early eighties. This has involved acquisitions in the Netherlands, Sweden, UK, Germany, 12 YARA ANNUAL REPORT 2004

15 BUSINESS SEGMENT Sales volume by market Million tonnes LatAm 3.2 Cont. EU 2.8 Asia 2.3 N America 2.2 Med. 2.1 Africa 1.8 UK & Ireland 1.8 France 1.8 N Europe highlights INCREASED SALES AND RECAPTURE OF MARKET SHARE IN EUROPE POSITION IN BRAZIL FURTHER STRENGTHENED THROUGH STRONG GROWTH AND THE OPENING OF TWO NEW LOCAL PRODUCTION AND STOR- AGE FACILITIES SALES OF LOW-MARGIN PRODUCTS IN ASIA SIGNIFICANTLY REDUCED, ENABLING A MORE FOCUSED PRODUCT AND MARKET PORTFOLIO FOR FUTURE GROWTH. POSITION WITHIN SPECIALITY FER- TILIZER FURTHER STRENGTHENED THROUGH INCREASED OWNERSHIP IN SQM (JANUARY 2005) AND FUR- THER INTEGRATION OF YARA AND SQM SALES ACTIVITIES IN SEVERAL MARKETS. AROUND THE WORLD, THE YARA BRAND WITH THE VIKING SHIP LOGO IS ASSOCIATED WITH RELIABILITY, QUALITY AND AGRONOMIC COMPETENCE key financials Pro forma Pro forma Pro forma (NOK Million) Operating Revenues 31,441 29,120 26,863 Operating income 1,356 1,162 1,347 EBITDA 2,068 1,833 1,956 CROGI 11.9% 11.1% 12.3% YARA ANNUAL REPORT

16 BUSINESS SEGMENT FOCUS ON: IMPORTANCE: OPPORTUNITY: BRAZIL THE WORLD S FOURTH LARGEST FERTILIZER MARKET YARA S MARKET SHARE DOUBLED SINCE 2000 FOCUS ON: IMPORTANCE: OPPORTUNITY: CHINA PRODUCES HALF OF THE WORLD S VEGETABLES AND MELONS AN ESSENTIAL MARKET FOR YARA S SPECIALITY BUSINESS With approximately 6 percent of its vast area being agricultural land, Brazil is the world s 4th largest market for fertilizers. From 1994 to 2003 its annual growth in fertilizer consumption was a strong 6 7 percent and 60 percent of the higher demand was met through imports. In 2000, Yara began a new era for its Brazilian operations with the acquisition of Adubos Trevo. Since the acquisition, the market share has doubled and Yara now operates 17 terminals, production and blending units in Brazil. A key asset is the highly efficient port in Rio Grande, which handles 2.5 million tonnes of product each year. China is an important market for Yara s speciality business and will continue to be so, as growers are switching from cereals to high-value cash crops. China now produces half of the world s vegetables and melons, compared to only one third in China s grain harvest peaked in 1998 at 512 million tonnes, and was reduced to 431 million tonnes in For Yara, China offers unique opportunities for niche marketing of quality fertilizers and related competence. The change from grain to high-value cash crops fits well with Yara s growth ambitions within speciality fertilizers. France and Italy. Although export sales to China can be documented as far back as 1913, our real international presence outside Europe was initiated by the completion of the Qafco plant in Qatar in This led to the establishment of a trade office in Hong Kong the same year. Seeing the advantage of a wider market spread for its plants, Yara extended its international presence in Asia and the Americas, as well as in Africa, during the 80s and 90s. THE VALUE OF A STRONG BRAND. Around the world, the Yara brand with the Viking ship logo is associated with reliability, quality and agronomic competence. This association is the same for a potato grower in Colombia, a grower of fruits and vegetables in China or an industrial player within the green house business in Poland. As a result, Yara enjoys the position of a premium brand in many markets, and thus the ability to command a premium price. Yara intends to further exploit the potential of its strong brand. In this effort, branded marketing is becoming increasingly important. THE GROWING IMPORTANCE OF SPECIALITY FERTILIZERS. One of the most pronounced trends in the fertilizer market is the increased focus on speciality fertilizers. These are formulas targeted at cash crops like fruit and vegetables, and where the contribution to quality and nutritional content is equally important to yield. The global market for speciality fertilizers is growing annually by 5 6 percent, which is more than twice the annual growth for traditional fertilizer. Yara intends to grow its market share in this attractive segment and gradually make speciality fertilizers a more important part of our product portfolio. This is reflected in our ambition to grow at twice the rate of the market in speciality fertilizers. The cornerstones of this ambition are our global sales and marketing agreement with the Chilean company SQM, and our position as the number one producer and supplier of calcium nitrate. SQM is the world s leading producer of potassium nitrate, a vital ingredient in value-added speciality fertilizers. STRATEGIES FOR STAYING ON TOP. The main growth markets for fertilizer are Brazil, China and Southeast Asia. Yara will capture its share of this growth by building on its unique position and utilizing current and new scale advantages. A recent step to achieve this goal was the conclusion of an agreement with the Russian fertilizer producer OAO Minudobreniya ( Rossosh ). The agreement includes a minority stock acquisition (30%), technology transfer and the integration of Rossosh into Yara s planning and marketing operations. Yara will coordinate production schedules and logistics for the export of 900,000 tonnes of NPK from Yuzhny by the Black Sea to key markets in Asia and other growth markets. Our efforts to maintain industry leadership will be guided by strong capital discipline and loyalty to our business model. It will also be critical to identify markets with an attractive supply and demand environment. High consumption growth does not make a market attractive if supply growth is even higher. In our downstream operation we will therefore closely monitor developments and build further positions where we believe good margins can be achieved. With local operations in 48 countries, Yara is a truly global company. Major production plant Office Number of plants/terminals/warehouses YARA OFFICES: NORTH AMERICA Canada United States YARA OFFICES: LATIN AMERICA Chile Argentina Brazil Colombia Costa Rica Guatemala Martinique Trinidad and Tobago 14 YARA ANNUAL REPORT 2004

17 BUSINESS SEGMENT FOCUS ON: IMPORTANCE: OPPORTUNITY: SPECIALITY FERTILIZERS THE NEW KEY GROWTH MARKET IN FERTILIZERS YARA IS THE NUMBER ONE GLOBAL BRAND FOCUS ON: IMPORTANCE: OPPORTUNITY: DOWNSTREAM PRODUCTION SERVES LOCAL MARKETS DIRECTLY ADDS STRENGTH TO YARA S GLOBAL POSITION Yara is the number one global brand within speciality fertilizers. Through its specialities business, Yara is a leading supplier of plant nutrient solutions for cash crops, typically fruit and vegetables. Agronomic competence is a unique and integral part of Yara s offering to growers of high quality crops, wherever they are in the world. A complete and balanced plant nutrition portfolio, combining our self produced products with third party products from our global partnerships, backs our competence. In 2004 speciality fertilizers contributed approximately 17 percent of Downstream revenues, with double-digit annual growth in recent years. In addition to a wide network of sales and distribution units, the Downstream segment also includes a number of production plants. These plants upgrade intermediate products like ammonia, phosphate and potash into more sophisticated fertilizer products. Downstream has seven production sites in Europe, one in Brazil and one in South Africa. These plants have a total production capacity of more than 5 million tonnes, serving customers in the local and regional markets. These production facilities, terminals and warehouses give Downstream a unique and cost competitive infrastructure for its global operations. YARA OFFICES: EUROPE Belgium Czech Republic Denmark France Germany Greece Ireland Italy Netherlands Norway Poland Russian Federation Spain Sweden United Kingdom YARA OFFICES: AFRICA Cameroon Ivory Coast Egypt Guinea Kenya Malawi Nigeria South Africa Tanzania Zimbabwe YARA OFFICES: ASIA/OCEANIA Australia China India Indonesia Iran Malaysia New Zealand Phillippines Qatar Singapore Sri Lanka Thailand Vietnam YARA ANNUAL REPORT

18 BUSINESS SEGMENT: INDUSTRIAL Yara Industrial nitrogen products Annual growth rate of 8.6%. (Thousand tonnes) YARA inside ,008 1,010 1, Source: Yara estimates 16 YARA ANNUAL REPORT 2004

19 BUSINESS SEGMENT THE INDUSTRIAL SEGMENT MAKES UP AN INCREASINGLY IMPORTANT PART OF YARA S BUSINESS PORTFOLIO. LEADERSHIP POSITIONS IN HIGH-GROWTH PROF- ITABLE MARKETS PROVIDE A SOUND PLATFORM FOR FURTHER DEVELOPMENT OF THE SEGMENT. Environmental applications Environmental applications have grown at an average annual rate of 11% since (Thousand tonnes) highlights NEW CO2 PRODUCTION CAPACITY ADDED IN DORMAGEN, GERMANY DIVESTMENT OF CO2 PLANTS IN MALAYSIA AND THAILAND STRENGHTENED POSITION IN TECHNICAL AMMONIUM NITRATE NEW ADBLUE PRODUCTION PLANT OPENED IN BRUNSBÜTTEL, GERMANY Source: Yara estimates key financials Pro forma Pro forma Pro forma (NOK Million) Operating Revenues 5,392 4,769 4,400 Operating income EBITDA CROGI 14.0% 14.3% 16.8% Over the last decades, the Industrial segment has used Yara s nitrogen fertilizer production as the basis for growth opportunities in many parts of the industrial sector, in Europe as well as in North America. Industrial s main activity is the use of ammonia and other co-products from Upstream as a basis for industrial applications. Finding new applications of existing Upstream products and co-products for end users have been the thrust for the successful development of Yara Industrial. For Yara overall, this market segmentation strategy also adds value by balancing out the dependency on commodity margins in the more volatile parts of Yara s business. The underlying growth in the segment s core markets has been attractive, and cash-flow generation has been strong. As an example, Yara has been able to grow its nitrogen chemical volumes by more than 8 percent annually during the last five years. Further on, it is likely that a higher share of Yara s organic growth in Europe will take place in the nitrogen chemical market relative to the European nitrogen fertilizer market. The industrial part of the European nitrogen market constitutes approximately one third of the combined industrial and fertilizer market, and Yara s share of the non-captive chemical market is approximately 25 percent. The development of the Industrial segment is built on a set of established key strengths, first of all the leadership positions established in profitable markets with high growth. In addition, the Industrial segment has a proven strong ability to develop new applications and achieve justin-time deliveries to a wide and diversified customer base. Yara s strong base for production of industrial chemicals and gases in the Upstream segment, is also key to this development. During 2004, the Industrial segment strengthened its position through a number of key initiatives. In Germany, the production capacity for CO2 was increased with the investment in a new liquefaction plant in Dormagen. This represents a new capacity located centrally in the important German market. Yara strengthened the market position for nitrates in its core markets for civil explosives (mining). In Germany (Brunsbüttel), a new plant was opened for the production of AdBlue, a high quality urea solution for reducing emission of nitric oxides (NOx) from heavy-duty vehicles. In addition, Yara has streamlined its operations by divesting the CO2 plants in Malaysia and Thailand. FROM FOODCARE TO ENVIRONMENTAL APPLICATIONS. The Industrial segment was reorganized in 2004 and comprises four business units: CO2, Industrial gases, N-chemicals and Nitrates. The focus on developing novel applications contributing to a cleaner environment is a core activity across all Industrial business units. CO2. Yara s ammonia plants produce CO2 as a co-product. This has led to a unique position as a major producer and distributor of liquid CO2 in Europe. Important customers include the large soft drink bottlers in Western Europe, as well as breweries and the food industry. Yara s dry ice factories in France, England, Germany and Denmark have been developed as downstream vehicles to further exploit the strong position in the food and transportation industry. The production facilities in Sluiskil (The Netherlands), Ferrara (Italy), Dormagen (Germany) and YARA ANNUAL REPORT

20 BUSINESS SEGMENT BUSINESS AREA: CO2 Yara s ammonia plants produce CO2 as a co-product. This has led to a unique position for Yara s Industrial segment as a major producer and distributor of liquid CO2 in Europe. Important customers include the large soft drink bottlers in Western Europe, as well as breweries and the food industry. BUSINESS AREA: Industrial gases Yara s Industrial segment supplies a wide range of industrial gases used in diverse applications in a number of industries. For customers involved in metal fabrication, Yara is an important provider of argon, helium and oxygen needed for welding and cutting. Liquid CO2 for the food and beverage industry Gases for welding and cutting in metal fabrication Porsgrunn (Norway) have a capacity exceeding 900,000 tonnes of liquid CO2 per year. In addition, Yara has long-term contracts for the purchase of third-party products from other producers in the UK and continental Europe. Yara operates its own dedicated vessels for shipping CO2 to distribution terminals in a number of countries and this capacity has made Yara a preferred supplier of CO2 due to security of supply. Industrial gases. Yara supplies a wide range of industrial gases used in diverse applications in a number of industries. The product portfolio includes nitrogen, argon, oxygen, a number of speciality gas mixtures and medical gases. In the metallurgical industry, oxygen boosts temperature in furnaces and argon removes impurities from liquid metal. Argon, helium and oxygen are needed for welding and cutting in metal fabrication. A wide range of products are used in the process industry, from making inert atmospheres to more demanding applications. Cylinder gases are distributed through a wide network of agents. N-chemicals is the term used by Yara for products like ammonia, urea and nitric acid. The major European chemical industries are served with N-chemicals from Yara. Some N-chemicals are produced in separate plants due to special requirements for quality standards. Nitrates. The nitrates business includes technical grade ammonium nitrates for civil explosive purposes, and calcium nitrate for a range of applications including waste water odour control and treatment of reservoir souring. The civil explosives are used for mining and to support infrastructure development. This includes road building and construction projects as well as for mining of important minerals used in the electronics industry and for coal used in the production of energy. The environmental applications of our nitrate business are further explained below. HELPING TO PROTECT THE ENVIRON- MENT. Environmental applications make up an essential component in all business units in the Industrial segment. Such applications have grown at an annual average rate of 11 percent since 1999, with annual volumes exceeding 450,000 tonnes in Yara is the global leader in calcium nitrate applications for wastewater treatment, and holds a strong position within the removal of NOx from combustion processes such as coal fired power plants. Nutriox is a unique, environmentally friendly, calcium nitrate product used to eliminate and prevent the formation of hydrogen sulphide. Hydrogen sulphide is an odorous, toxic and corrosive gas that is formed for instance in wastewater pipes. In Europe, customers range from municipalities to water treatment companies. The Nutriox purification technology is well established in Europe and in North America, and is in use at thousands of sites. In Europe, France is a major market, with the municipality of Paris as a key customer. PetroCare products are nitrate-based products tailor-made for the oilfield market. One of the applications is based on the same principles as Nutriox with the aim to avoid production of 18 YARA ANNUAL REPORT 2004

21 BUSINESS SEGMENT BUSINESS AREA: N-chemicals N-chemicals is the term used by Yara for products like ammonia, urea and nitric acid. The major European chemical industries are served with N-chemicals from Yara. An important new application with a high potential is AdBlue, a high-quality urea solution used to reduce NOx emissions from heavy-duty vehicles. Air1 is Yara s AdBlue concept. BUSINESS AREA: Nitrates The nitrates business includes technical grade ammonium nitrates for mining and infrastructure development, and calcium nitrate for a range of applications including waste water odour control and treatment of oil reservoir souring. Under the product brand PetroCare, Yara markets a family of nitrate-based products tailor-made for the oilfield market. Air1 PetroCare hydrogen sulphide in oil reservoirs. However PetroCare could also be used to increase oil production from reservoirs and to extend the lifetime of oil fields. This technology is now well established in the Norwegian, Danish and British sector of the North Sea as well as in the Gulf of Mexico. New markets are currently being evaluated. Reduktan is a product applied to reduce the emission of NOx from power plants, waste incineration sites and shipping vessels. The product reacts with the undesired nitrogen compounds in exhaust gases resulting from the combustion processes, forming pure nitrogen gas and water. AdBlue is a new environmental product with a high potential. This is a high quality urea solution that is used for reducing NOx emissions from heavy-duty vehicles based on the Selective Catalytic Reduction (SCR) technology. The solution was developed in cooperation with major truck manufacturers and responds to more stringent restrictions on exhaust gas emissions now being implemented by the EU. Yara is now launching its Air1 marketing supply concept for AdBlue together with Brenntag, Europe s largest chemical distributor. Yara s urea production facilities in Germany, Netherlands, France and Italy are uniquely positioned to take advantage of this particular growth opportunity. The truck industry estimates that West Europe will need 3.5 million tonnes of AdBlue by CLOSE DIALOGUE WITH OUR CUSTOMERS. Yara s approach to the market in the Industrial segment is governed by three key value propositions to the customers: Reliability, long-term relations, and the ability to solve problems and challenges related to the customer s process. Yara s goal is to develop effective solutions by combining its product expertise with the customers knowledge of their process. Central to the market strategy is also the ambition to be present in large sections of the value chain. This presence is often related to quality control, as demonstrated in our CO2 delivery concept. Yara is also working to extend the product offering with relevant service applications. An example is enutriox, a web solution that allows Nutriox customers to monitor status throughout the purification process. FOCUS ON INNOVATION AND SYNERGIES. The Industrial segment will continue to focus on product innovations, services and applications based on products originating from Yara s production plants. Restructuring opportunities in the fertilizer/chemical industry can provide the segment with access to new infrastructure. As some plants can produce fertilizer grade as well as industrial products, Yara will continue to evaluate opportunities between such products to optimize long-term margins. The competitiveness of industrial products often depends on their proximity to production plants. Yara will therefore focus on securing market positions that allow for synergies with existing infrastructure and that enables Yara to further optimize its global logistics operations. YARA ANNUAL REPORT

22 BUSINESS SEGMENT: UPSTREAM CHASING AN EVER STRONGER COST POSITION 20 YARA ANNUAL REPORT 2004

23 BUSINESS SEGMENT THE PLANTS IN THE UPSTREAM SEGMENT FORM THE BACKBONE OF YARA S PRODUCTION SYSTEM. THROUGH A PERSISTENT FOCUS ON COST, THROUGHPUT AND SAFE OPERATIONS, THE SEGMENT PROVIDES A HIGHLY COMPETITIVE FOUNDATION FOR YARA S GLOBAL BUSINESS. YARA ANNUAL REPORT

24 BUSINESS SEGMENT Safety and productivity improvements go hand in hand* Productivity (million tonnes finished products per million hours worked in plants) LTI-rate (number of lost-time injuries per million hours worked) Yara s basic production process Nitrogen (N) from air Natural gas Ammonia Natural minerals: Phosphorus (P) Potassium (K) FINISHED PRODUCTS* ) : NPK Global # 1 producer Nitrates (CAN, AN) Global # 1 producer Urea European # 1 producer Speciality fertilizer Global # 1 cash crops Industrial products European # 1 CO2 supplier * ) Market share based on sales LTI-rate * All Yara plants Productivity 2004 key financials Pro forma Pro forma Pro forma (NOK million) Operating Revenues 18,603 15,181 11,180 Operating Income 2,166 1, EBITDA 3,379 2,249 1,130 CROGI 14.7% 10.6% 5.7% T he Upstream segment includes Yara s own ammonia production and large-scale fertilizer facilities. In combination with the local plants in Yara s Downstream segment, this production capacity makes Yara the world s leading producer of ammonia, nitrate and NPK. This position provides Yara with ample opportunities to reap economies of scale and share best practices across a large network of similar plants, and contributes substantially to Yara s competitive returns. The Upstream segment also comprises the trade and shipping of ammonia, which supplies Downstream plants with ammonia and employs Yara s global ammonia shipping and distribution network to generate additional value. In addition, global gas sourcing, technical R & D and global production support are crucial to the success of the Upstream segment was a very satisfactory year for the Upstream segment, with return on capital employed reaching historically high levels. The key factors behind the result are high prices of ammonia, high production volumes and successful energy sourcing. At the same time, strict capital discipline has been maintained, providing for a high cash flow. Cost improvement efforts continued through the year, with a particular focus on three major plants: Brunsbüttel in Germany, Sluiskil in the Netherlands and Ferrara in Italy. Significant results have been achieved, particularly within energy efficiency and regularity. In addition at our facility in Porsgrunn, Norway, systematic operation and removal of bottlenecks resulted in all time high production volumes. Record production volumes have been achieved for ammonia, nitric acid and finished fertiliser for Yara total in BASED ON NITROGEN AND NATURAL GAS. In the basic process to produce nitrogen fertilizers, nitrogen is extracted from the air and combined with natural gas to form ammonia. In turn, ammonia forms the basis for urea, nitrate and other nitrogen fertilizers. For a western producer, natural gas typically accounts for percent of total input cost for urea, depending on gas prices. Potash and phosphate are extracted from mines and sold separately or combined with ammonia or nitrogen fertilizers to form NPK fertilizers. The side streams of the main production are fully utilized by Yara s businesses within speciality fertilizer and industrial products. Yara has five integrated production sites with own ammonia production located in Yara s European home market. These are found in Porsgrunn (Norway), Brunsbüttel (Germany), Sluiskil (the Netherlands), Le Havre (France) and Ferrara (Italy). Two overseas ammonia production facilities are located where lower cost gas is available one in Qatar (joint venture) and one in Trinidad (comprises of one fully-owned plant and two plants in a joint venture). Over the past five years, these plants have performed well, showing a solid production increase both for ammonia and urea. This can mainly be attributed to productivity increases in existing plants without major investments and the successful completion of the Qafco-4 project in Qatar. As a result, Yara can benefit from some of the most competitive production plants in the industry. THE COST IMPERATIVE. A strong cost position is a basic requirement for healthy returns in the fertilizer industry. This involves two fundamental challenges: reduce cost and increase throughput. In Yara we strive for constant improvement on both dimensions, with an overriding ambition to pursue scale in everything we do. Today, Yara enjoys a cost position well below the European average for all its core products ammonia, nitrates and NPK. As we chase an ever stronger position, three areas are of particular importance: improved feedstock cost, improved energy efficiency and the removal of bottlenecks in production. Feedstock cost advantage is largely determined by the price differences of natural gas between Europe, the US and the Middle East and other stranded gas areas. As swing capacity exists in the US, production costs in this market represent a floor price for ammonia and urea. Since 2000, gas prices in Europe have been lower than in the US. This supports good margins for Yara, as a large part of its costs are based on European energy prices. Another cost advantage is the fact that Yara s gas contracts have a 22 YARA ANNUAL REPORT 2004

25 BUSINESS SEGMENT 2004 highlights: RECORD PRODUCTION VOLUMES FOR AMMONIA, NITRIC ACID AND FINISHED FERTILIZER. SIGNIFICANT PRODUCTIVITY IMPROVEMENTS ACHIEVED AT OUR PLANTS IN BRUNSBÜTTEL (GERMANY), SLUISKIL (THE Key events Q NETHERLANDS), PORSGRUNN (NORWAY) AND FERRARA (ITALY) QAFCO-4 COMMISSIONED. PRODUCTION VOLUMES CLOSE TO FULL CAPACITY END OF 2004 RETURN ON CAPITAL EMPLOYED AT HISTORICALLY HIGH LEVELS Yara the European low cost leader Average cost Yara s European plants Ammonia cost position Nitrate cost position NPK cost position Production cost index: 100 = European EFMA average excl. Yara A letter of intent is signed for the building of a fifth fertilizer plant in Qatar (Qafco-5). The plant will provide additional growth for what is already the world s largest fertilizer producing site. A minority stake is acquired in the Russian fertilizer producer Rossosh. The plant will be of particular importance for the development of Yara s market positions in key Asian markets like China, Thailand and Indonesia. An agreement is signed with the owners of the new, world-scale ammonia plant on the Burrup Peninsula in Western Australia, acquiring a 30 percent stake in Burrup Holdings Pty Ltd Source: EFMA significant link to low-sulphur fuel oil, which has not followed crude oil to the current high levels. It should be noted, however, that forward prices for fuel oil point upwards while they point downward for crude (March 2005). The cost of energy is controlled by combining different vendors in a balanced purchasing portfolio with contracts of different durations. From 2003 to 2004 our price of energy rose by less than 10 percent, compared to an increase in oil price of around 50 percent in the same period. While the basic process to produce nitrogen fertilizers has remained unchanged for many years, there is still room for improvement in our plants. At all times, Yara performs systematic plant testing and systematic maintenance to increase yield and remove bottlenecks. Improvements are documented and best practice is spread across our large network of similar plants. ADDED VALUE THROUGH TRADE AND SHIPPING. Ammonia is shipped in liquid form in tailored vessels. The handling of ammonia during transport involves particular challenges where Yara has unique skills and experience. We are the only producer in our industry, to have built up a significant fleet of specialized ammonia vessels. We currently have operative control over 15 ships, but only 3 of these are wholly owned by Yara. In 2004, two new vessels of 40,000 tonnes each were added to the fleet, providing significant extra capacity and flexibility. The fleet, together with an extensive involvement in storage and trade, makes Yara a global no. 1 also in this part of the industry. Thus, we extend our physical control through the value chain, which again results in improved margins. Success in our trade, shipping and commercial activities also rests on our ability to maintain optimal customer relations and world-class logistics. FOCUS ON SAFETY. Health, safety and environmental protection are issues of critical importance across the activities in the Upstream segment. In this area, we aspire for the highest standards for ourselves as well as our partners. Our upstream activities involve potentially dangerous products and processes. If not handled safely and professionally, several of our mechanical and chemical processes may cause serious harm. Yara s key performance indicator in this area LTI: Lost-Time Injury showed a positive development during Yara not only cares about the safety of the people in its plants, but also about the safety of customers and others involved in our activities. To facilitate the best possible handling of its products, Yara and the European Fertilizer Manufacturers Association have launched a Product Stewardship initiative to improve product handling procedures and other processes. (See page 26) CONTINUED FOCUS ON PRODUCTIVITY AND CAPITAL DISCIPLINE. The price of ammonia and urea and the cost of oil, gas and other raw materials will continue to be essential external parameters for Yara s Upstream business. In response, Yara will strive to further improve its leading competitive position by improving productivity and maintaining capital discipline. Lower fixed cost and higher production volume will be key to maintaining and improving productivity. Additional improvements will be pursued through systematic plant testing in order to remove bottlenecks. A strong financial position will enable Yara to acquire additional capacity when the timing is appropriate. The most likely location for such initiatives will be the stranded gas areas, where energy is cheaper than in Europe. One example is the Letter of Intent recently signed ( ) with Qatar Petroleum and Qafco to add more capacity to our joint venture in Qatar through a new project (Qafco-5). YARA ANNUAL REPORT

26 COO PERSPECTIVE WE NEED TO BE RELEVANT FOR THE NEXT DIET AN INTERVIEW with DANIEL CLAUW, CHIEF OPERATING OFFICER THE EXTENSIVE INTERFACE WITH END USERS AROUND THE WORLD SETS YARA APART FROM ITS COMPETI- TORS. WITH THE EMERGING NEED FOR NEW TYPES OF FERTILIZERS, THIS INTERFACE WILL BECOME AN EVEN MORE IMPORTANT ASSET, EXPLAINS DANIEL CLAUW, YARA S CHIEF OPERATING OFFICER. While the fundamentals of the fertilizer industry remain largely intact, there are significant new developments to watch. Daniel Clauw is concerned with both, and believes that Yara needs a multiple strategic focus to succeed. - Our industry is truly global and it has a good size. Many observers will also call it mature, but it still grows by around 2 percent a year. A growing population, combined with less availability of arable land, will inevitably result in a continued need for good fertilization. But there are also significant changes affecting the industry. The most important is the shift to a broader focus on yield including a focus on nutritional content in the crop, protein in particular. This change, which has been going on for 5 6 years, implies that the traditional product approach to the market will have to be supplemented by a nutrition approach. At Yara, we take pride in a good understanding of the product and the farmer s needs. However, we need an even broader understanding of these needs and how they change. In particular, this understanding is important to further develop our business within speciality products. We must understand the fertilization needs for growing cash crops like fruit and vegetables, including the role of micronutrients, different climatic conditions, different soil factors, and so on. This will require a change of perspective, seeing ourselves as part of the food supply chain. To meet the needs of what is often called the next diet, we must proactively develop our marketing efforts and our product portfolio. Our global Downstream operation and closeness to the farm gate makes us uniquely positioned to achieve this objective. We are able not only to understand the needs in different regions and for different kind of crops, but also to drive the change. With our total value chain approach we can benefit from the market pull, while having control over the commodity part of our business. What examples from Yara s business can illustrate this development? - One example is our strategic joint venture with the Chilean company SQM, the world s most competitive producer of potassium nitrate (PN). Through this partnership, we are able to offer a complete product portfolio for the high value crop segment being served by our specialities business. Included in this offer are solutions for fertigation fertilizer applied through the irrigation of water. The SQM agreement, combined with our position as the number one producer of calcium nitrate (CN), has enabled us to take a global leadership position in fertigation. Another example is our activities in China. In this vast market, a major transition is sweeping across the agricultural sector, with the growers switching from cereals to high-value cash crops. China now produces half of the world s vegetables and melons, compared to only one third in For Yara, China offers unique possibilities for niche marketing of quality fertilizers and related competence. Apart from the increased emphasis on specialities, what is Yara s strategic focus? - Our focus is dual. From our product platform, 24 YARA ANNUAL REPORT 2004

27 COO PERSPECTIVE with a best-in-class cost position, we control the basic elements of mineral fertilizers: ammonia, urea and nitric acid, which form the basis for a wide range of products. We combine this with a world-class marketing and brand value approach to achieve healthy margins on the distribution side. With this dual focus, supported by good business intelligence, we have been able to take leadership in our industry. This will also be the basic approach as we seek to strengthen our leadership and create shareholder value in the years ahead. Building on its leadership position, Yara has stated an ambition to shape the industry. What does this ambition imply? - First of all it implies a clear ambition to grow. It is important to note, however, that we will only grow when we see good strategic reasons for doing so. In other words: we will grow by design, not by default. Being the preferred partner for local producers and also the preferred partner Upstream, nobody can match our position in mineral fertilizers. From this vantage position, we can grow in several dimensions: Downstream, there is an opportunity for organic growth. Upstream, we may pursue step growth, but only if it fits in with and is beneficial to the whole value chain of Yara. In considering such steps, we also have to evaluate the consequences for the industry structure as a whole. How would you describe the role of the Industrial segment in Yara s future development? - Our Industrial segment primarily conducts its business in Europe. On the agricultural side, Europe is the most mature market we operate in. However, it represents a significant growth potential for our industrial products, existing and new. We will continue to develop this important business through a constant search for new applications and a strategy of seeking a deep presence in the customer s value chain. In some parts of the world, the fertilizer business has been subject to political barriers, motivated by some countries ambition to remain self-sufficient. What developments do you see in this area? - Here, we observe a clear positive trend. Every year it gets easier for companies like Yara to gain access to markets that were formerly closed. The fertilizer industry is gradually becoming a privately owned business where influence is shifted from policymakers to shareholders. This is an important development, as it affects huge markets like India and China. Since March 2004, Yara has been an independently listed company. How does that affect the agenda of the corporate management group? - Because we are leaner, we are now more flexible and can act more quickly. We can pursue our own vision and strategy with full independence. However, it also means that we are able to spend more time with analysts, institutional investors and journalists. More than before, we are expected to be clear and outspoken about our strategy and business model. I believe this to be a good thing, also for Yara. YARA ANNUAL REPORT

28 PRODUCT STEWARDSHIP RESPONSIBILITY THROUGHOUT THE VALUE CHAIN THE MANUFACTURING, DISTRIBUTION AND SALE OF FERTILIZER IMPLY A NUMBER OF OBLIGATIONS RELATED TO SAFETY AND CARE FOR THE ENVIRONMENT. YARA TAKES ON THIS RESPONSIBILITY IN A STRINGENT AND SYSTEMATIC MANNER, GUIDED BY THE INDUSTRY S PRINCIPLES OF GOOD PRODUCT STEWARDSHIP. I n 2003 the European Fertilizer Manufacturers Association (EFMA) established a Product Stewardship programme to ensure that proper care is taken along the whole fertilizer value chain from product development and purchase of raw materials, during production and storage and in the distribution network right up to delivery and use on the farm. The requirements deal specifically with the hazards related to ammonium nitrate fertilizers, and responds to some recent serious accidents in the storage and transportation of such products. Yara has participated in the development of the program, and has expanded on the requirements in its own application of the principles. The elements of Product Stewardship reflect the specific challenges in each of the steps in the value chain. Many of the principles are also applied in Yara s Industrial segment, where a number of safety challenges are similar to those found in the fertilizer business. PRODUCT DEVELOPMENT. At the product development stage, considerations include how new fertilizer products should be composed. The products must meet the requirements of balanced fertilization, ensuring that the fertilizer provides the correct amount of nutrients needed by the plant. At the same time the physical and chemical properties of the product must comply with customer demands and meet with international and national legislation. Yara has established a Product Technology Centre dealing specifically with the legislative requirements in all markets and is the centre for issuing product safety data sheets and transport emergency cards. 26 YARA ANNUAL REPORT 2004

29 PRODUCT STEWARDSHIP Product Stewardship in Yara PRODUCT APPLICATION AND FARMER SERVICES: Advice on product use and application Information on safe use and handling of fertilizers MARKETING AND SALES: Sales of qualityapproved products Product safety information to customers Responses to inquiries PRODUCT DEVELOPMENT: Assessment of HSE and product quality Regulations Processing limitations STORAGE: Selection of and cooperation with storage operators Use of best practices in operating standards Emergency plans and safety information PRODUCT STEWARDSHIP SOURCING: Selection and cooperation with suppliers Product quality criteria HSE of processing and final product TRANSPORTATION: Selection of and cooperation with transporters Use of best practices in operating standards Emergency plans and product safety information PACKAGING Assessment of packaging material Recycling and safe waste disposal MANUFACTURING: Operational and technical standards Selection of contractors Product quality criteria HSE of processing and final product YARA ANNUAL REPORT

30 PRODUCT STEWARDSHIP EFMA/SGS external audit of Yara s European operations, 2004 Fertilizer application rates and environmental impacts Product Stewardship management 81 Relative environmental impact per tonne wheat grain Eutrophication Acidification Global Warming Land use Sourcing, Manufacturing and Packaging Transportation and Storage Marketing and Sales Good information is essential to good product stewardship Score (100=best) Source: Yara Research 0 Zero N Optimum N Excessive N SOURCING, MANUFACTURING AND PACK- AGING. Whether produced by Yara or by a thirdparty supplier, Yara has established stringent criteria for the quality of raw materials, additives and finished products. For example, the quality of ammonium nitrate is set at a stricter level than the EU requirements, and when sourcing minerals and additives, the content of cadmium and other impurities is reviewed to meet environmental requirements. The increasing attention directed at food safety in general is reflected in Yara s policy of continuously developing products that are safe and clean, and which meet the need for cost-efficient agriculture. The manufacturing stage has traditionally been the cornerstone of safety efforts in our industry, with a focus on occupational health and safety and serious risk factors like fires, explosions and emissions of pollutants. Manufacturing processes are today strongly regulated by international and national requirements, where the EU has taken a leading role. Yara s manufacturing sites satisfy these regulations. In addition, Yara has implemented more detailed European industry standards for its fertilizer operations and industrial activities, for instance on the safe treatment of waste products and reject fertilizer materials. Closely related to manufacturing is the packaging stage, where important issues include the choice of packaging material and possibilities for recycling. Another issue of relevance to packaging is labelling, where the main challenge is to provide concise and relevant information for safe and correct handling of the product. TRANSPORTATION AND STORAGE. To secure good Product Stewardship, stronger attention is needed to operations beyond the factory gate, where other companies are involved and take over the formal responsibilities. Yara is directing much attention to external service providers and in setting standards for safe operations. This is of particular relevance to transportation. The perception of the industry s safety standard is closely linked to the performance of the service providers. Therefore, Yara must be confident about the quality of the vehicles used, the skill of the driver and other personnel, and the status of the emergency procedures. In effect, Yara critically reviews the safety performance when choosing partners, and has a requirement for tight operational standards. In some instances we offer a Total Service Provider concept, which includes elements like training of people who handle our products, and technical solutions for receiving and storing products. For storage of fertilizer products, Yara has established an industry code together with other producers, taking account of the risk of accidents and thefts. This is followed up at Yara s own warehouses, at rented storages and at customers sites. MARKETING, SALES AND CUSTOMER SERVICES. At the user end of the value chain, the key product stewardship challenge is to provide sound advice on the best use of fertilizer, as well as giving directions on the safe storage and handling on the farm. This means that our sales and marketing personnel need to be resourceful consultants to wholesalers, retailers and farmers. It also implies a constant need for good information material an area where Yara spends significant resources. In addition, our services to the farmer include a number of tools to assist in the correct application of fertilizer. One example is the N-Sensor, a device fitted to the tractor that measures the nitrogen status of the crop and calculates the optimum nitrogen requirement for each individual part of the field. An attached spreader immediately applies the correct amount of nitrogen. Environmental protection is the basis for the advice we give on fertilizer application rates. Research shows that balanced fertilization, i.e. the right amount and the right kind of nutrients applied at the right time during the growing season, provide the least detrimental environmental impact and the most efficient and profitable farming. ROOM FOR IMPROVEMENT. In a rating performed by SGS, an independent auditor on behalf of EFMA, Yara scores high on the Product Stewardship parameters. Still there is room for improvement, and this is currently being addressed by Yara s business units. Yara is committed to the further development of fertilizer products which meet high demands on quality, agronomic efficiency, safety and environmental care. Likewise, Yara s operational procedures and technical standards are continuously being reviewed to match best industry practices. This also applies to the distribution and application of fertilizer and other products in Yara s portfolio. The Product Stewardship programme is a key tool in this effort. 28 YARA ANNUAL REPORT 2004

31 FINANCIAL STATEMENTS AND OTHER MANAGEMENT-RELATED INFORMATION CONTENTS: 30 REPORT OF THE BOARD OF DIRECTORS 34 CORPORATE GOVERNANCE, SOCIAL RESPONSIBILITY & HSE 39 MANAGEMENT DISCUSSION & ANALYSIS 47 CONSOLIDATED FINANCIAL STATEMENTS 47 Consolidated Profit and Loss Statements 48 Consolidated Balance Sheets 50 Consolidated Cash Flow Statements 51 Notes to Consolidated Financial Statements 83 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 83 Yara International ASA Profit and Loss Statement 84 Yara International ASA Balance Sheet 86 Yara International ASA Cash Flow Statement 87 Notes to the Financial Statements for Yara International ASA 97 AUDITORS REPORT 98 USE OF NON-GAAP MEASURES 100 IMPLEMENTATION OF IFRS 101 OPERATIONAL DATA 102 BOARD OF DIRECTORS 104 MANAGEMENT AND ORGANISATION 106 THE YARA SHARE As a result of rounding differences, figures or percentages may not add up to the total YARA ANNUAL REPORT

32 FROM THE BOARD OF DIRECTORS REPORT OF THE BOARD OF DIRECTORS YARA WAS DEMERGED FROM NORSK HYDRO AND LISTED ON THE OSLO STOCK EXCHANGE 25 MARCH WITH RECORD FINANCIAL RESULTS FOR THE YEAR AND WITH A SUCCESSFUL LISTING, THE BOARD OF DIRECTORS BELIEVE YARA HAS BEEN LAUNCHED WITH A STRONG START. BACKGROUND The decision to demerge and list Yara in 2004 was taken by Norsk Hydro after concluding that its shareholders would benefit from Yara having direct access to capital markets and a better opportunity to grow both organically and through the ongoing restructuring of the fertilizer industry. 80 % of the shares in Yara were distributed to the Norsk Hydro shareholders and 20 % were sold in a public offering. Since April 2004 Yara has had no ownership relationship or other ties to Hydro with the exception of some arm slength contracts for the supply of selected products and administrative services. Yara is a chemical company mainly focusing on production, sales and distribution of nitrogen chemicals. The main application is fertilizer, but many industrial applications are also important. Yara is the world's largest fertilizer company measured by revenues and profit. Yara's head office is located in Oslo, Norway, and the company has operations in approximately 50 countries with products distributed to approximately 120 countries. Yara's business is organized into three segments: DOWNSTREAM which contains the global fertilizer distribution system and smaller plants upgrading intermediate fertilizer products like ammonia into finished fertilizer. The main plants are located in Europe, South Africa and Brazil. INDUSTRIAL which contains the marketing of nitrogen chemicals and gases for industrial purposes. The plants are located in Europe and Sri Lanka. UPSTREAM which contains the main production plants converting natural gas and other raw materials into nitrogen chemicals and NPKs. The plants are located in Europe, Trinidad and Qatar. The segment also comprises ammonia trade and shipping, which includes a fleet of owned and chartered vessels. MARKETS AND RESULTS FOR THE YEAR The fertilizer market was good in 2004 with strong demand. After several years of grain consumption exceeding grain production, global grain stocks diminished to a 20-year low level in 2003/2004. In particular, populous Asian countries like China and India increased their consumption of fertilizer significantly, mainly with the intention to secure food supply. In combination with a limited growth in fertilizer production capacity in recent years, this led to attractive margins for fertilizer producers. However, fertilizer prices were also positively influenced by the high energy prices in As most of the nitrogen fertilizer production costs are energy cost, high energy prices will normally lift nitrogen fertilizer prices to higher levels. A major event in 2004 related to Yara's business was the opening of the 25 % Yara-owned Qafco-4 plant in Qatar, which has an annual production capacity of 1.1 million tonnes of urea, the most common type of fertilizer outside Europe. In total, the Qafco site is now the world's largest urea production facility with an annual capacity of 2.8 million tonnes and an ammonia capacity of 2.0 million tonnes. Yara has over the last years sharpened its strategic focus and divested from non-core activities. No significant acquisitions were made during In February 2005, Yara announced the acquisition of a minority stake in a Russian fertilizer plant (Rossosh) and the intention to build a fifth fertilizer plant in Qatar with a final decision expected in Production performance was satisfactory in 2004 and Yara's total production reached the highest level ever of 15.5 million tonnes. The increase in production was mainly due to productivity improvements and in part due to minor debottlenecking activities in some plants. Sales volumes were at a level similar to the year 2003 due to the divestment of low margin sales of products from other sources. Profitability was satisfactory in all regions except Africa where provisions for doubtful receivables were made, primarily due to the difficult political and financial situation in the Ivory Coast. The accounting numbers in the following sections are pro forma numbers, which was derived from Norsk Hydro's consolidated financial statements, and include the historical information for operations being transferred to Yara. Financial numbers referring to the period after 25 March 2004 are actual figures. The financial results for 2004 were the best ever. Net income after minority interest was NOK 3,761 million (NOK per share), compared with NOK 2,186 million (NOK 6.84 per share) in Operating income was NOK 3,584 million, compared with NOK 2,751 million in EBITDA (see Note 06 in consolidated financial statement) was NOK 5,765 million, compared with NOK 4,671 million in Yara's revenues were NOK 43.3 billion in 2004, an increase of 12 % compared with The most substantial improvement came from higher fertilizer prices and productivity gains in the production system. Yara's after-tax measure for return on capital, CROGI (Cash return on gross investment), was 13.3 % compared to a target of minimum 10 % as an average over the business cycle. In terms of relative competitiveness as 30 YARA ANNUAL REPORT 2004

33 FROM THE BOARD OF DIRECTORS measured by Gross Return on assets (EBITDA/Total assets), Yara remained in the targeted top quartile of its defined company peer group. Downstream operating income was NOK 1,356 million in 2004, compared with NOK 1,162 million in EBITDA was NOK 2,068 million compared with NOK 1,833 million in Fertilizer sales in 2004 were approximately 640 kt lower than in 2003, primarily due to deliberate efforts to reduce activity in Africa and trade of low-margin products in Asia. In Europe, Yara gained market share, primarily at the expense of imports. Margins were improved due to a tighter supply/demand balance. A significant share of the increase was related to improved sales margins in Brazil, but the positive impact from Europe, in particular from the Mediterranean, was also substantial. The Industrial segment's operating income for 2004 was NOK 454 million, compared with NOK 442 million in the same period in EBITDA was NOK 688 million, unchanged from Despite divestments in Asia, sales of industrial gases increased in Also environmental products and industrial nitrogen chemicals showed growth as a result of new contracts in Europe and the US. Technical ammonium nitrate prices rose as mining activity increased. Despite a historically high price level for ammonia, which is an input to the Industrial business, margins increased. In 2004, Upstream operating income was NOK 2,166 million compared with NOK 1,212 million in EBITDA was NOK 3,379 million compared with NOK 2,249 million in Upstream production in 2004 totaled 12.2 million tonnes, close to full capacity and 5 % above Sales prices were significantly higher than 2003 and were the largest contributor to the improved result, while energy costs for the European plants increased compared to Net cash from operating activities in 2004 was NOK 3,772 million, mainly reflecting strong earnings. Net cash from operating activities in 2003 was NOK 1,628 million. The improvement from 2003 was mainly due to higher earnings, a net increase in current tax payables, collection of a tax receivable from Norsk Hydro, and an improved net operating capital development. Net cash used in investing activities for 2004 was NOK 986 million, mainly for continuity investments and some smaller capacity and cost improvement projects. With respect to financial solidity Yara's longterm rating target is mid-investment grade. Having received ratings of BBB (Standard & Poor) and Baa2 (Moodys) in December and with a debt/equity ratio of 0.39 at the end of 2004, Yara is well within this target. Yara's net interest-bearing debt at the end of 2004 was NOK 4,199 million, while the total assets were NOK 27,486 million. The total majority shareholders equity as of 31 December 2004 was NOK 10,714 million. Yara's total risk exposure is analyzed and evaluated at corporate level. Both at corporate and business unit level risk evaluation is an integrated part of the way Yara does business. Yara's most important market risk is related to the margin between nitrogen fertilizer prices and natural gas prices. Although there is some correlation between these prices, margins vary depending on the demand for food relative to the demand for energy. While margins have been higher at previous cycle peaks, 2004 clearly represented a year with above average margins. Yara has a well-established system for credit and currency risk management with established limits for exposure both on customer level and on country level. Yara's geographically diversified portfolio reduces the overall credit and currency risk of the company. As the fertilizer business essentially is a US dollar business with both revenues and raw material costs priced in dollars, Yara seeks to keep a major share of its debt also in US dollars to reduce the overall USD currency exposure. Yara has the majority of its net interest-bearing debt as 10-year USD bonds with a fixed interest rate. According to Section 3-3 of the Norwegian Accounting Act, we confirm that the accounts are prepared on the assumption of a going concern. As a chemical company, it is important for Yara to have high health, environment and safety standards. The company's working environment is considered to be satisfactory. In Norway several of the subsidiaries have entered IA agreements ( Inkluderende Arbeidsliv ), which are designed to support a continued improvement of the working environment. Absence due to illness was 3.5 %, down from 3.7 % in The LTI rate (Lost Time Injuries per million hours worked) for Yara employees and contractors was 1.1, which is an improvement from 1.5 in The average LTI rate for the European fertilizer industry was 3.8 in There were three tragic fatal occupational accidents in Yara in 2004, one in Asia involving a Yara employee, the others involving two contractors in Latin America and Africa. There was also a serious fire at Yara s plant in Köping, Sweden, but without personnel injuries. While the Board is pleased with the generally positive trend related to systematic safety work, the number of near-misses underline that high priority must be given to improvement efforts in the safety area. The lessons learned have been communicated to all relevant parts of Yara's organization, and a program for behaviorbased safety is under establishment. Yara's operations are subject to environmental requirements under the laws and regulations of the various jurisdictions in which Yara conducts its business. Such laws and regulations govern, among other matters, air emissions, waste water discharges, solid and hazardous waste management, transportation of hazardous materials and remediation of past activities. Emissions from Yara's production plants are within the limits set by the authorities, except for minor breaches of short term permit levels at some locations, but without regulatory reactions. In general, Yara satisfies the best achievable emission levels established by the European Fertilizer Manufacturing Association. YARA ANNUAL REPORT

34 FROM THE BOARD OF DIRECTORS In terms of energy efficiency Yara ammonia plants perform better than the industry average. Having invested considerable research in developing new technology for the abatement of nitrous oxide gas (N2O) from nitric acid plants, Yara is well positioned to meet the challenges of reducing climate gas emissions. Yara has a number of facilities that have been operated for a period of years. Subsurface impact to soil and groundwater are common to such sites and may require remediation or give rise to liabilities under the laws of the various jurisdictions in which the facilities are located. Yara has attempted to identify such impacts where they are apparent and has initiated remediation or containment procedures in coordination with the appropriate authorities. As some of Yara's products can be dangerous if not handled properly, the European Fertilizer Manufacturers' Association and Yara have launched a Product Stewardship program aimed at securing proper handling of products both by Yara's own organization and Yara s customers. The implementation of this program has been audited by external auditors. At the end of 2004 Yara had 7,067 permanent employees in 41 different countries. In order to attract the right competence, Yara seeks to recruit, develop and retain people of different experience, age, gender, nationality and preferences. Both the Board and the company's management are well aware of the society's expectations of equal opportunities in the company and on the board of directors. Yara's global presence and business model have secured a welldiversified organization in terms of nationalities with employees representing a broad degree of diversity. In the Norwegian part of the organization women represent 20 % of the employees versus 8 % of the senior managers and 20 % of all managers. In order to improve the balance between the genders in managerial positions, the company has aimed at a higher relative proportion of women in Yara's leadership development program. Two of the five shareholder-elected board members are women, while there is one woman among the three employee-elected board members. THE ESTABLISHMENT OF YARA AND THE COMPANY'S GOALS Yara's new Board of Directors was established at the time of the demerger on 25 March and has had nine meetings during The five shareholder-elected members all have extensive management experience from international industrial companies, while the three employeeelected board members represent the three different segments of the organization. On the establishment of Yara, it was agreed not to have a corporate assembly. Consequently, the Board of Directors is responsible directly to the General Meeting and the shareholders. A compensation committee under the Board was established in April Yara has no separate Audit Committee as audit issues are dealt with directly by the Board. During 2004 there was one change in Yara's management when Terje Bakken replaced Jon Reutz as head of the Industrial segment. Yara's mission is We strive for better yield. This wording has a double meaning as Yara's fertilizer and industrial products contribute to a better productivity and yield for customers, and as the company strives to maximize return for its shareholders. The business concept is to convert energy and nitrogen from the air into useful products for farmers and industrial customers. Yara's ambition to be the Industry Shaper materializes into three strategic goals: Deliver leading financial performance based on organic growth Drive the development and consolidation of our industry Develop a performance culture known for operational excellence based on a clear set of values The core Yara values are Ambition, Trust, Accountability and Teamwork. For each of these values a number of specific behaviours have been identified that are consistent with these values. Yara's primary financial goal is to maximize shareholder return over time. Yara applies a hurdle rate of minimum 10 % real return after tax for new projects, and minimum 10 % CROGI as an average over the cycle for existing businesses. The targets are ambitious, and there is good evidence that companies that have delivered on these targets have been able to supply an excellent shareholder return. Yara's profitability over the last four years generated an average CROGI of 10.5 %. Yara expects to return % of net income to its shareholders as an average over the business cycle through dividend payments and share buy-backs. As long as Yara can maintain an attractive profitability also for growth projects, a dividend level restricting Yara's possibilities for growth will not be desirable. Consequently, Yara must define an optimal dividend level taking into account the company s ability to pursue attractive and profitable investments. Yara's dividend policy is to pay out minimum 30 % of net income as an average over the business cycle. Yara believes it will be beneficial for the shareholders that the company strives for a gradual increase and predictability in the absolute dividend level over the years independently of the business cycle. Yara will use share buy-back programs when certain conditions are met. Share buy-backs are more flexible than dividends, and for shareholders in some countries, buy-backs provide tax advantages compared to dividends. As part of the buyback program authorized by the General Meeting in June 2004, Yara has bought back approximately 3 million shares at a cost of NOK 206 million with the intention of amortization, exclusive future buy-back from the Norwegian state. OUTLOOK FOR 2005 Despite a modest increase in grain inventories after record harvests in 2004, global grain inventories still remain at a low level. This is a concern, particularly in several Asian countries. During similar situations in the past, 32 YARA ANNUAL REPORT 2004

35 FROM THE BOARD OF DIRECTORS those countries have sought to increase fertilizer consumption to boost domestic food production. High forward prices for US natural gas indicate that the substantial production capacity in the United States will continue to have high production costs. This is expected to continue to set a high floor for global nitrogen fertilizer prices. For non-us producers like Yara this will create some protection in the event of a slow-down of demand growth. In such an event, the industry could move from the demand-driven situation witnessed in 2004 to a supply-driven situation where commodity prices are determined by the cost of the marginal cost producer. However, the forward market also indicates increased gas prices in Europe. This may lead to lower margins in 2005 compared with 2004 even though the overall margin level is expected to be attractive. New nitrogen fertilizer capacity in 2005 is forecast to be roughly in line with historical average demand growth. The necessary level of investments to maintain current capacity is estimated to be NOK million. Yara's total investment level in 2005 is expected to increase from a modest level of NOK 1,250 million in 2004 since Yara has already committed to and expects to identify new growth opportunities. Yara's financial solidity is expected to remain strong. The transition to IFRS (International Financial Reporting Standards) has no major consequences for Yara. The annual impact on net income is expected to be positive by approximately NOK 50 million. The inclusion of net unfunded pension obligations is expected to have a one-time negative effect on equity as of 1 January 2004 of approximately NOK 650 million. However, this will be partially offset by the positive after tax consequence of approximately NOK million capitalization of plant maintenance shutdowns. YARA INTERNATIONAL ASA Net profit for Yara International ASA, the parent company, amounted to NOK 75 million. The profit and loss statement covers the period from 10 November 2003, when the company was established, to 31 December DIVIDEND The Board proposes a dividend of NOK 2.25 per share, totalling a payment of NOK 712 million. With a net profit in Yara International ASA of NOK 75 million, this results in a total reduction of NOK 637 million in retained earnings of the parent company. Distributable equity in the parent company as of 31 December 2004 was NOK 3,986 million after proposed dividend for The sum of proposed dividends and buy-backs for 2004 amounts to NOK 918 million, which is equivalent to approximately 25 % of net income. The Board of Directors of Yara International ASA Oslo, 18 March 2005 Lone Fønss Schrøder Board member Jørgen Ole Haslestad Board member Åse Aulie Michelet Board member Leiv L. Nergaard Board member Arthur Frank Bakke Board member Charlotte Dyrkorn Board member Frank Andersen Board member Øivind Lund Chairperson Thorleif Enger President and CEO YARA ANNUAL REPORT

36 GOVERNANCE & HSE CORPORATE GOVERNANCE SOCIAL RESPONSIBILITY AND HEALTH, SAFETY AND ENVIRONMENT TRANSPARENT AND SOUND CORPORATE GOVERNANCE IS KEY TO ALIGNING THE INTERESTS OF SHAREHOLDERS, MANAGEMENT, EMPLOYEES AND OTHER STAKEHOLDERS. YARA BELIEVES GOOD CORPORATE GOVERNANCE DRIVES VALUE CREATION AND PROMOTES SUSTAINABLE BUSINESS CONDUCT. When Yara was demerged from Norsk Hydro and established as a separate company 25 March 2004, it faced several unique challenges. While having the benefit of emerging from a professional system with high standards for corporate governance, Yara nevertheless had to establish its own practices adapted to the specific challenges for the world s largest and most global fertilizer company. Yara has decided to comply with the Norwegian Code of Practice for Corporate Governance during This code has requirements in addition to what is mandated by law. In the following only the main features of that practice are described. The scope of Yara s business is defined in its Articles of Association and is presented in the Report of the Board of Directors together with its goals and strategies. Yara is listed on the Oslo Stock Exchange and is subject to the Norwegian securities legislation. The reporting follows the standards of Norwegian GAAP for 2004, but will from 2005 follow the new international standards IFRS. The expected changes as a result of this transition are explained on page 100. Yara has an equity level adapted to the goals, strategy and risk of the company. The dividend policy, which is described in the Report of the Board of Directors and the section on the Yara share, should enable a predictable pay-out over the years. New equity capital will only be asked for when defined opportunities arise. The Board has an authorization to buy back up to approximately 16 million shares out of which approximately 3 million shares have already been bought back. The reasons are further described in the Report of the Board of Directors. All Yara shareholders have equal rights, and there is only one class of shares. There are no restrictions on the purchase or sale of shares. Communication with the financial market is based on principles of openness and equal treatment of all shareholders. Yara s web site contains an updated financial calendar and a large amount of other investor-related information. In 2004 Yara was awarded the Information and English certificate of the Oslo Stock Exchange testifying that Yara complies with a set of information requirements beyond a defined minimum standard. Yara s Board of Directors receive regular updates from the Management as to how the company is perceived by the financial market. In 2004 there have been no significant transactions with related parties, except for those described in the notes to the consolidated financial statements. Yara uses the new IFRS rules to determine who are related parties. Yara s corporate directives were originally inherited from Norsk Hydro after the demerger. After the demerger the Yara Board of Directors has reviewed the directives, and Yara today has updated corporate directives encompassing Instructions for the Nomination Committee Rules of Procedure for the Board Internal Audit Charter Mandate for the Board s Compensation Committee Insider Regulations Code of Conduct At the General Meeting all shareholders are entitled to submit items to the agenda, meet, speak and vote. In accordance with Norwegian corporate law, the physical presence of the shareholders or their authorized representatives is required in order to vote. Shares must be registered with the Norwegian Registry of Securities if the holders want to vote for their shares at the shareholders meeting. The Annual General Meeting is normally held in May. Notice of the meeting is sent to all shareholders individually, or to their depository banks, minimum two weeks in advance of the meeting. The General Meeting of shareholders elects the Nomination Committee, the shareholders representatives to the Board of Directors, and approves the annual accounts and the Board report and any proposed dividend payment. In accordance with Norwegian legislation, shareholders consider and vote on the appointment of the external auditor based on the Board of Directors proposal, and approve the remuneration to be paid to the external auditor. Normally, the Board of Directors, the Nomination Committee and the external auditor are all present at the Annual General Meeting. The meeting is led by an independent, qualified person. The Nomination Committee consists of four independent members elected by the General Meeting for two years at a time. The Nomination Committee makes a recommendation to the General Meeting on the election of shareholderelected Directors of the Board. The selection of Board candidates is done considering both the competence, experience, capacity and diversity of each individual and the group in total. The Nomination Committee also proposes a remu- 34 YARA ANNUAL REPORT 2004

37 GOVERNANCE & HSE neration of the Directors to the Annual General Meeting reflecting the responsibility, competence, time and complexity of the work involved. The remuneration is a fixed amount which does not depend on results or involve options. Based on an agreement with the trade unions, Yara does not have a Corporate Assembly. Yara believes this supports a more direct communication between the Board and Management, increases accountability and improves the speed and quality of decision-making in the company. Yara s Board of Directors consists of eight members, five independent shareholder-elected and three employee-elected (minimum one third according to Norwegian legislation). Members are elected for a period of two years at a time. Neither the President and CEO nor any other member of the executive management is a director of the Board. According to Norwegian corporate law, the Board of Directors has the overall responsibility for management of the company, while the President and CEO is responsible for day-to-day management. The Board supervises day-to-day management as carried out by the President and CEO, and the activities of the company in general, as well as ensures that appropriate steering and control systems are in place. The Board s internal rules of procedure establish in more detail the Board s role in relation to the management of the company as well as the other corporate bodies. The President and CEO s authority and responsibilities are defined in order to allow the Board of Directors to concentrate on the company s strategy and organization. The Board s work follows an annual plan, and it conducts an evaluation every year of its work and procedures. In 2004 the Board held nine meetings. The Norwegian legal and regulatory corporate governance structure requires the entire Board to be involved in deliberation and decision-making. Indeed, the Norwegian Public Limited Companies Act stipulates that a Board of Directors may not adopt a resolution without members of the Board having been given an opportunity, to the extent possible, to participate in the discussion of the matter in question. Consequently, the formation and delegation of certain responsibilities of the Board of Directors of a Norwegian company to one or more committees of the Board is less common than for companies in some other jurisdictions. Yara s Board of Directors has chosen not to have a separate Audit Committee, but to deal with audit matters as a full board. The Compensation Committee consists of three members elected by and among the members of the Board. The Committee shall prepare and make proposals to the Board of Directors on terms and compensation to the CEO. Frames for possible future share incentive rights (SiRs) will be approved by the General Meeting. Yara s Internal Audit Department is accountable to the Board of Directors and provides an annual assessment of the adequacy of Yara s processes for controlling its activities and managing its risks. Information on the status and results of the annual audit plan and the sufficiency of department resources will be communicated to the Board when appropriate. The Chief Internal Auditor has the right and duty to inform the Board of Directors of fraud/corruption or other issues that in his/her opinion may inflict damage to the company. Internal Audit has unrestricted access to all functions, records, property, and personnel, and has full and free access to the Board of Directors. Yara s external auditor also follows an annual plan. The external auditor participates in the Board meeting approving the annual accounts, and meets with the Board as deemed appropriate. The President and CEO constitutes a formal corporate body according to Norwegian corporate law. The CEO is responsible for day-to-day management of the company. In Yara, the division of functions and responsibilities has been defined in greater detail in the Rules of Procedures established by the Board which are published on Yara s web site, The President and CEO appoints a management to assist the President and CEO in his or her stewardship duties delegated by the Board and in the day-to-day management, including the organization and operation, of the company. The President and CEO determines the instructions for Management after prior discussion with the Board. The instructions for Management, and the function descriptions and the appropriation authorizations issued to each member of the Management, reflect a joint obligation for these members to safeguard the overall interests of Yara and to protect Yara s financial position. The Board of Directors determines the remuneration to the President and CEO based on a proposal from the Compensation Committee. YARA ANNUAL REPORT

38 GOVERNANCE & HSE The Board also decides on the terms of the company s incentive plans for officers and certain key employees in the company. The President and CEO decides the compensation to other members of Management. Remuneration to the Board of Directors and the Nomination Committee is determined by the General Meeting. The actual payments to the CEO and the company s corporate bodies in 2004 are further described on page 89. YARA S CODE OF CONDUCT Yara seeks to ensure that all Yara employees act in a consistent manner in line with its quality standards and business needs. Yara s corporate responsibility is determined by two defining characteristics being a listed company and a global business with local operations and by Yara s ambition to become the Industry Shaper. Listed company. As a listed company we have a responsibility to deliver on our promises to stakeholders. We are committed to doing this by employing strategies that balance financial, environmental and social performance. Yara will operate in a sustainable manner in order to create long-term value through strong financial performance. Yara will strive to attain high standards of corporate governance. Yara s core values: ambition, trust, accountability and teamwork will be reflected in our behavior and in our business conduct. Global Business. As a truly global company with local operations on five continents, Yara governs the creation of future value and has a fundamental influence on society. Our strategy of local partnership based on trust gives us a unique potential for supporting sustainable agriculture and ethical business practices. Yara will take a leading role in the sustainable development of the industry through an active dialogue and cooperation with all stakeholders. Yara will develop and explore existing and new markets and businesses where this is in the interests of, and of benefit to, our stakeholders with the ambition to be a good local citizen. Industry Shaper. As the only truly global supplier of plant nutrition with presence throughout the product life cycle, Yara is uniquely equipped, and committed, to driving the development of our industry to ensure high standards of performance and behavior. Yara will drive the industry in pursuing common high standards and anchoring best practices. Yara will promote product stewardship to ensure that the entire value chain, from raw material sourcing to end use, is rooted in sustainable conduct and consideration for health, environment, safety, quality and food safety. Yara will support the development of sustainable agriculture. SOCIAL RESPONSIBILITY Yara contributes to the development of the local communities where it operates. Yara sponsors programmes and initiatives supporting children and youngsters in communities where we work, particularly related to schools, education and sports. Yara and its Brazilian subsidiary Trevo have as an example supported a team from Rio Grande competing in Norway Cup for the last three years. In 2005 there will be two teams one from Trevo and one from Kynoch in South Africa. Team members are teenagers recruited in the neighbourhood of Yara s plants on the basis of good behaviour and school performance as much as on their sports excellence. Yara is also supporting employee education. In several countries basic education in reading and writing skills as well as mathematics are given during normal working hours (ex. are South Africa, Guatemala, Colombia and Brazil). Yara is continuously striving to improve performance of operation at all levels. Literate employees can contribute more and in better ways to the good functioning of their unit and hence help ensure its future. At the same time these employees become more active citizens in the community where they live, contributing to overall progress and development. As part of its Centennial celebration, Yara is supporting the Millennium villages programme set up to implement the actions recommended by the UN Millennium project. Yara is sponsoring a school programme that combines free school lunches and scholarships for children with the purchase of food from local farmers, thereby stimulating local demand and agricultural productivity including new and better crops and agricultural methods. Yara applies criteria for social responsibility to its own investments. Yara has directives listing the demands that must be fulfilled in order for a project to be eligible for investment by Yara. It defines what type of projects that are covered by the directive and lists all types of analysis and evaluation required before a project can be presented for approval. Social consequences and environmental impact are among the criteria listed in addition to a number of technical and financial requirements. HEALTH, SAFETY AND ENVIRONMENTAL PERFORMANCE (HSE) The management of HSE is an important part of Yara s business operations. A systematic approach over many years has produced substantial improvements in HSE, and reflects a continuous and ongoing process. Company-wide requirements are set to the management of occupational health and safety, process safety, pollution prevention and control, emergency preparedness, product stewardship and security. The business units and support groups are responsible for ensuring that relevant governance documents exist within their area of responsibility. HSE performance indicators are established at all management levels, integrated into business plans and personal performance objectives, and systematically reviewed. 36 YARA ANNUAL REPORT 2004

39 GOVERNANCE & HSE Yara has established a safety committee at management level, with the participation of the European Works Council, to guide and review the safety work. The follow-up of HSE is carried out at many levels in the organisation. Many tools are applied to monitor and audit the HSE performance, that covers: Lost-time injury rate, (Number of lost-time injuries per million hours worked) Sickness rate, (%) 5% 4% 3% 2% 4.6% 4.2% 4.2% 3.7% 3.5% HSE reporting and investigation of accidents and nearmiss incidents. Technical standards and operational procedures. Plant performance reviews. ISO quality and environment certification of manufacturing, logistical and commercial operations, and HACCP analysis (Hazard Analysis and Critical Control Points) for products to the food industry. Global benchmarking of HSE performance. Auditing of HSE management using international rating systems developed by Det Norske Veritas, and operational and technical audits of specific activities. Product Stewardship as described in Responsibility throughout the value chain, see page 26. Health & Safety Performance. Although the overall accident rate in Yara is low, at 1,1 losttime injuries per million hours worked in 2004, three fatal injuries occurred at Yara sites during the year: An employee was fatally injured when hit by heavy machinery during construction work in Sri Lanka. A contractor was fatally injured when falling 6.5 meters through a roof during construction of a new blending unit in Brazil. A contractor security guard suffered fatal injuries when falling down a staircase in South Africa In addition, a major fire took place in July 2004 at Yara Köping in Sweden, when a fire in a conveyor belt spread and destroyed a storage building on site. Yara was fined NOK 1 million in 2004 by Norwegian authorities in connection with a fatal accident at a farm due to an ammonia tank explosion in The safety work is now being further strengthened by reviewing the technical standards and by establishment of a company wide program on behaviour-based safety. Yara Ferrara (Italy), was awarded the Yara Safety Award for its excellent performance in The occupational sickness rate is improving, with an average rate of 3.5 % for Yara s production sites in Improvement programs are established for units with a sickness rate higher than 4% % 0% Environmental Performance. All Yara sites were in compliance with regulatory environmental permits in 2004, except for minor exceedances of short term permit levels at some locations. None of this has prompted regulatory reactions. The eco-efficiency indexes for energy consumption and emissions show a positive trend, as shown in the graphs. It is expected that Yara is well positioned to meet the future regulatory requirements of the European Union in 2007, when new emission permits will be issued based on Best Available Techniques for pollution prevention and control. Yara emits significant amounts of the climate gases CO2 (carbon dioxide) and N2O (nitrous oxide) from the production of fertilizers. The emission of CO2 is associated with the energy consumption in the production of ammonia, and is kept as low as possible by operating at high energy efficiency levels. On average, the ammonia plants in Yara use nearly 10 % less energy per tonne of ammonia produced than the industry average (PSI 2004: Benchmarking of 41 ammonia plants). Four of the Yara ammonia plants rank amongst the world top 10 % in terms of energy efficiency YARA ANNUAL REPORT

40 GOVERNANCE & HSE The emission of N2O is associated with the production of nitric acid. No technology has as yet been made available for reduction of such emissions, except when building a new nitric acid plant. In 2004 Yara successfully concluded ten years of research for a technology that can be fitted to existing plants. The technology has been tested at full scale and preparations are being made for launching the technology at commercial scale, to the benefit of the fertilizer industry and the global environment. Emissions to air contributing to acidification, Emission (1,000 tonnes SO2-equivalents) Eco-efficiency index (emission/production) Energy consumption, Energy consumption (PJ) Eco-efficiency index (energy/production) Although the fertilizer industry represents a major source of climate gas emissions, it should be recognised that fertilizers play an important role in harvesting energy and capturing CO2. Fertilizers stimulate plant growth, and the solar energy stored in the plants may be 5 10 times higher than the energy needed in making the fertilizer. Growing plants capture CO2 and the roots help building organic soil structure. If care is taken to utilise plant waste material as an energy source, the production and use of fertilizers will help in reducing global climate gas emissions. Emissions to water contributing to eutrophication, Eco-efficiency index (emission/production) 0 00 NOx NH SO2 F Eco-efficiency Emission (1,000 tonnes PO4-equivalents) Emissions contributing to global warming, Emission (million tonnes CO2-equivalents) 0 00 LPG Natural gas Heavy oil Gasoil Electricity Coal Eco-efficiency Eco-efficiency index (emission/production) 0 NOx NH N P Eco-efficiency 0 00 CO2 N2O CH4 Eco-efficiency YARA ANNUAL REPORT 2004

41 MD&A MANAGEMENT DISCUSSION & ANALYSIS YARA S PRO FORMA CONSOLIDATED STATEMENTS FOR 2004 AND 2003 ARE THE BASIS FOR ALL DISCUSSIONS AND ANALYSIS. Financial highlights Pro forma Pro forma Million, except per share information Operating Revenues NOK 43,252 38,481 Operating Income NOK 3,584 2,751 EBITDA NOK 5,765 4,671 EBITDA USD 1) Net income after minority interest NOK 3,761 2,186 Earnings per share 2) NOK Avg. number of shares outstanding (in million) 3) CROGI (12-month rolling avg.) 13.3% 10.6% 1) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) 2) Yara currently has no stock option compensation program with a dilutive effect on Earnings per share. 3) Average number of shares reduced in 2004 due to the share buy-back program. Yara EBITDA (MNOK) 6,000 5,000 4,000 3,000 2,000 1, ,730 4, , , , Key Statistics Fertilizer Sales Europe kt 10,231 10,044 Fertilizer Sales Outside Europe kt 9,600 10,324 Industrial Sales kt 2,052 1,838 Total Sales kt 21,883 22,206 Whereof Yara s own produced product, incl. bulk blends kt 15,525 15,270 Whereof JV and Third Party products kt 6,358 6,936 Production ammonia 1) kt 5,205 4,992 Production finished fertilizer and industrial products, excl. bulk blends 1) kt 13,096 12,654 1) Including share of Tringen and Qafco. Net income after minority interest was NOK 3,761 million (NOK per share), compared with NOK 2,186 million (NOK 6.84 per share) last year. Excluding net foreign exchange gains, the result for 2004 was approximately NOK per share. Operating income was NOK 3,584 million, compared with NOK 2,751 million last year. EBITDA was NOK 5,765 million, compared with NOK 4,671 million last year. The Board proposes to the Annual General Meeting a dividend of NOK 2.25 per share for was a record year for Yara, both in terms of cash flow and earnings, which were the strongest ever delivered by a fertilizer company. The fertilizer market remained attractive during 2004 and Yara increased its market share in Europe at the expense of imports. Total nitrogen industry fertilizer sales to West European agriculture were estimated 4% down on last year, while Yara was able to maintain its sales volume in Europe from last year. During the last 12 months, Yara has undergone a substantial transformation, beginning with the successful demerger and stock market listing, and concluding with the announcement of several significant strategic moves. Capacity was boosted in 2004 with the opening of a fourth fertilizer plant in Qatar (Qafco-4), and in early 2005 with the signing of a letter of intent for Qafco-5 and the acquisition of a minority stake in the Russian fertilizer producer Rossosh. Operational focus has been sharpened through the sale of non-core Industrial and Downstream assets and the strengthening of our position in the Chilean speciality fertilizer producer SQM. These initiatives, the successful USD 500 million bond offering and our solid credit rating have strengthened Yara s ability to meet its ambitious objectives. GENERAL DEVELOPMENT IN MAIN FERTI- LIZER MARKETS West European fertilizer producers gained market share in their domestic markets in Fertilizer imports to West Europe were down 5% from 2003 (Yara estimates), losing one percentage point market share, as imports were unusually low in the second half of the year as a result of YARA ANNUAL REPORT

42 MD&A very strong fertilizer markets also outside Europe. Asian demand was strong in 2004, with a substantial increase in imports to India, Bangladesh and Pakistan. In China, nitrogen production continued to increase, and both domestic consumption and exports were higher than in Declining soybean prices dampened market growth in Brazil, and urea imports were down on Despite high natural gas prices in the US, global fertilizer demand was sufficiently strong to secure demand-driven pricing and high capacity utilization for US producers. Overall, the nitrogen supply-demand balance tightened as the market improved considerably in The International Fertilizer Association estimates that global nitrogen fertilizer consumption will increase by 2.8% for the fertilizer season ending June Yara estimates that total nitrogen growth exceeded 3% in 2004, due to strong growth also in the industrial segments. Variance analysis NOK million USD 1) EBITDA 2004 pro forma 5, EBITDA 2003 pro forma 4, Variance EBITDA in NOK 1,094 Conversion (NOK vs. USD) 209 Variance EBITDA 1, Volume Price/Margin 1, Effect of long position (198) (29) Energy cost in Europe (100) (15) Currency effect on net fixed cost 2) (149) (22) Divestments 55 8 Drop-down cost (75) (11) Other (265) (39) Total variance explained 1, ) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) 2) Net fixed cost is derived from fixed cost in NOK and Euro less NOK and Euro related revenues. demand balance improved. For most of the year, demand drove prices, and even the highest cost producers made positive margins. High nitrogen fertilizer and ammonia price levels improved EBITDA by NOK 1,940 million (USD 289 million). Crop prices for most agricultural produce have declined, as a result of the record crop in Grain production in 2004 is estimated to have slightly exceeded consumption, leading to a small increase in stocks. DEVELOPMENT IN MAIN FERTILIZER PRICES The average prilled urea price fob Arabian Gulf was USD 200 per tonne, compared with USD 148 per tonne in Demand growth was strong, particularly in Asia, while production capacity was almost unchanged, tightening the supply/ demand balance significantly. The average urea price fob Black Sea was USD 175 per tonne, compared with USD 139 per tonne last year. The stronger increase in the Arabian Gulf reflect the stronger freight market, as it improve their logistical advantage to nearby Asian markets. The average ammonia price (fob Caribbean) was USD 251 per tonne, compared to USD 203 per tonne in For urea, demand growth outstripped supply additions, and the supply/ The average CAN price in Germany was USD 165 per tonne, compared with 146 USD per tonne The price increase reflects the increase in urea prices. VARIANCE ANALYSIS EBITDA was NOK 5,765 million, compared with NOK 4,671 million last year. The appreciation of the Norwegian krone against the US dollar had a NOK 209 million negative effect on EBITDA. Converted EBITDA was USD 858 million, up USD 194 million on last year. Sales were down 323 kt on last year, primarily for low-margin third party products in Asia and reduced activity levels in Africa. The volume reduction outside Europe was more than offset by increased sales of own produced products, generating a NOK 95 million (USD 14 million) EBITDA improvement. In Europe, Yara gained market share as it maintained last year s sales level, while the overall market declined. Yara s long position in ammonia created a NOK 198 million (USD 29 million) negative effect compared with last year, since ammonia prices increased more in 2003 than in The price for ammonia was relatively low at the start of 2003, while 2004 saw a generally higher price level. At year-end 2004, the ammonia position was valued at the lower of cost and market based on the mid January price level. Higher energy costs in Europe had a NOK 100 million (USD 15 million) negative effect on EBITDA. The divestment variance includes the gain on the sale of Hydrogas Malaysia, Hydrogas Thailand, Ballance Agri-Nutrients and Yara Formates oilfield business. The item Other includes provisions taken for doubtful receivables in West Africa. Yara has implemented a number of measures to limit the consequences of the on-going conflict in the Ivory Coast. Other also includes a NOK 65 mil- 40 YARA ANNUAL REPORT 2004

43 MD&A lion (USD 10 million) charge for Yara s deductible in connection with a fire at our production plant in Köping, Sweden. For further details, see the variance analysis for each segment. FINANCIAL ITEMS Yara bases its long-term funding on diversified sources of capital. At the time of the demerger Yara established two bank facilities, one of which was a USD 750 million syndicated revolver facility due 2009 and the other a USD 750 million 364-day bridge facility. In December 2004, Yara launched a bond issue of USD 500 million due 2014 pursuant to rule 144A/ Regulation S, with proceeds from the bond issue used to repay some of the bridge facility. Yara s long-term debt at year-end was thus more than 90% US dollar denominated, consisting of the bond totalling USD 500 million and drawings on bank facilities totalling USD 220 million. The remaining part of the long-term debt was kept in emerging market currencies to hedge economic exposure in these markets. More than 50% of the long-term debt carried fixed interest rates. See Note 19 in the financial statements for further details on long-term debt. The December bond issue was supported by solid investment grade ratings from Moody s (Baa2) and S&P (BBB), both with a stable outlook. Net interest-bearing debt at the end of 2004 was NOK 4,199 million compared with NOK 7,584 million at the end of See the cash flow section for further details. The debt/equity ratio at the end of December, calculated as net interest-bearing debt divided by shareholders equity plus minority interest, was 0.39 compared with 0.86 at the end of December Financial items Pro forma Pro forma NOK million Interest income on customer credits Interest income, other Dividends and net gain (loss) on securities (4) 2 Interest income and other financial income Interest expense (266) (311) Capitalized interest 1 15 Net foreign exchange gain (loss) Other financial expense (68) (62) Interest expense and foreign exchange gain/(loss) 403 (348) Net financial income (expense) 574 (206) Net financial income for 2004 was NOK 574 million compared with net financial expense of NOK 206 million last year. Net foreign exchange gains during 2004 were NOK 737 million. The US dollar depreciation against the Euro and the Norwegian krone during the second half of the year affected the USD million part of Yara s US dollar debt established as an economic hedge of future US dollar cash flows. Additionally, a foreign exchange gain of approximately NOK 200 million was made in the first quarter on Euro positions kept during the demerger process. In 2003, Yara reported a net exchange gain of NOK 11 million. This was a pro forma amount based on Yara s relative share of Norsk Hydro s net exchange gain. Interest income on ordinary customer credits, mainly in markets outside Europe, amounted to a total of NOK 137 million in 2004, up from NOK 128 million in TAX Full-year provisions for current and deferred taxes were NOK 1,185 million, representing approximately 24% of income before tax. In 2004, Yara s tax expense was reduced by NOK 140 million due to implementation of new tax legislation in Norway. At the end of 2003, Yara had provided for deferred tax related to its share of net income from Qafco (25% ownership). After the implementation of participation exemption for capital gains and dividends in the Norwegian tax legislation, only the tax provision related to Qafco shares owned directly from Norway (10%) has to be maintained. In 2004, Yara s results benefited from the utilization of tax loss carry-forwards previously not recognized as deferred tax assets. CASH FLOW Net cash from operating activities in 2004 was NOK 3,772 million, mainly reflecting strong earnings. Net cash from operating activities in 2003 was NOK 1,628 million. The improvement from last year was mainly due to higher earnings, a net increase in current tax payables, collection of a tax receivable from Norsk Hydro, and an improved net operating capital development. At the end of 2004, net operating capital was NOK 7,838 million. From 31 December 2003 to 31 December 2004, net operating capital increased mainly as a result of higher fertilizer prices. Net operating capital productivity, measured as capital turnover on a 12-month rolling basis, showed a stable development from end YARA ANNUAL REPORT

44 MD&A Net cash used in investing activities for 2004 was NOK 986 million, mainly for continuity investments and some smaller capacity and cost improvement projects. The amount includes proceeds from the sale of the industrial gas activities in Malaysia and Thailand, while the proceeds from the sale of Ballance Agri- Nutrients in December 2004 will be included in the cash flow for the first quarter of For 2003, net cash used in investing activities was NOK 734 million. DIVIDEND POLICY Yara s objective is to pay a minimum 30 % of net income in dividends as an average over the business cycle. In addition, the company expects to use share buy-back programs to achieve on average 40 45% of net income over the business cycle in cash payments to shareholders. The company s ambition is also to deliver steady growth in absolute dividend payments. Yara s board will propose to the Annual General Meeting a dividend payment of NOK 2.25 per share for 2004, which represents 19% of net income. The share buy-backs carried out in 2004 amount to more than 5% of net income for The Board intends to propose to the Annual General Meeting to expand the share price range of the buy-back program. DOWNSTREAM The Downstream segment consists of Yara s global sales and marketing units and regional production facilities that primarily serve home markets in Europe, South Africa and Brazil. The key strengths of the Downstream business are its worldwide marketing organization, infrastructure and regional presence, which allow for optimization of fertilizer shipments and sales to prevailing market conditions. Third party and joint venture product sourcing improve Yara s flexibility and market position, enabling it to offer customers a complete range of fertilizer products. Strong purchasing power Downstream Pro forma Pro forma Operating Revenues NOK million 31,441 29,120 Operating Income NOK million 1,356 1,162 EBITDA NOK million 2,068 1,833 EBITDA USD 1) million CROGI (12-month rolling avg.) 11.9% 11.1% Net Operating Capital Turnover 2) Total Sales per product group Nitrate kt 5,024 4,970 NPK kt 7,047 6,826 CN kt Urea kt 3,597 3,857 UAN kt 1,065 1,101 Other products kt 1,959 2,529 Total sales kt 19,613 20,254 1) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) 2) Total operating revenues last 12 months divided by average net operating capital for the same period. ensures the competitiveness of third party volumes, increasing growth and arbitrage opportunities across regions and product groups without the need for large investments. Downstream EBITDA (MNOK) 2,500 2,000 1,500 1, , , , Yara has a strong position in value-added speciality fertilizer products, such as calcium nitrate and potassium nitrate. This position has been strengthened during late 2004 and early 1,833 In 2000, the Downstream business was affected by significant non-recurring cost related to Agri Turnaround. 03 2, as Yara increased its indirect ownership in SQM, the Chilean speciality fertilizer company. The above factors combine to provide a stable platform for Yara, as the Downstream business is essentially a margin business where raw material cost changes can be passed on to end customers due to the strong link between input costs and end product prices. Hence, cash flows tend to be relatively stable irrespective of fertilizer price changes, and the Downstream business provides a natural hedge against the industry cycle exposure in the Upstream segment. For 2004, operating income was NOK 1,356 million, compared with NOK 1,162 million last year. EBITDA was NOK 2,068 million compared with NOK 1,833 million last year. Converted EBITDA was USD 308 million, up USD 47 million from last year. EBITDA per tonne for 2004 was USD 16, up approximately USD 2 compared with the same period last year. 42 YARA ANNUAL REPORT 2004

45 MD&A Fertilizer sales in 2004 were approximately 640 kt lower than in 2003, primarily due to deliberate efforts to reduce activity in West Africa and reduce trade of low-margin third party products in Asia. In Europe, Yara gained market share, primarily at the expense of imports. Sales in Brazil, Yara s single largest market, increased compared with last year, despite a subdued market after record growth in Since the acquisition of Adubos Trevo in 2000 Yara has steadily increased scale and profitability in the fast growing Brazilian market. In 2004, sales in Brazil amounted to approximately 11% of Yara s total fertilizer sales volume. Net margin improvements increased EBITDA per tonne by USD 4 due to a tighter supply/demand balance. A significant share of the increase was related to improved sales margins in Brazil, but the positive impact from Europe, in particular from the Mediterranean, was also substantial. As part of its continuous efforts to streamline operations and enhance return on capital, Yara sold its 20.1% shareholding in Ballance Agri- Nutrients in New Zealand at the end of Together with the insurance compensation for the assets lost in the fire in Köping (Sweden) this represents the main gains on divestments for Downstream variance analysis NOK USD 1) USD/ million million tonne 2) EBITDA 2004 pro forma 2, EBITDA 2003 pro forma 1, Variance EBITDA in NOK 236 Conversion (NOK vs. USD) 82 Variance EBITDA Volume (9) (1) - Produced in Downstream (25) (4) - Other Margin Margin excl. ammonia effect 1, Ammonia effect on margin (538) (80) (4) Divestments Other (220) (33) (2) Total variance explained ) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) 2) Divided by volume sold in Net operating capital turnover, measured on a 12-month rolling basis, was 5.0 at the end of 2004, in line with turnover at the end of Downstream Net Operating Capital Turnover* Operating revenues/net operating capital INDUSTRIAL The Industrial segment markets nitrogen chemicals and industrial gases originating from the production plants in Upstream and Downstream. It has a broad presence across the product value chain and has a wide and diversified customer base, ranging from multinationals to small welding operators. With its strong ability to create new applications in different markets, Industrial adds value to Yara product streams over and above normal returns from the fertilizer business. Activity in West Africa has been scaled down in an effort to limit the risk associated with the ongoing conflict and weak financial situation for the local farming community. Provisions taken for doubtful receivables in West Africa are included in Other. Production performance in Downstream plants continued the positive trend, producing a total of 5.3 million tonnes of solid fertilizer, almost 2% higher than in The Downstream segment s total production capacity represents approximately 45% of Yara s overall production capacity for fertilizer products * 12-month rolling average 02 Turnover has improved significantly over the past 5 years due to a combination of improved credit control, shorter credit terms and better inventory management. The improvement from the end of 2000 is equivalent to a capital release of approximately NOK 1.2 billion Examples of growth markets are liquid technical urea for the reduction of NOx emissions, calcium nitrate for water purification, technical nitrate for explosives and carbon dioxide for the food industry. The Industrial segment is the leading European supplier for many of these products. During 2004, several steps were taken to improve operational focus and prepare the Industrial organization for future organic growth. Two Industrial gas plants in Asia were divested, in addition to the petroleum industry related activities of Yara Formates. YARA ANNUAL REPORT

46 MD&A Industrial EBITDA (MNOK) Industrial Pro forma Pro forma Operating Revenues NOK million 5,392 4,769 Operating Income NOK million EBITDA NOK million EBITDA USD 1) million CROGI (12-month rolling avg.) 14.0% 14.3% Total Sales per product group Environmental Products kt Industrial N-chemicals kt 1,649 1,475 1) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) Operating income for 2004 was NOK 454 million, compared with NOK 442 million in the same period last year. EBITDA was NOK 688 million, unchanged from last year. Converted EBITDA was USD 102 million, up USD 5 million from last year. EBITDA increased by USD 10 million in 2004 due to higher volumes, with N-chemicals being the major contributor. Despite divestments in Asia, industrial gases showed growth in 2004 mainly due to higher sales of cylinder gases in Norway and Denmark. Environmental product sales increased as water treatment and air purification volumes grew in both Europe and the US. Industrial N-Chemicals saw strong volume growth as a result of new contracts in Central and South Europe. Industrial variance analysis NOK USD 1) million million EBITDA 2004 pro forma EBITDA 2003 pro forma Variance EBITDA in NOK - Conversion (NOK vs. USD) 31 Variance EBITDA 30 5 Volume Industrial gases 9 1 Environmental products 9 1 Industrial N-chemicals 51 8 Margin 10 1 Margin excl ammonia effect Ammonia effect on margin (100) (15) Divestments 18 3 Other (66) (10) Total variance explained ) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) Technical ammonium nitrate prices rose as mining activity within both the coal and the metal mining industries increased. Despite a historically high price level for ammonia, margins increased by USD 1 million, mainly for technical ammonium nitrate and carbon dioxide. Last year s EBITDA included gains of USD 6 million from divestments, while the sale of the gas activity in Malaysia and Yara Formates petroleum industry business in 2004 resulted in a gain of USD 9 million. The Other EBITDA reduction of USD 10 million primarily reflects costs incurred to further increase efficiency and streamline the organization for future organic growth, in addition to the negative impact of the appreciation of the Euro against the US dollar. UPSTREAM The Upstream segment is based on Yara s worldwide ammonia and urea production, including the global trade and shipping of ammonia, as well as nitrate and complex fertilizer production co-located with ammonia production. All products except ammonia are distributed through Downstream and Industrial. 44 YARA ANNUAL REPORT 2004

47 MD&A The primary input factor for Upstream is natural gas, from which hydrogen is combined with nitrogen from the air to form ammonia. Ammonia is the basic building block for production of urea, nitrates and other nitrogen fertilizers. Natural gas typically accounts for 50 80% of the total input costs for urea production, depending on gas prices, for a European producer. The long-term fertilizer price level for nitrogen fertilizer products is strongly linked to international ammonia and urea prices. Upstream s ammonia trade and shipping unit (ATS) supplies Downstream plants with ammonia from Upstream plants or external parties, and utilizes its shipping and distribution network to generate additional returns from external trade. Financial results for the Upstream segment are driven mainly by fertilizer prices and raw material costs, with fuel oil and natural gas prices being the most important. The Upstream segment is exposed to fertilizer industry cyclicality, but this impact is reduced by Yara s economies of scale and strong focus on productivity improvements. Yara s unit cost is significantly below the European average, for all major product groups. Upstream EBITDA (MNOK) 4,000 3,379 Upstream Pro forma Pro forma Operating Revenues NOK million 18,603 15,181 Operating Income NOK million 2,166 1,212 EBITDA NOK million 3,379 2,249 EBITDA USD 1) million CROGI (12 month-rolling avg.) 14.7% 10.6% Energy cost (weighted avg.) USD/MMBtu Production Ammonia 2) kt 4,975 4,778 Finished Fertilizer 2) kt 7,246 6,858 TOTAL kt 12,221 11,636 1) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) 2) Incl. Yara s share of 20 50% owned companies. Upstream variance analysis NOK USD 1) USD/ million million tonne 2) EBITDA 2004 pro forma 3, EBITDA 2003 pro forma 2, Variance EBITDA in NOK 1,129 Conversion (NOK vs. USD) 100 Variance EBITDA 1, Volume Price/Margin 1, Effect of long position (198) (29) (2) Energy cost in Europe (100) (15) (1) Other (125) (19) (3) Total variance explained 1, ) Based on average NOK/USD rate 2004: 6.72 (2003: 7.04) 2) Divided by volume produced. 3,000 2,000 1,982 1,883 2,249 Converted EBITDA was USD 503 million in 2004, up USD 183 million on last year. Upstream production (kt) 1,000 1,130 EBITDA margin per produced tonne was USD 41 for 2004, up USD 14 per tonne on ,000 12,000 11,305 11,420 11,418 11,636 12, For 2004, operating income for the Upstream segment was NOK 2,166 million compared with NOK 1,212 million last year. EBITDA was NOK 3,379 million compared with NOK 2,249 million in The volume variance of USD 2 per tonne was mainly due to higher nitrate sales compared with 2003, together with higher production levels. 9,000 6,000 3, ,735 6, ,546 6, ,688 6, ,778 6, ,975 7, Finished fertilizer Ammonia YARA ANNUAL REPORT

48 MD&A Upstream production in 2004 totaled 12.2 million tonnes, close to full capacity and 5% above Production consists of 5.0 million tonnes ammonia and 7.2 million tonnes finished fertilizer, and includes Yara s share of production in 20 50% owned companies. Captive ammonia consumption was 83%, compared with 84% in Qafco-4 in Qatar, in which Yara holds a 25% ownership interest, began production in mid Production was close to full capacity by the end of Sales prices were significantly higher than last year, improving EBITDA per tonne by USD 18. The ammonia price increase had the greatest impact, but higher urea, nitrate and NPK prices also contributed to the improvement. Relative to 2003, the EBITDA margin declined by USD 2 per tonne due to Upstream s long position in ammonia. At year-end 2004, the ammonia position was valued at the lower of cost and market based on the price level in mid January Energy costs for European plants were up on last year, reducing the EBITDA margin by USD 1 per tonne. The average cost of purchased energy for Upstream, including its share of energy costs in non-consolidated investees, was 3.5 USD/ MMBtu in the 2004, compared with 3.2 USD/MMBtu in This increase was due to higher gas prices in Europe, in addition to higher ammonia-linked gas costs in non-consolidated investees outside Europe. A new energy contract for the Sluiskil plant was signed during 2004, after the previous contract expired at the end of Yara s energy exposure in Europe changed somewhat as a result of the new contract with Gasuine, reducing our exposure to fuel oil prices and increasing our exposure to gas oil prices. The item Other is mainly the negative effect on fixed cost of the weaker US dollar against the Euro and Norwegian krone. OTHER AND ELIMINATIONS Other and eliminations consists of Yara headquarters costs and cross-segment eliminations EBITDA was a negative NOK 370 million compared with a negative NOK 99 million last year. Unrealized profits from cross-segment sales were eliminated to show the correct earnings for Yara. The level of unrealized profit in inventory increased mainly due to higher prices. This had a NOK 95 million negative impact on EBITDA. One-time costs related to the demerger from Norsk Hydro of NOK 57 million and Yara s deductible of NOK 65 million for the Köping fire were the other main reasons for the change in EBITDA. 46 YARA ANNUAL REPORT 2004

49 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED PROFIT AND LOSS STATEMENTS Actual Pro forma Pro forma Pro forma Notes NOK million, except per share information Notes ,030 Revenues 43,066 38,334 33, Other income ,219 6 Operating Revenues 6 43,252 38,481 33,750 23,105 Raw materials and energy costs 30,106 27,207 23, Change in inventories of own production 155 (16) (76) 2,790 5,7,19 Payroll and related costs 5,7,19 3,600 3,216 2, ,14,15 Depreciation and amortization 6,14,15 1,208 1,147 1,183 3,636 7,24 Other 7,24 4,597 4,176 4,003 30,571 Operating Expenses 39,667 35,730 31,480 2,649 6 Operating Income 6 3,584 2,751 2, ,12 Share of net income in non-consolidated investees 6, ,23 Interest income and other financial income 8, ,429 6 Earnings before interest expense and tax (EBIT) 6 4,523 3,503 2, ,23 Interest expense and foreign exchange gain/(loss) 8, (348) 294 3,656 Income before tax and minority interest 4,926 3,155 2,820 (796) 9 Income tax expense 9 (1,185) (966) (915) 2,860 Net Income 3,741 2,189 1,905 (6) 3 Minority interest 3 20 (3) (11) 2,854 Net Income after minority interest 3,761 2,186 1, Earnings per share ,788,669 Average number of shares outstanding 1) 318,938, ,442, ,442,590 1) Average number of shares outstanding was reduced in fourth quarter 2004 due to share buy-backs. YARA ANNUAL REPORT

50 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS Actual Pro forma Pro forma Notes NOK million Notes Assets 1,362 9 Deferred tax assets ,19 Other intangible assets 15, ,646 Intangible assets 1, ,786 14,21 Property, plant and equipment 14,21 7,219 7,091 2, Non-consolidated investees 12 2,549 2,089 1,151 13,19 Prepaid pension, investments and other non-current assets 13,19 1, ,709 Financial non-current assets 3,580 2,950 12,141 6 Total non-current assets 6 11,822 10,603 5, Inventories 11 5,325 4,383 6,518 7 Accounts receivable, less allowances 7 7,095 5,550 1,766 Prepaid expenses and other current assets 1,168 1, Other liquid assets ,230 Cash and cash equivalents 1,153 1,146 15,345 6 Total current assets 6 14,769 12,145 27,486 6 Total assets 6 26,591 22, YARA ANNUAL REPORT 2004

51 CONSOLIDATED FINANCIAL STATEMENTS Actual Pro forma Pro forma Notes NOK million, except for number of shares Notes Liabilities and shareholders' equity 543 Share capital (5) - Treasury shares - - 3,703 Premium paid-in capital 3,703 3,703 4,241 3 Total paid-in capital 3 4,246 4,246 6,674 Retained earnings 5,349 3,348 (201) - Treasury shares ,714 3 Total majority shareholders' equity 3 9,595 7, Minority shareholders' interest in consolidated subsidiaries ,777 Shareholders' equity 9,691 7,680 1, Accrued pension liabilities 19 1,760 1,530 1,037 9 Deferred tax liabilities Other long-term liabilities ,313 Long-term liabilities 2,888 2,408 4,494 18,21 Long-term interest bearing debt 18,21 7,488 7, Bank loans and other interest-bearing short-term debt Current portion of long-term debt Dividends payable , Other current liabilities 17 5,993 4,640 8,901 Current liabilities 6,524 5,171 27,486 Total liabilities and shareholders' equity 26,591 22, ,441,190 Total number of shares outstanding 1) 319,442, ,442,590 1) Number of shares outstanding was reduced in fourth quarter 2004 due to share buy-backs. Oslo, 18 March 2005 Lone Fønss Schrøder Board member Jørgen Ole Haslestad Board member Åse Aulie Michelet Board member Leiv L. Nergaard Board member Arthur Frank Bakke Board member Charlotte Dyrkorn Board member Frank Andersen Board member Øivind Lund Chairperson Thorleif Enger President and CEO YARA ANNUAL REPORT

52 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED CASH FLOW STATEMENTS Actual Pro forma Pro forma Pro forma Notes NOK million Notes Operating activities: 2,854 Net income after minority interest 3,761 2,186 1,894 Adjustments to reconcile net income to net cash provided by operating activities: 928 6,14,15 Depreciation and amortization 6,14,15 1,208 1,147 1,183 (641) 6,12 Equity in net income of non-consolidated investees 6,12 (772) (610) (57) Dividends received from non-consolidated investees (65) 9 Deferred taxes 9 (109) (33) (3) (185) Loss (gain) on sale of non-current assets (180) (109) (294) (461) 8 Loss (gain) on foreign currency transactions 8 (737) (11) (670) (145) Other (171) Working capital changes that provided (used) cash: (89) Receivables (166) (628) (201) (194) Inventories (675) (564) Prepaid expenses and other current assets 6 (493) (247) 402 Current liabilities 1, ,724 Net cash provided by operating activities 3,772 1,628 2,933 Investing activities: (849) Purchases of property, plant and equipment (974) (930) (1,134) (210) Purchases of other long-term investments (251) (281) (529) 10 Net sales (purchases) of short-term investments 9 6 (21) 58 Proceeds from sales of property, plant and equipment Proceeds from sales of other long-term investments (827) Net cash used in investing activities (986) (734) (954) Financing activities: 10,341 Loan proceeds 10, (11,947) Principal payments (12,056) (1,278) 1,125 - Pro forma adjustments (924) 280 (3,067) (206) 3 Purchase of treasury stock 3 (206) - - (7) Net cash transfers (to)/from minority interest (7) (1) 36 (1,819) Net cash used in financing activities (2,851) (964) (1,881) 10 Foreign currency effects on cash flows (106) 88 Net increase (decrease) in cash and cash equivalents 77 7 (8) 1,142 Cash and cash equivalents as of beginning of period 1,153 1,146 1,154 1,230 Cash and cash equivalents at the end of period 1,230 1,153 1, YARA ANNUAL REPORT 2004

53 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 01 Summary of significant accounting policies The Actual and Pro forma consolidated financial statements for Yara International ASA and its subsidiaries (Yara) presented in this report have been prepared in accordance with accounting principles generally accepted in Norway (N GAAP). 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 are an integral part of the consolidated financial statements. Consolidation The consolidated financial statements include Yara International ASA and entities in which Yara International ASA controls, directly or indirectly, more than 50 % of the voting interests. In certain circumstances, an entity may be controlled through means other than majority voting interest, such as through contractual agreements. All significant intercompany transactions and balances have been eliminated in the Financial Statements. Non-consolidated investees Investments in companies in which Yara exercises significant influence (non-consolidated investees) are accounted for using the equity method. Significant influence normally exists when Yara has an ownership interest or otherwise controls 20 to 50 % of the voting shares. Participation in joint ventures is accounted for using the equity method. Yara reviews non-consolidated investees for impairment if indications of loss in value are identified. As Yara's nonconsolidated investees are generally not listed on a stock exchange or regularly traded, the impairment review for such non-consolidated investees can only rarely be based on observable market prices. Impairment indications may include operating losses, or adverse market conditions. Fair value of the investment is estimated based on valuation model techniques. If it is considered probable that the fair value of the non-consolidated investee is below Yara's carrying value, the investment is written down as impaired. Business Combinations Acquisitions are accounted for using the purchase method. See Note 04 for a description of significant acquisitions and disposals during the past three years. Purchase accounting involves recording assets and liabilities of the acquired company at their fair value at the time of acquisition. Any excess of purchase price over fair value is recorded as goodwill. 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 items, and average exchange rates for the profit and loss statement. Translation gains and losses, including effects of exchange rate changes on transactions designated as hedges of net foreign investments, are included in Shareholders equity as retained earnings. Foreign Currency Transactions Realized and unrealized gains or losses on transactions, assets and liabilities denominated in a currency other than the functional currency that do not qualify for hedge accounting treatment, are included in net income. YARA ANNUAL REPORT

54 CONSOLIDATED FINANCIAL STATEMENTS 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. Yara's rebate arrangements include fixed-rate rebates negotiated with each individual customer or variable rate rebates increasing with increasing volumes. For variable rate rebates, the maximum possible rebate is accrued at each revenue transaction, and the accrual is adjusted at the end of each rebate period, which typically is the end of a fertilizer season. The rebate arrangements are cash rebates accounted for as revenue reduction. In arrangements where Yara acts as an agent, such as commission sales, only the net commission fee is recognized as revenue. Cash and Cash Equivalents Cash and cash equivalents include cash, bank deposits and all other monetary instruments with a maturity of less than three months at the date of purchase. Other Liquid Assets Other liquid assets include bank deposits and all other monetary instruments with a maturity between three months and a year at the date of purchase. Inventories Inventories are valued at the lower of cost, using the first-in, first-out method ( FIFO ), and net realizable value. Cost includes direct materials, direct labor, other direct cost, and the appropriate portion of production overhead or the price to purchase inventory. Property, Plant and Equipment Property, plant and equipment is carried at historical cost less accumulated depreciation and amortization. If a legal obligation for the retirement of a tangible long-lived asset incurs, the carrying value of the related asset is increased by the 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. The carrying value of a long lived asset is considered impaired when the carrying amount of an asset exceeds its recoverable amount which is the higher of net selling price and value in use. Value in use is the present value of estimated future cash flows expected to arise from continuing use of an asset and from its disposal at the end of its useful life. Impairment tests for long-lived assets measure impairment as the difference between carrying value and recoverable amount of such an asset. The recoverable amount of an asset is the higher of net selling price and the present value of estimated future cash flows expected to arise from continuing use of such an asset and from its disposal at the end of its useful life. An impairment loss in prior years is reversed if events or circumstances have resulted in a change in the estimate used to determine the recoverable amount since the last impairment loss was recognized. 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 plant, properties and equipment are capitalized and any assets replaced are retired. Capitalized Interest Interest is capitalized as part of the historical cost of major assets constructed. Leased Assets Leases that provide Yara with substantially all the rights and obligations of ownership are accounted for as capital leases. Such leases are valued at the present value of minimum lease payments or fair value if this is lower, and recorded as assets under Property, plant and equipment. The liability is included in Long-term debt. The assets are subsequently depreciated and the related liabilities are reduced by the amount of the lease payments less the effective interest expense. Other leases are accounted for as operating leases with lease payments recognized as an expense over the lease term. Environmental Expenditures Environmental expenditures that increase the life, capacity, or result in improved safety or efficiency of a facility are capitalized. Expenditures that relate to an existing condition caused by past operations are expensed. Liabilities are recorded when environmental assessments or clean-ups are probable and the cost can be reasonably estimated. 52 YARA ANNUAL REPORT 2004

55 CONSOLIDATED FINANCIAL STATEMENTS Depreciation and Amortization Depreciation is determined using the straight-line method with the following rates: Machinery and equipment 5 25 % Buildings 2 5 % Ships 4 5 % Other % 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 indefinite useful lives are not amortized until a finite life can be determined. These intangible assets are subject to impairment testing on an annual basis and an impairment loss is recognized whenever the carrying amount of an intangible asset exceeds its recoverable amount. 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 amortized over a period not exceeding ten years. If there is an indication that goodwill may be impaired, the recoverable amount is determined for the cash-generating unit to which goodwill belongs, and the recoverable amount is compared to the carrying amount of the cash-generating unit. Any impairment loss is allocated to reduce the carrying amount of the assets of the unit, first to reduce goodwill allocated to the unit and then to reduce the other assets of the unit on a pro-rata basis. Shipping costs Purchase related shipping and handling costs are included in Other operating expenses. Shipping and handling cost invoiced to customers are included in Operating revenues. Research and Development Research and development costs are expensed as incurred. Income Taxes Deferred income tax expense is calculated using the liability method in accordance with Norsk RegnskapsStandard ( NRS ) regarding Income Taxes ( Resultatskatt ). Under this standard, deferred tax assets and liabilities are measured based on the differences between the carrying values of assets and liabilities for financial reporting and their tax basis, which is considered temporary in nature. Deferred income tax expense represents the change in deferred tax asset and liability balances during the year except for 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 are enacted. Derivative Instruments Derivative instruments are marked to their market value with the resulting gain or loss reflected in the Profit and Loss statement, except when the instruments meet the criteria for hedge accounting. See Note 23 for the balance sheet classification of these instruments. Gains or losses on cash flow hedge instruments are booked directly against equity until the underlying transactions are recognized. Gain or loss on fair value hedge instruments is recognized in the Profit and Loss statement, but is partly offset by changes in value of the hedge item. Forward currency contracts Forward currency contracts are marked to their market value at each balance sheet date with the resulting unrealized gain or loss recorded as foreign exchange gain (loss). Interest rate and foreign currency swaps Interest income and expense relating to swaps that are not designated as hedge instruments 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 interest expense and foreign exchange gain (loss). YARA ANNUAL REPORT

56 CONSOLIDATED FINANCIAL STATEMENTS Derivative Commodity Instruments Commodity derivative instruments that are traded in a liquid market are marked-to-market with their fair market value recorded in the balance sheet as either assets or liabilities. Share-based Incentive program Yara accounts for the share-based incentive program based on intrinsic value. For awards settled in cash, compensation cost is measured at the end of each period as the amount by which the market price of the shares exceeds the strike price of the share based incentive program. Compensation is charged to expense over the periods when the employee earns the benefit. Employee Retirement Plans Pension costs are calculated in accordance with the NRS no. 6. 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 % of the greater of the benefit obligation or the fair value of assets are amortized over the remaining service period of active plan participants (See Note 19). Change in presentation of Other items In 2004, Yara decided to change the classification of Other Income/Loss. Gains from divestments of companies and disposal of property, plant & equipment are now included in Operating Revenues, while losses from divestments and disposals are included in Other under Operating Expenses. The figures for previous periods presented have been restated accordingly. Change in Accounting Principles There has not been any change in accounting principles in The following is included with reference to EU-directive 83/349 YARA GmbH & Co. KG with legal seat in Dülmen/Germany and its directly and indirectly owned subsidiaries are included in the consolidated financial statement of Yara International ASA as defined by sec. 291 HGB (German commercial code). For the purpose of sec. 264b HGB, YARA GmbH & Co. KG makes use of the relief to not disclose any independent financial statement and notes. 54 YARA ANNUAL REPORT 2004

57 CONSOLIDATED FINANCIAL STATEMENTS 02 Notes to Pro forma Accounts Yara International ASA was demerged from Norsk Hydro ASA and listed on the Oslo Stock Exchange as a separate company on 25 March In the demerger, the assets, rights and liabilities primarily related to Hydro s activities in connection with fertilizer products and related chemicals and industrial gases were transferred to Yara International ASA. The consolidated financial statements for Yara have been prepared on a historical cost basis in accordance with accounting principles generally accepted in Norway (N GAAP). The pro forma consolidated financial statements have been derived from Hydro s consolidated financial statements, and include the historical information for operations being transferred to Yara. In addition, pro forma adjustments have been made to revenues, general and overhead cost, financial expenses and interest-bearing debt and tax, as if Yara had been a stand-alone company. The pro forma adjustments are prepared in accordance with Oslo Stock Exchange requirements ( Regnskapssirkulære 2001 and Børsforskriftens 5-3 ) regarding demergers. The operations and companies demerged from Hydro are not identical to the operations reported as Agri Business Area in Hydro s segment reporting. General and overhead cost In the pro forma figures for Yara, costs invoiced and allocated from Hydro are adjusted to represent estimates for Yara's general and overhead costs, calculated as if Yara was a stand-alone company. For the years 2003 and 2002 the adjustments amounted to NOK 12 million and NOK 15 million. No adjustment was made subsequent to third quarter In addition, costs relating to cash management and finance functions were allocated to Yara to the amount of NOK 22 million for No such cost was allocated in the third quarter 2003 and first quarter For 2002 the amount allocated was NOK 30 million. For cash management, costs were allocated based on ratios of the two companies revenues, to reflect use of the services. Financial expenses and interest-bearing debt Yara was allocated a net interest-bearing debt of NOK 8.5 billion as of 1 October 2003 (the agreed date of transferring risk and rewards in the demerger). Yara reduced its net interest-bearing debt to NOK 6.8 billion as of 24 March 2004, which was applied in the pro forma financial statements for all periods presented, except for the 25 March to 31 December period of 2004, where the actual net interest-bearing debt was used. In the calculation of pro forma net interest expense, it was assumed that Yara needs an average cash level of NOK 800 million for the operations. As explained above, net interest-bearing debt as of 24 March 2004 was applied in calculating shareholders' equity in the Pro Forma Consolidated Balance Sheet as of 31 December 2003 and prior periods presented. The portion of net income in the period 1 January 2004 to 24 March 2004 used to reduce net interest-bearing debt, is concequently reflected in shareholders' equity in the Pro Forma Consolidated Balance Sheets as of 31 December Shareholders' equity including minority interests, as of 31 December 2004 was NOK 10,777 million compared to NOK 8,108 million allocated to Yara on 1 October Interest rates used in the pro forma calculation are based on the terms for the new Yara financing effective from 25 March 2004, adjusted for Yara s target to have a major part of its financing at fixed interest terms. For periods prior to 1 October 2003 the pro forma accounts reflect foreign currency gains and losses allocated to Yara based on Hydro s actual foreign currency gains and losses and Yara s interest-bearing debt relative to Hydro s total interestbearing debt. For periods subsequent to 1 October 2003, the accounts reflect foreign currency gains and losses based on Yara s actual loans, terms and currency mix. Income taxes The income tax expenses in the pro forma financial statements for 2003 and prior periods presented, were established in order to give an indication of what the tax expense would have been, had Yara been a separate group. All significant effects from tax consolidation of Yara s taxable income with the taxable income of the remaining part of Hydro have been adjusted for. Hydro is, according to the Demerger Plan, responsible for the current taxes on Yara s results for the period prior to 1 October Yara s tax liability, as of 31 December 2003 therefore reflects only current income tax payable for the period from 1 October 2003 until 31 December YARA ANNUAL REPORT

58 CONSOLIDATED FINANCIAL STATEMENTS 03 Consolidated shareholders' equity Ordinary Shares to Total Majorbe issued / issued by Yara Premium Total ity Share- International ASA paid-in paid-in Retained holder s NOK million, except number of shares Number Amount capital capital earnings equity 1) Pro forma Balance 31 December ,442, ,703 4,246 6,246 10,492 Net income ,894 1,894 Other items recorded directly to shareholder's equity (233) (233) Hedge of net investment Transfers to Hydro 2) (2,547) (2,547) Foreign currency translation, net (2,024) (2,024) Pro forma adjustments 3) (179) (179) Balance 31 December ,442, ,703 4,246 3,348 7,594 Net income ,186 2,186 Other items recorded directly to shareholder's equity Hedge of net investment (107) (107) Transfers to Hydro 2) (478) (478) Foreign currency translation, net 1,453 1,453 Pro forma adjustments 3) (1,079) (1,079) Balance 31 December ,442, ,703 4,246 5,349 9,595 Net income ,761 3,761 Dividends proposed (712) (712) Foreign currency translation, net (688) (688) Other items recorded directly to shareholder's equity (57) (57) Cash flow hedges (77) (77) Purchase of treasury stock (3,001,400) (5) (5) (201) (206) Pro forma adjustments 3) (902) (902) Balance 31 December ,441, ,703 4,241 6,473 10,714 Actual Balance 31 December ) 63,888, ,939 2, ,053 Demerger Yara 25 March 255,554, ,764 2,198 5,416 7,614 Net income 25 March - 31 December 2,854 2,854 Dividends proposed (712) (712) Foreign currency translation, net (767) (767) Other items recorded directly to shareholder's equity (46) (46) Cash flow hedges (77) (77) Purchase of treasury stock (3,001,400) (5) (5) (201) (206) Balance 31 December ,441, ,703 4,241 6,473 10,714 1) Minority interest at the end of the periods 2004, 2003 and 2002 amounted to NOK 63 million, NOK 96 million and NOK 85 million. 2) Yara's net interest bearing debt is kept stable at NOK 6.8 billion for all periods prior to the effective date of the demerger, 25 March Accordingly, Yara's earnings in the period does not directly affect changes in equity for this period. For the period after the effective date of the demerger, Yara has assumed the risk of operations and financing. 3) Pro forma adjustments is related to changes in equity due to different assumptions in the P&L and Balance sheet. 4) Represents equity balance in Yara International ASA. On 19 October 2004, Yara started the purchase of own shares, as part of the buy-back program approved by Yara's General Meeting 16 June The program opens for buy-back of up to 5 % of Yara's shares (15,972,130 shares), and is valid until 15 December According to the buy-back program, the purchase price shall not be less than NOK 25 per share or more than NOK 75 per share. The intention is to amortize the shares. This decision must be taken by Yara s annual general meeting 56 YARA ANNUAL REPORT 2004

59 CONSOLIDATED FINANCIAL STATEMENTS Yara's largest shareholder, the Norwegian State, has committed to sell a proportional part of its shares, leaving the State's % ownership unchanged. The compensation to the State will be equal to the average price paid in the market for the buy-back shares, plus interest of NIBOR +1 %, calculated from the dates of the acquisition of the corresponding shares. In 2004, Yara purchased 3,001,400 shares at an average price of NOK per share, and with a total cost of NOK 206 million. Minority interest is mainly related to the following units; Minority Company Country interest in % Adubos Trevo s.a. Brazil 4.10 % Yara Cameroun s.a. Cameroon 35 % Ceylon Oxygen Ltd. Sri Lanka % Yara Fertilizers Philippines Inc. Philippines 44 % P.T. Yara Indonesia Indonesia 30 % 04 Acquisitions and disposals Subsequent to and during the three years ended 31 December 2004, Yara entered into the following significant business combinations and disposals Acquisitions In January 2005 Yara acquired a 30 % stake in the Russian fertilizer producer OAO Minudobreniya ("Rossosh"). The Rossosh plant has a total production of approximately 900,000 tonnes of NPK, 450,000 tonnes of ammonium nitrate (AN), and 800,000 tonnes of ammonia. Half of the ammonia is upgraded to NPK and AN. The Rossosh plant will be fully integrated into the Yara product planning and fertilizer marketing system Acquisitions No significant acqusitions were made during Disposals Yara sold its 20.1 % shareholding in Ballance Agri-Nutrients in New Zealand to the majority owner Ballance Agri- Nutrients Cooperative. The transaction resulted in a gain of NOK 81 million. At the same time Yara entered into a supply agreement with Ballance and will continue to supply urea and other fertilizer products to the company Acquisitions No significant acqusitions were made during Disposals No significant disposals were made during Acquisitions In April 2002 Yara entered into a joint venture, SQYA, in Chile as a part of the strategy to strengthen its speciality fertilizer operations. Through its 49 % ownership in SQYA, and a parallel investment in Pampa Calichera, a listed Chilean company, Yara indirectly acquired approximately 6 % of the shares in SQM, a Chilean company with a strong position in nitrate and potassium-based speciality products. Yara's acquistion costs was NOK 240 million Disposals During 2002 Yara reorganized the Vlaardingen operations in the Netherlands into a new joint venture company, named NU3. Yara exhanged property, plant & equipment in Vlaardingen for a 50 % ownership in the new company. The transaction was recorded at fair value and resulted in a pre-tax gain of NOK 66 million. YARA ANNUAL REPORT

60 CONSOLIDATED FINANCIAL STATEMENTS 05 Stock-based compensation A cash-settled share-based incentive program was established in During 2004, 2,055,000 share incentive rights (SIRs) were granted to 9 persons in Yara's top management. The SIRs vesting schedule is based on the performance of the shares in Yara on the Oslo Stock Exchange (OSE). Under the share-based incentive program the employees will receive a bonus if certain market performance criterias are met. The bonus vests after two and three years, with 1/3 and 2/3 respectively, and can be exercised during the period 8 May 2007 to 8 May In the agreement the employees consent to that they have to invest half of the bonus after tax in the company's shares and not sell the shares within one year from the exercise date. SIR plan: Target Outstanding Granted Strike Exercised Forfeited Expired Outstanding Exercisable Group (NOK) in 2004 in 2004 in Management - 2,055, ,055,000 - Yara has recorded a liability related to the SIR plan of approximately NOK 19 million at 31 December The compensation expense related to the plan is recognized over the vesting period of the SIRs using the intrinsic value method. The intrinsic value of the SIRs is re-measured each reporting date until the SIRs are settled. The market share price as of 31 December 2004 was NOK YARA ANNUAL REPORT 2004

61 CONSOLIDATED FINANCIAL STATEMENTS 06 Operating and geographical segment information Operating segments are components of a business that are evaluated regularly by dedicated senior management utilizing financial and operational information prepared specifically for each segment for the purpose of assessing performance and allocating resources. In general, financial information should be disclosed on the same basis as internally, in order to enable investors to follow the company s development in the same way as Yara management. Segment Structure The current segment structure was implemented 1 October Historical figures for the years 2003 and 2002 have been reclassified to reflect this segment structure. Yara s segments are managed as separate and strategic businesses. Downstream The Downstream segment contains the global fertilizer distribution and marketing system, but also includes production facilities that primarily serve the regions in which such production facilities are located. Less than 30 % of the segment's sales volumes is related to the segment's own chemical production of fertilizers. The remaining sales volume is purchased on an arm s- length basis from the Upstream segment or third parties. The Downstream segment's activities are margin or commission-based. This reduces volatility in income significantly compared with a traditional fertilizer production company, since the margins and commissions will remain relatively stable not much influenced by market prices for fertilizers and the cost of energy inputs used to make fertilizers. The Downstream segment is characterized by a high capital turnover, a low ratio of property, plant and equipment to total assets compared to a traditional production-oriented fertilizer operation, and by a relatively low EBITDA margin in relation to revenues. Industrial The Industrial segment markets numerous industrial products, mainly originating from Yara s fertilizer operations to other industries. The industrial segment takes the advantage of the fertilizer operations, which is used to build strong market positions within industrial gases, nitrogen chemicals and environmental products. Upstream The Upstream segment comprises ammonia and urea production in different parts of the world, the global trade and shipping of ammonia, as well as nitrate and NPK fertilizer production co-located with ammonia production and is serving both domestic and international markets. The Upstream segment includes large joint venture operations (e.g., Qafco, Tringen). Because of the level of ownership in these joint venture entities (i.e., less than 50 %), their operating results are not reflected in operating income, but Yara s share of the associates net income are included in EBITDA and net income. The Upstream segment's operating results are, to a great degree, based on the segment's production margins, which are primarily affected by the price levels for ammonia, urea, nitrates and NPK and the price level of energy and raw materials such as phosphate rock and potash. In addition, operating results can be greatly influenced by movements in currency exchange rates. The fluctuation of the Upstream segment's operating results is typical of that of traditional fertilizer producers and is, normally, less stable than the operating results of Yara s Downstream and Industrial segments. Operating Segment Information Yara s steering model reflects management's focus on cash flow-based performance indicators, before and after taxes. EBITDA is an approximation of cash flow from operations before taxes. EBITDA is considered an important measure of performance for the company's operating segments. Yara defines EBITDA as operating income plus interest income, other financial income and results from non-consolidated investees. It excludes depreciation, write-downs and amortizations as well as amortization of excess values in non-consolidated investees. In addition the segments are followed up on CROGI (defined as gross cash flow after tax divided by gross investment). Intersegment sales and transfers reflect arm s-length prices as if sold or transferred to third parties. Results of activities considered incidental to Yara's main operations as well as revenues, expenses, liabilities and assets not originating in, or defined as part of, either the Upstream, Downstream or Industrial segment, are reported separately under the caption "Other and eliminations". These amounts principally include interest income and expenses, realized and unrealized foreign exchange gains and losses and the net effect of pension schemes. In addition, elimination of gains and losses related to transactions between the segments will be accounted as part of Other and Eliminations. General corporate overhead costs and costs related to cash management and finance function are also charged to Other and Eliminations. YARA ANNUAL REPORT

62 CONSOLIDATED FINANCIAL STATEMENTS Actual Pro forma Pro forma Pro forma NOK million External operating revenues Downstream 23,463 30,436 27,788 25,909 Industrial 4,163 5,345 4,721 4,331 Upstream 5,474 7,302 5,793 3,317 Other and Eliminations Total 33,219 43,252 38,481 33,750 Internal operating revenues Downstream 720 1,005 1, Industrial Upstream 8,456 11,301 9,387 7,863 Other and Eliminations (9,219) (12,353) (10,767) (8,887) Total Operating revenues Downstream 24,183 31,441 29,120 26,863 Industrial 4,206 5,392 4,769 4,400 Upstream 13,930 18,603 15,181 11,180 Other and Eliminations (9,100) (12,185) (10,588) (8,694) Total 33,219 43,252 38,481 33,750 Operating expenses excl. depreciation and amortization Downstream 22,906 29,688 27,582 25,147 Industrial 3,669 4,715 4,096 3,635 Upstream 11,967 15,868 13,435 10,149 Other and Eliminations (8,899) (11,812) (10,529) (8,633) Total 29,643 38,459 34,583 30,297 Depreciation and amortization Downstream Industrial Upstream Other and Eliminations (1) Total 928 1,208 1,147 1,183 Operating income Downstream 973 1,356 1,162 1,347 Industrial Upstream 1,527 2,166 1, Other and Eliminations (217) (392) (64) (59) Total 2,649 3,584 2,751 2,270 Share of net income non-consolidated investees Downstream Industrial Upstream Other and Eliminations Total YARA ANNUAL REPORT 2004

63 CONSOLIDATED FINANCIAL STATEMENTS Actual Pro forma Pro forma Pro forma NOK million Earnings before interest and tax (EBIT) Downstream 1,206 1,638 1,418 1,560 Industrial Upstream 2,054 2,810 1, Other and Eliminations (204) (389) (104) (57) Total 3,429 4,523 3,503 2,526 Earnings before interest, tax, depreciation and amortization (EBITDA) Downstream 1,542 2,068 1,833 1,956 Industrial Upstream 2,491 3,379 2,249 1,130 Other and Eliminations (188) (370) (99) (58) Total 4,389 5,765 4,671 3,817 Investments during the period Downstream ,082 Industrial Upstream Other and Eliminations (191) Total 1,085 1,250 1,188 1,549 External interest income Downstream Industrial Upstream Other and Eliminations 18 9 (40) (35) Total Pro forma Pro forma Pro forma NOK million Gross cash flow after tax 1) Downstream 1,613 1,435 1,500 Industrial Upstream 2,728 1, Other and Eliminations (81) (165) (40) Total 4,811 3,706 3,079 1) Defined as EBITDA less total tax expense, excluding tax on net foreign exchange gains/losses. Gross investment 1) Downstream 13,520 12,929 12,156 Industrial 3,927 3,850 3,758 Upstream 18,500 17,834 17,293 Other and Eliminations Total 36,119 34,866 33,598 1) 12-month average. Cash Return on Gross Investment (CROGI) Downstream Industrial Upstream Other and Eliminations Negative Negative Negative Total YARA ANNUAL REPORT

64 CONSOLIDATED FINANCIAL STATEMENTS Actual Pro forma Pro forma NOK million Assets 1) Downstream 15,158 13,965 12,767 Industrial 2,633 2,754 2,531 Upstream 8,850 8,802 7,790 Other and Eliminations 846 1,068 (342) Total 27,486 26,591 22,747 1) Assets exclude internal cash accounts and accounts receivable related to group relief. Current assets 1) Downstream 10,767 9,440 8,480 Industrial 1,446 1,472 1,186 Upstream 3,297 3,330 2,554 Other and Eliminations (166) 525 (75) Total 15,345 14,769 12,145 1) Current assets exclude internal cash accounts and accounts receivable related to group relief. Non-current assets Downstream 4,390 4,525 4,286 Industrial 1,187 1,282 1,345 Upstream 5,552 5,472 5,236 Other and Eliminations 1, (265) Total 12,141 11,822 10,603 Non-consolidated investees, investments and advances Downstream Industrial Upstream 1,746 1,516 1,351 Other and Eliminations Total 2,558 2,549 2,089 Segment debt 1) Downstream 4,431 3,928 4,460 Industrial Upstream 2,261 1,800 1,742 Other and Eliminations (1,106) (562) (2,214) Total 6,361 5,834 4,640 1) Segment debt is defined as short-term interest-free liabilities excluding income taxes payable and short-term deferred tax liabilities. 62 YARA ANNUAL REPORT 2004

65 CONSOLIDATED FINANCIAL STATEMENTS Geographical segment information Revenues 1) Actual Pro forma Pro forma Pro forma NOK Million Norway 1,696 2,052 1,833 1,759 France 2,931 4,200 3,730 3,392 Germany 2,195 2,833 2,461 2,312 Great Britain 1,773 2,516 2,357 2,239 Italy 1,760 2,672 2,339 2,099 Spain 1,368 1,743 1,639 1,236 Sweden 756 1,111 1, The Netherlands Belgium Denmark Other 1,079 1,473 1, Total EU 13,608 18,690 16,488 14,511 Other Europe Total Europe 15,874 21,652 19,059 16,791 South and Central America 5,307 6,149 5,191 4,716 Asia 3,571 4,503 4,269 4,166 North America 4,851 6,537 5,637 3,831 Africa 3,162 3,905 3,934 3,805 Australia and New Zealand Total outside Europe 17,157 21,414 19,275 16,686 Total 33,030 43,066 38,334 33,477 1) Revenues are identified by customer location. YARA ANNUAL REPORT

66 CONSOLIDATED FINANCIAL STATEMENTS Assets 1) Long-lived Assets 1) Investments 1) Pro Pro Pro Pro Pro Pro Actual forma forma Actual forma forma Actual forma forma NOK Million Norway 6,118 5,632 6,237 2,545 2,680 2, France 4,825 4,613 3,892 1,027 1,097 1, The Netherlands 2,393 2,150 2,230 1,345 1,259 1, Germany 2,169 2,160 1, Italy 1,625 1,833 1, Great Britain 1,520 1,470 1, Belgium 905 1, Sweden Denmark Spain Other Total EU 15,349 15,205 13,001 4,870 4,708 4, Other Europe Total Europe 21,476 20,870 19,264 7,424 7,417 7,078 1, Asia 3,744 3,055 2,679 1,348 1,632 1, South and Central America 3,013 2,379 2,020 1,179 1, Africa 2,001 1,902 1, North America 1,543 1,695 1, Australia and New Zealand Total outside Europe 10,332 9,062 7,934 3,071 3,381 2, Eliminations (4,323) (3,341) (4,450) Total 27,486 26,591 22,747 10,495 10,799 10,041 1,250 1,188 1,549 1) The identification of assets, long-lived assets and investments is based upon location of operation. Included in long-lived assets are investments in non-consolidated investees; property, plant and equipment (net of accumulated depreciation) and non-current financial assets. The intangible assets are not included. Eliminations are related to internal transactions between geographical areas. 64 YARA ANNUAL REPORT 2004

67 CONSOLIDATED FINANCIAL STATEMENTS 07 Operating expense Operating expense include research and development, operating lease expense and payroll and related costs as follows: Actual Pro forma Pro forma Pro forma NOK million Payroll and related costs: Salaries 2,004 2,600 2,347 2,254 Social security costs Social benefits Net periodic pension cost (Note 19) Total 2,790 3,600 3,216 2,921 Other: Selling and administrative expense 986 1,254 1,187 1,258 Rental of buildings etc Travel expense Freight and insurance expense 2,170 2,764 2,410 2,219 Allowance for bad debt Other Total 3,636 4,597 4,176 4,003 Research and development expense Operating lease expense: 1) ) Total minimum future rentals of NOK 2,929 million are due under non-cancellable operating leases as follows (in NOK million): 2005 (447); 2006 (359); 2007 (254); 2008 (273); 2009 (260); and thereafter (1,336). Over the last few years, Yara has focused on orienting research and development resources towards commercial activities, both with respect to process and product improvements and agronomical activities. It is impracticable to give a fair estimate of possible future financial returns of these activities. 08 Financial income and expense Actual Pro forma Pro forma Pro forma NOK million Interest income on customer credits Interest income, other Dividends and net gain (loss) on securities (4) (4) 2 38 Interest income and other financial income Interest expense (194) (266) (311) (339) Capitalized interest Net foreign exchange gain (loss) Other financial expense (42) (68) (62) (47) Interest expense and foreign exchange gain (loss) (348) 294 Net financial income (expense) (206) 493 The basis for the pro forma interest income and expense calculation is the pro forma debt structure (see Notes 16 and 18 for pro forma short-term and long-term debt, respectively). YARA ANNUAL REPORT

68 CONSOLIDATED FINANCIAL STATEMENTS 09 Income taxes Actual Pro forma Pro forma Pro forma NOK million Income before taxes and minority interest: Norway Other countries 3,344 4,506 2,944 2,453 Total 3,656 4,926 3,155 2,820 Current taxes: Norway Other countries 787 1, Current income tax expense 861 1, Deferred taxes: Norway (12) (20) (82) (95) Other countries (53) (89) Deferred tax expense (benefit) (65) (109) (33) (3) Total income tax expense before pro forma adjustment 796 1, Tax effect on pro forma adjustment Total income tax expense - Pro forma 1, Reconciliation of Norwegian nominal statutory tax rate to effective tax rate. Actual Pro forma Pro forma Pro forma NOK million Expected income taxes at statutory tax rate 1) 1,024 1, Tax law changes (159) (159) 54 (3) Losses and other deductions with no tax benefit Non-deductible expenses Foreign tax rate differences (148) Tax free income non-consolidated investees (158) (125) (86) (25) Tax free income miscellaneous (46) (46) (29) (28) Dividend exclusion (38) (38) (21) (27) Losses and other benefits not previously recognized 2) (276) (276) (80) (174) Other, net Total income tax expense before pro forma adjustment 796 1, Tax effect on pro forma adjustment Total income tax expense - Pro forma 1, Effective tax rate 3) 21.8 % 24.1 % 30.6 % 32.4 % 1) Norwegian nominal statutory tax rate is 28 %. 2) Use of deferred tax assets previously not recognized due to valuation allowances. 3) The Effective tax rate - Pro forma is calculated on the base of Pro forma Income before tax and minority interest. 66 YARA ANNUAL REPORT 2004

69 CONSOLIDATED FINANCIAL STATEMENTS Assets Liabilities Assets Liabilities Assets Liabilities Deferred tax Actual Actual Pro forma Pro forma Pro forma Pro forma NOK million Property, Plant & Equipment 1,868 (1,912) 1,919 (1,984) 1,739 (1,804) Capitalized interest - (26) - (30) - (31) Other non-current assets 56 (26) 47 (16) 41 (27) Inventory valuation 86 (109) 55 (111) 59 (77) Other current assets Accrued expenses, short-term 593 (379) 526 (296) 344 (201) Unrealized exchange (gains) losses 34 (49) Accrued expenses, long-term 109 (66) 77 (50) 83 (41) Pensions 359 (192) 234 (97) 227 (88) Deferred (gains) losses on sales 20 (90) 51 (208) 60 (58) Other non-current liabilities 110 (330) 95 (294) 79 (266) Total tax loss carry forwards ,064 - Subtotal 4,055 (3,179) 3,968 (3,086) 3,723 (2,593) Total valuation allowance (551) - (734) - (977) - Gross deferred tax assets and liabilities 3,504 (3,179) 3,234 (3,086) 2,746 (2,593) Net 1,362 (1,037) 784 (636) 408 (254) Deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries, amounting to NOK 11,566 million, since those earnings are considered to be indefinitely invested. No deferred income taxes have been recognized on undistributed earnings of Norwegian subsidiaries which also can be distributed as tax-free dividends. Deferred income taxes have not been provided on undistributed earnings in foreign non-consolidated investees, amounting to NOK 780 million, which can be distributed as taxfree dividends. At the end of 2004, Yara had tax loss carry forwards of NOK 2,475 million, primarily in Germany, France and Italy. Tax loss carry forward amounts expire as follows: NOK million After Without expiration 1,881 Total tax loss carry forwards 2, Other liquid assets Actual Pro forma Pro forma NOK million Bank time deposits (4-12 months) Inventories Actual Pro forma Pro forma NOK million Finished goods 3,316 3,299 2,795 Work in progress Raw materials 2,346 1,733 1,387 Total inventories 5,814 5,325 4,383 YARA ANNUAL REPORT

70 CONSOLIDATED FINANCIAL STATEMENTS 12 Non-consolidated Investees NOK million Qafco Tringen NHFL Farmland Ballance Carbonor NU3 SQYA Other Total Pro forma 2004 Balance , ,549 Changes in 2004: Investments (sale), net (178) - - (17) (4) (114) Transfers (to) from other investments (12) (12) Yara's share of net income (loss) (3) Amortization and write-down (34) (34) Dividends received by Yara (230) (85) - - (23) - (5) - (41) (385) Foreign currency translation & other (126) (34) (2) (7) 3 (1) (2) (53) (29) (252) Balance , ,558 Actual 2004 Balance ,499 Investments (sale), net (178) - - (17) 12 (98) Transfers (to) from other investments (12) (12) Yara's share of net income (loss) (2) Amortization and write-down (32) (32) Dividends received by Yara - (85) - - (23) - (5) - (30) (143) Foreign currency translation & other (161) (43) (1) (9) (5) (2) (2) (50) (56) (329) Balance , ,558 Specification of Non-consolidated Investees Percentage Investments in Yara's current NOK million, owned by Yara and advances receivable (payable) except ownership (equals voting rights) to investees net with investees Actual Pro forma Actual Pro forma Qafco 25.0 % 1,199 1,121 1,002 (507) (378) (142) Tringen 49.0 % (112) (135) (72) NHFL 50.0 % Farmland Hydro 50.0 % Ballance Agri-Nutrients Carbonor 50.0 % NU % SQYA 49.0 % Others Total 2,558 2,549 2,089 (172) (235) YARA ANNUAL REPORT 2004

71 CONSOLIDATED FINANCIAL STATEMENTS A description of significant investees' business, majority owners and the nature of related party transactions with Yara including sales and purchase amounts (if material) is laid out below. Qatar Fertilizer Company (S.A.Q.), ( Qafco ), owns and operates a fertilizer complex for which Yara provides marketing support and technical assistance. Yara has a 25 % ownership stake in Qafco, the remaining 75 % of Qafco is owned by Industries Qatar, a Doha Stock Market listed company, owned 70 % by Qatar Petroleum and 30 % by the general public. QAFCO 4, a US$470 million project, went on-stream in Yara International ASA and QAFCO have signed a letter of intent (LOI) with Qatar Petroleum for QAFCO 5, creating a platform for the construction of a 1 million tonnes ammonia and 1,1 million tonnes urea plant. Sales from Qafco to Yara amounted to NOK 1,969 million, NOK 1,524 million and NOK 944 million in 2004, 2003 and 2002, respectively. Tringen owns and operates a fertilizer complex for which Yara provides marketing support and technical assistance, regulated by a management and operating agreement. Yara has a 49 % ownership stake in Tringen, the remaining 51 % of Tringen is owned by National Enterprises Limited, which is a public registered Company, in which the Government of Trinidad & Tobago has a majority shareholding. Tringen operates two separate lines for production of Ammonia. Sales from Tringen to Yara amounted to NOK 1,556 million, NOK 1,145 million and NOK 692 million in 2004, 2003 and 2002, respectively. NHFL Erste and NHFL Zweite are German incorporated Companies, based in Rostock. The companies own two ammonia carriers, which are on time charter to Yaraship AS. Yara has a 50 % ownership in the two companies and the remaining 50 % are owned by Reederi F. Laeisz. Sales from NHFL Erste to Yara amounted to NOK 10 million in Yara owns 50 % in Farmland Hydro LP, a former phosphate fertilizer producer in Florida, in the United States. In the fourth quarter 2002, Farmland Hydro LP transferred all its employees and sold all its assets to Cargill Fertilizer Inc. Yara's sales to Farmland Hydro LP amounted to NOK 225 million in Yara has sold its 20.1 % shareholding in Ballance Agri-Nutrients Ltd. in New Zealand to the majority owner Ballance Agri-Nutrients Cooperative. At the same time Yara entered into a supply agreement with Ballance and will continue to supply urea and other fertilizer products to the company. Sales from Yara to Ballance Agri-Nutrients Ltd. amounted to NOK 98 million, NOK 78 million and NOK 72 million in 2004, 2003 and 2002, respectively. Carbonor S.p.A, an Italian incorporated company based in Milan, manages four ships on time-charter contracts with Yara. Yara has a 50 % ownership in Carbonor, the remaining 50 % is owned by Carbofin S.p.A. Sales from Carbonor S.p.A to Yara amounted to NOK 172 million, NOK 200 million and NOK 207 million in 2004, 2003, and 2002, respectively. NU3 owns and operates two specialty fertilizer production facilities, one in the Netherlands and one in Belgium. NU3, which is a 50/50 joint venture between Yara and NutriSi (owned by SQM of Chile and Rotem, an Israeli company), is part of a worldwide alliance between Yara and SQM. NU3 sells specialty fertilizers through the Yara - SQM sales and marketing network. Sales from NU3 to Yara amounted to NOK 239 million, NOK 246 million and NOK 39 million in 2004, 2003 and 2002, respectively. Yara has a 49 % interest in Inversiones SQYA s.a, a Chilean investment company, as part of the strategy to strengthen its specialty fertilizer operations. Through this company and a parallel investment in Pampa Calichera, a listed Chilean company, Yara indirectly owns approximately 6 % of the shares in SQM, a Chilean company with a strong position in nitrate and potassium-based specialty fertilizer products. Sales from SQM to Yara amounted to NOK 625 million, NOK 574 million and NOK 483 million in 2004, 2003 and 2002, respectively. The results of the non-consolidated investees split by segment can be found in Note 06. YARA ANNUAL REPORT

72 CONSOLIDATED FINANCIAL STATEMENTS Non-consolidated investees on a 100 % basis The following table sets forth summarized unaudited financial information of Yara's non-consolidated investees on a 100 % combined basis. Yara's share of these investments, which is specified above, is accounted for using the equity method. Profit and Loss statement, unaudited data NOK million Operating revenues 12,030 9,614 10,302 Operating income 3,168 2,609 1,742 Income before taxes and min. interest 3,083 2, Net income 2,733 2, Yara's share of net income Balance Sheet Data (unaudited) NOK million Non-current assets 8,318 9,211 6,746 Current assets 6,292 6,143 4,371 Assets 14,609 15,354 11,117 Shareholders' equity 8,270 8,582 6,528 Minority interest Non-current liabilities 2,762 3,347 2,335 Current liabilities 2,923 2,767 2,248 Liabilities and shareholders' equity 14,609 15,354 11,117 Yara's investments and advances 2,558 2,549 2, Prepaid pension, investments and other non-current assets Actual Pro forma Pro forma NOK million Prepaid pension (Note 19) Loans to pension fund Other investments at cost Long term VAT receivables Other non-current assets Total prepaid pension, investments and non-current assets 1,151 1, YARA ANNUAL REPORT 2004

73 CONSOLIDATED FINANCIAL STATEMENTS 14 Property, plant and equipment Machinery Plant Pro forma 2004 and under NOK million Land Equipment Buildings construct. Other Total Cost: Cost ,681 3, ,345 Additions at cost ,026 Retirements (7) (365) (59) - - (431) Transfers (299) - - Foreign currency translation (8) (309) (34) (6) - (358) Balance ,828 3, ,583 Depreciation: Balance (14,830) (1,957) (339) (17,126) Depreciation and amortization (983) (124) (37) (1,144) Impairment loss 1) (1) (18) (4) - (23) Additions new companies (40) (2) - (42) Retirements Transfers (2) Foreign currency translation Balance (1) (15,396) (2,025) (376) (17,798) Net Book Value: Balance ) 386 4,851 1, ,219 Balance ) 371 4,432 1, ,786 Machinery Plant Actual 2004 and under NOK million Land Equipment Buildings construct. Other Total Cost: Cost ,815 3, ,580 Additions at cost Retirements (5) (341) (57) - - (402) Transfers (296) - - Foreign currency translation (12) (417) (59) (7) - (494) Balance ,828 3, ,583 Depreciation: Balance (15,108) (1,998) (348) (17,454) Depreciation and amortization (751) (92) (28) (870) Impairment loss 1) (1) (18) (4) - (23) Additions new companies (40) (2) - (42) Retirements Transfers (2) Foreign currency translation Balance (1) (15,396) (2,025) (376) (17,798) Net Book Value: Balance ) 387 4,707 1, ,127 Balance ) 371 4,432 1, ,786 Useful life in years Depreciation % 2-5 % % 1) The fair value of the impaired asset is generally estimated by discounting the expected future cash flows of the individual assets. Impairment is generally indicated as the result of current period cash flow losses, combined with a history of losses, or a significant change in the manner in which the asset is to be used. 2) Includes NOK 31 million related to capital leases for 2004 both actual and pro forma and NOK 26 million for YARA ANNUAL REPORT

74 CONSOLIDATED FINANCIAL STATEMENTS 15 Intangible assets Pro forma 2004 NOK million Goodwill Other Intangibles Total Cost: Cost Additions at cost Retirements (13) (22) (35) Transfers Foreign currency translation (4) (7) (11) Balance Depreciation: Balance (155) (236) (391) Depreciation (4) (35) (39) Impairment loss - (3) (3) Additions new companies - (3) (3) Retirements Transfers Foreign currency translation Balance (143) (248) (390) Net Book value Balance Balance Actual 2004 NOK million Goodwill Other Intangibles Total Cost: Cost Additions at cost Retirements (13) (22) (35) Transfers Foreign currency translation (6) (17) (22) Balance Depreciation: Balance (158) (250) (408) Depreciation (3) (29) (32) Impairment loss - (3) (3) Additions new companies - (3) (3) Retirements Transfers Foreign currency translation Balance (143) (247) (390) Net Book value Balance Balance In addition to intangibles specified in this Note, Other intangible assets include an additional minimum employee retirement liability of NOK 152 million for the year 2004 and NOK 140 million for 2003 (see Note 19). The entire remaining net book value of the goodwill is related to the acquisition of Kaltenbach Thüring SA in The goodwill is amortized over ten years, based on the expected future period of return. Intangible assets are amortized on a straight line basis over their benefit period. Yara policy is to amortize intangible assets up to a 10-year period using an amortization rate of up to 10 % per year. If the value of an intangible asset is deemed to last less than 10 years, a shorter life is used. 72 YARA ANNUAL REPORT 2004

75 CONSOLIDATED FINANCIAL STATEMENTS 16 Bank loans and other interest-bearing short-term debt Weighted Average Interest Rates Actual Pro forma Pro forma NOK million Bank loans and overdraft facilities 6.03 % 8.26 % % Other 8.00 % 8.00 % 8.00 % Total bank loans and other interest bearing short-term debt The short-term debt specified above is primarily local financing arrangements in various emerging markets. As of 31 December 2004, Yara International ASA has unused short-term credit facilities with various banks totalling approximately NOK 590 million. The interest rate for withdrawals under these facilities is based on the interbank interest rate for the relevant currency plus a margin depending on the currency. 17 Other current liabilities Actual Pro forma Pro forma NOK million Accounts payable 4,494 4,378 3,635 Income taxes payable Payroll and value added taxes Accrued liabilities Other liabilities Total other current liabilities 7,238 5,993 4, Long-term interest-bearing debt Weighted Denominated Balance Balance Balance average amounts in NOK in NOK in NOK interest Actual Actual Pro forma Pro forma Amounts in million rates USD 5.8 % 492 2, Total unsecured debenture bonds 2, USD 2.8 % 220 1,328 7,323 7,314 XOF (Ivory Coast) 9.0 % 15, BRL (Brazil) 14.0 % MYR (Malaysia) ZAR (South Africa) 9.0 % VND (Vietnam) 9.3 % 50, Other Total unsecured bank loans 1,586 7,428 7,468 Capital lease obligation Mortgage loans Other long-term debt Total Outstanding long-term debt 4,669 7,518 7,572 Less: Current portion (175) (30) (84) Total long-term debt 4,494 7,488 7,488 YARA ANNUAL REPORT

76 CONSOLIDATED FINANCIAL STATEMENTS As of 31 December 2004, the fair value of long-term debt, including the current portion, is NOK 4,693 million and the carrying value is NOK 4,669 million. Yara bases its funding on a negative pledge structure with the basic funding ranking pari passu. Substantially all unsecured debenture bonds and unsecured bank loan agreements therefore contain provisions restricting the pledging of assets to secure future borrowings. Of the long-term debt at the end of 2004, the USD 492 million bond debt originates from Yara's December bond issue according to 144A/RegulationS including issuance discount and capitalised issuance costs. The other pillar of Yara's long-term funding is committed bank facilities, which are drawn USD 220 million at year end. After regrouping the drawings from two bank facilities in January 2005, one facility will be cancelled while a USD 750 million facility expiring in 2009 will be kept, with an un-drawn part of USD 530 million. The additional minor portion of long-term debt is arranged in emerging markets. Payments on long-term debt fall due as follows: Capital Deben- Bank lease and NOK million tures loans other l.t. loans Total ,213-1,213 Thereafter 2, ,968 Total 2,968 1) 1,586 2) 115 4,669 1) Of which Yara International ASA is responsible for NOK 2,968 million. 2) Of which Yara International ASA is responsible for NOK 1,328 million. 19 Employee retirement plans Yara International ASA and many of its subsidiaries have defined benefit retirement plans that cover substantially all of their employees. Plan benefits are generally based on years of service and final salary levels. Some subsidiaries have defined contribution or multi-employer plans. Employee Retirement Plans With respect to employee retirement plans, as of 31 December 2004, the projected benefit obligations ("PBO") associated with Yara's defined benefit plans was NOK 5,996 million and the fair value of pension plan assets was NOK 4,444 million, resulting in a net unfunded obligation for such plans of NOK 1,552 million. In addition, termination benefit obligations and other pension obligations amounted to NOK 234 million, leaving the net unfunded pension obligations at a total of NOK 1,786 million. Net accrued pension liability was NOK 1,246 including additional minimum liabilities of NOK 667 million. Recognized liability with profit and loss statement effect is therefore NOK 579 million. Unrecognized net loss and prior service costs were NOK 1,208 as of 31 December 2004, of which NOK 693 (approximately NOK 485 after tax) is not recognized in equity. Yara's net pension cost for 2004 amounted to NOK 431 million. The discount rate that Yara utilizes for determining pension obligations and pension cost is based on the yield on a portfolio of long-term corporate bonds that receive one of the two highest ratings given by a recognized rating agency. Yield on state bonds are used in countries without a deep market for such corporate bonds. Yara provides defined benefit plans in several countries and in various economic environments that will effect the actual discount rate applied. Approximately one-fifth of Yara's projected benefit obligation relates to Norway. The weighted average discount rate applied as of 31 December 2004 was 5.1 %. Normal assumptions for demographical and retirement factors have been used by the actuaries when calculating the obligation. 74 YARA ANNUAL REPORT 2004

77 CONSOLIDATED FINANCIAL STATEMENTS Net periodic pension cost Actual Pro forma Pro forma Pro forma NOK million Defined benefit plans: Benefits earned during the year, net of participants' contributions Interest cost on prior period benefit obligation Expected return on plan assets (182) (238) (194) (216) Recognized net (gain) loss Amortization of prior service cost Amortization of net transition (asset) obligation (17) Curtailment (gain) loss Net periodic pension cost Defined contribution plans Multiemployer plans Termination benefits and other Total net periodic pension cost Change in the additional minimum pension liability included within other comprehensive income (34) 341 Change in projected benefit obligation (PBO) Pro forma 1) Pro forma Pro forma NOK million Projected benefit obligation at beginning of year (5,776) (4,290) (4,456) Benefits earned during the year (172) (120) (91) Interest cost on prior period benefit obligation (300) (266) (249) Actuarial gain (loss) 3 (316) (72) Plan amendments (46) (3) 7 Benefits paid Curtailment gain (loss) - - (1) Settlements Special termination benefits - - (37) Divestments Inclusion of plans deemed immaterial in prior period (27) (612) - Translation 95 (390) 423 Projected benefit obligation at end of year (5,996) (5,776) (4,290) 1) Pro forma, except for the actual obligation as of 31 December Change in pension plan assets Pro forma 2) Pro forma Pro forma NOK million Fair value of plan assets at beginning of year 4,049 3,005 3,746 Actual return on plan assets (290) Company contributions Plan participants' contributions Benefits paid (184) (181) (156) Divestments - - (9) Inclusion of plans deemed immaterial in prior period Translation (71) 276 (363) Fair value of plan assets at end of year 4,444 4,049 3,005 2) Pro forma, except for the value as of 31 December YARA ANNUAL REPORT

78 CONSOLIDATED FINANCIAL STATEMENTS Status of pension plans reconciled to balance sheet Actual Pro forma Pro forma NOK million Defined benefit plans: Funded status of the plans at end of year (1,552) (1,727) (1,285) Unrecognized (gain) loss 953 1, Unrecognized prior service cost (credit) Unrecognized net transition (asset) obligation (1) 1 2 Net accrued pension liability recognized with profit and loss statement effect (345) (367) (80) Termination benefits and other (234) (275) (405) Total net accrued pension liability recognized with profit and loss statement effect (579) (642) (485) Amounts recognized in the balance sheet consist of: Prepaid pension cost Accrued pension liability (1,846) (1,760) (1,530) Intangible asset Accumulated amount booked to equity Net amount recognized (579) (642) (486) Weighted-average assumptions at end of year (PBO): Actual Pro forma Pro forma Discount rate 5.1 % 5.5 % 6.0 % Expected return on plan assets 5.6 % 6.1 % 6.5 % Rate of compensation increase 2.6 % 3.1 % 3.2 % Weighted-average assumptions at beginning of year (NPPC): Pro forma Pro forma Pro forma Discount rate 5.2 % 5.8 % 6.0 % Expected return on plan assets 5.8 % 6.5 % 6.5 % Rate of compensation increase 2.6 % 3.1 % 3.2 % Plans in which ABO exceed Plan Assets: Actual Pro forma Pro forma Projected Benefit Obligation (PBO) (3,921) (4,910) (4,158) Accumulated Benefit Obligation (ABO) (3,451) (4,358) (3,736) Fair Value of Plan Assets 2,407 3,278 2,885 Investment profile of plan assets 1) Actual 2004 Equity instruments 41 % Bonds and other interest bearing instruments 54 % Cash and cash equivalentes 5 % 1) Pro forma figures for 2003 and 2002 are not presented due to the demerger. Actual figures are based upon investment profile as of 31 December YARA ANNUAL REPORT 2004

79 CONSOLIDATED FINANCIAL STATEMENTS 20 Contingencies and other long-term liabilities Actual Pro forma Pro forma NOK million Post-retirement benefits other than pension Investment grants Accruals for environmental clean-up Accruals for plant maintenance shut-down Other Total Yara s future cost for environmental clean-up depends on a number of uncertain factors, such as the extent and type of remediations required. Due to uncertainties inherent in the estimation process, it is possible that such estimates could be revised in the near term. In addition, conditions which could require future expenditures may be determined to exist for various sites, including Yara's major production facilities and product storage terminals. The amount of such future costs cannot be determined due to the unknown timing and extent of corrective actions that may be required. As of 31 December 2004, Yara had accrued NOK million 96 million, whereof NOK 72 million was classified as long term, for corrective environmental measures. The corresponding expense was NOK 8 million in 2004 compared with NOK 22 million and NOK 25 million in 2003 and 2002, respectively. Yara's operations are subject to environmental laws and regulations. These laws and regulations are subject to change, and such changes may require that the company make investments and/or incur costs to meet more stringent emissions standards or to take remedial actions related to e.g. soil contamination. Yara is party to lawsuits in various jurisdictions arising out of the conduct of its business. None of these lawsuits, individually or in aggregate, is anticipated to have a material adverse effect on Yara. 21 Secured debt and guarantees Actual Pro forma Pro forma NOK million Amount of secured debt Assets used as security: Machinery and equipment, etc Buildings and structural plant Other Total Guarantees (off-balance sheet): Contingency for discounted bills Guarantees of debt Non-Financial guarantees: Commercial guarantees 1,826 1, Public guarantees Total 2,987 2,197 1,070 Guarantees of debt include parent company guarantees issued on behalf of non-consolidated investees and third party companies covering external credit facilities in the name of non-consolidated investees and third party companies. Yara could be required to perform in the event of a default by the entity guaranteed. Guarantees issued on behalf of consolidates companies are not included since drawings made by these companies are shown as liabilities in the consolidated balance sheet, and Yara s obligations under such guarantees are limited to the amounts drawn at any time. Non-financial guarantees consist of commercial guarantees related to contractual obligations (Bid Bonds, Performance Guarantees and Payment Guarantees) and various mandatory public guarantees (Customs Guarantees, Receivable VAT Guarantees) recorded as off-balance sheet liabilities. These guarantees are issued on behalf of Yara International ASA, its subsidiaries and non-consolidated investees. The guarantor could be required to perform in the event of a default of a commercial contract or non-compliance with public authority regulations. NOK 1,671 million of the non-financial, offbalance sheet guarantees are issued as parent company guarantees. Guarantees issued to public authorities covering tax and VAT liabilities are not included as these obligations are already included in the consolidated balance sheet. YARA ANNUAL REPORT

80 CONSOLIDATED FINANCIAL STATEMENTS Contingent liabilities related to the demerger from Norsk Hydro ASA Under the Norwegian Public Limited Companies Act, Yara may be contingently liable for obligations established by Norsk Hydro ASA prior to the demerger, unless the right to enforce against Yara any rights to payments (or other rights) has been specifically waived by the party holding the right. The process of obtaining such waivers has been ongoing throughout the year and will continue in At the end of 2004, Yara remains contingently liable for approximately NOK 0.5 billion of Hydro's external loans and debt securities. Of that total, approximately NOK 0.3 billion matures in 2005 and NOK 0.2 billion in The amount of outstanding guarantees for which Yara remains contingently liable is approximately NOK 3.8 billion, while the remaining liability for Hydro's debt to its subsidiaries is approximately NOK 0.2 billion. Hydro also has unfunded pension liabilities. To the extent such liabilities have accrued prior to the consummation of the demerger, Yara is contingently liable for such liabilities as a matter of the joint and several liability provided by Norwegian law. Hydro's unfunded pension liabilities, calculated in accordance with Norwegian GAAP and US GAAP, amounted to approximately NOK 2 billion as of 31 December Contractual and other commitments for future investments and operations 31 December 2004: Investments NOK million 2005 Thereafter Total Contract commitments for investments in property, plant and equipment Additional authorized future investments in property, plant and equipment Contract commitments for other future investments 3-3 Total Additional authorized future investments include projects formally approved for development by the Board of Directors or management given the authority to approve such investments. General investment budgets are excluded from these amounts. Yara has entered into take-or-pay and long-term contracts providing for future payments to transportation capacity, processing services, raw materials and electricity. In addition, Yara has entered into long-term sales commitments, mainly related to the sale of formates. Non-cancellable future obligations as of 31 December 2004 are as follows: Take-or-pay and Long-term contracts 1) Sale Transport Raw Energy commit- NOK million and Other materials related ments (683) (642) (515) (439) (347) Thereafter (886) Total (3,511) 1) The amounts are calculated based on minimum contracted quantities and market prices as of 31 December Total purchases under take-or-pay agreements and long-term contracts were as follows (in NOK million): 2004 (954); 2003 (2,740) and 2002 (1,446). 78 YARA ANNUAL REPORT 2004

81 CONSOLIDATED FINANCIAL STATEMENTS 23 Derivative instruments and risk management Risk Management Policies Risk Management in Yara is based on the principle that risk evaluation is an integral part of all business activities. Yara has established procedures for monitoring the primary risk exposures and for assessing appropriate risk levels. Based on overall evaluations of risk, Yara may use derivative instruments to reduce risk exposures. The primary derivative instruments that Yara uses to manage main market risks are forward contracts, options and swaps. Yara's positions and business model provide natural hedges. The most important of these is the quality of Yara s production facilities, which ensures its competitive posision. Furthermore, Yara's geographical spread supports a diversified gas supply, reducing the impact of regional price changes, and a reduced exposure to the inherent seasonality of the fertilizer business. Yara's substantial sales of differentiated products, comprising speciality fertilizers and industrial products, also contribute to more stable margins for the business as a whole. Finally, a certain correlation between energy prices and fertilizer prices reduces the volatility of Yara's results. Main elements of the funding strategy are to secure long term-debt and to base the funding of Yara on diversified capital sources to avoid dependency on single markets. Yara aims at an even debt repayment schedule and has secured committed un-drawn credit facilities to provide financial flexibility. Commodity Price Risks A major portion of Yara's operating revenues are derived from the sale of ammonia, urea, and other fertilizers that may generally be classified as commodities. Yara also purchases natural gas, electricity and other commodities. The prices of these commodities can be volatile and may create fluctuations in Yara's earnings. To manage this risk, Yara's financial policy prioritizes maintaining a low debt/equity ratio and maintaining liquidity reserves. Yara utilizes derivative instruments to manage certain price risk exposures and also for some position taking within the limits established by the risk management policies. As of 31 December 2004, Yara had no derivative contracts to manage the commodity price risk exposure. Foreign Currency Exchange Rate Risk The prices of Yara's most important products are either directly denominated or determined in US dollars. Also in markets outside the US, local prices will generally adjust to fluctuations in the US dollar exchange rate, albeit with a certain time lag. The prices of Yara's raw materials, such as natural gas used in the production of ammonia, are also either denominated in US dollars or highly correlated to changes in the US dollar exchange rate. In order to hedge Yara's long-term exposure to fluctuations in the US dollar exchange rate, Yara incurs most of its debt in US dollars. A certain portion of the total debt is, however, kept in various local currencies to finance local currency-exposed business positions. Yara utilizes derivative instruments to manage foreign currency exchange rate risks by adjusting the composition of the debt portfolio to changes in Yara's overall risk exposure. Derivative instruments are also utilized to manage foreign currency exchange rate risk related to forecasted purchases and sales or to offset short-term liquidity needs in one currency with surplus liquidity in another currency. Such forward contracts are not designated as hedging instruments for accounting purposes. Changes in fair value are therefore recognized in the Profit and Loss statement. YARA ANNUAL REPORT

82 CONSOLIDATED FINANCIAL STATEMENTS The following forward currency contracts were outstanding as of 31 December 2004: Amounts in million Buying Notional Selling Notional NOK currency amount currency amount Maturity value AUD 1 NOK CAD 3 NOK CZK 47 EUR EUR 51 GBP EUR 67 NOK EUR 2 PLN EUR 43 SEK (1) EUR 156 USD GBP 2 CAD GBP 5 EUR (3) GBP 8 USD NOK 200 DKK (2) NOK 9 SEK NOK 360 USD SGD 3 USD THB 156 USD USD 15 CAD USD 52 EUR (9) USD 6 GBP USD 31 NOK (5) USD 18 NZD USD 3 SEK (1) USD 78 THB 3, (23) USD 13 BRL (13) USD 52 ZAR (43) USD 8 COP 19, (5) USD 6 BRL (5) Fair value of currency forwards recorded on the balance sheet as of 31 December 2004: NOK million Actual Pro forma Pro forma Currency forwards Assets Liabilities (114) (35) (48) Interest Rate Risk Yara is exposed to fair value risk and cash flow risk from its debt portfolio as disclosed in Note 18 Long-Term Debt. Yara aims to secure a significant part of its debt at fixed interest rates. In 2004, this was achieved by entering into an interest rate swap prior to the bond issue (see the following paragraph for further details) and thereafter by keeping the majority of the USD 500 million bond issue as fixed. Yara may utilize derivative instruments to manage the interest risk. Financial derivatives designated as hedge instruments are presented below. Cash flow hedge - interest swap In 2004, Yara used interest rate swaps to hedge the future cash flows of USD 300 million of the December bond issue. The after-tax result of this hedge was a loss of NOK 81 million, of which NOK 4 million have been reclassified into expenses. The remaining NOK 76 million have been booked to equity per 31 December 2004 and will be reclassified into expenses over the duration of the bond (due in 2014). 80 YARA ANNUAL REPORT 2004

83 CONSOLIDATED FINANCIAL STATEMENTS Fair value hedge - interest swap After the December bond issue, Yara entered into an interest rate swap to convert USD 100 million of the bond from fixed to floating interest rate. The fair value of this contract at 31 December 2004 was NOK 6 million. Credit Risk Yara has a well-established system for credit management with established limit at both customer and country level. Yara s geographically diversified portfolio reduces the overall credit risk of the company. Credit risk arising from the inability of the counter-party to meet the terms of Yara's derivative financial instrument contracts is generally limited to amounts, if any, by which the counter-party's obligations exceed Yara's obligations. Yara's policy will be to enter into derivative financial instruments with various international banks with established limits for transactions with each institution. Therefore, Yara does not expect to incur material credit losses on derivative financial instruments. Liquidity Risk Yara generates a positive net cash flow from operations and has, in addition, access to committed long-term credit lines that can be used to meet future obligations. 24 External audit remuneration Deloitte Statsautoriserte Revisorer AS (Deloitte) is Yara's principal auditor. Ernst & Young and other firms are the auditors of certain parts of the companies international activities. The following table shows total audit and non-audit fees for the fiscal year Actual 2004, Pro forma 2004, Pro forma 2003 and Pro forma Audit Other related non-audit NOK thousand Audit fee services Tax fee services Total Deloitte Norway 2,393 1, ,222 Deloitte Abroad 8,144 1,205 1, ,087 Total Deloitte 10,537 3,034 1, ,309 Ernst & Young 2, ,926 Others ,058 2,593 Actual fees ,518 3,480 3,520 1,310 21,828 Deloitte Norway 3,190 2, ,630 Deloitte Abroad 10,859 1,606 2, ,783 Total Deloitte 14,049 4,046 2, ,412 Ernst & Young 3, , ,235 Others ,221 1,411 3,457 Pro forma fees ,024 4,640 4,693 1,746 29,104 Deloitte Norway 1, ,491 Deloitte Abroad 12,095 1, ,147 15,482 Total Deloitte 13,545 1, ,151 16,973 Ernst & Young 3, ,814 Others ,407 Pro forma fees ,963 2,660 1,888 1,683 23,194 Deloitte Norway 1, ,000 Deloitte Abroad 9, ,995 Total Deloitte 11,399 1, ,995 Ernst & Young 3, ,767 Others Pro forma fees ,959 1, ,762 YARA ANNUAL REPORT

84 CONSOLIDATED FINANCIAL STATEMENTS 25 Related parties The Norwegian State owned as of 31 December 2004, 115,674,848 ordinary shares, representing 36.2 % of the total number of ordinary shares issued. There are no different voting rights associated with the ordinary shares held by the State. Transactions with non-consolidated investees are described in Note 12 - Non-Consolidated Investees. Members of the board of directors are elected for two-year terms. Their rights and obligations as board members are solely and specifically described in the company's articles of association and by Norwegian law. The company has no significant contracts in which a board member has a material interest. The number of shares owned by the members of the Board as of 31 December 2004 are: Number of shares Øyvind Lund 6,000 Åse Aulie Michelet 3,600 Lone Fønss Schrøder 1) 2,800 Jørgen Ole Haslestad 2) Leiv L. Nergaard 3) 36,923 Arthur Frank Bakke 4) 884 Charlotte Dyrkorn Frank Andersen 99 1) Including 2,800 shares owned by Schrøder Consult, a company 100 % owend by Lone Fønss Schrøder. 2) Jørgen Ole Haslestad is Chairman of the Board in US Filter Corporation, which is a customer and collaborating partner of Yara. 3) Including 5,000 shares owned by Leina AS, a company 100 % owned by Leiv L. Nergaard. 4) Yara provides a gurarantee for a loan of NOK 41,900. The number of shares owned by the deputy board members: Number of shares Geir Thorson Solvi 104 Nils-Egel Nilsen Sten Arntzen 2 The Yara management ownership of shares and SIRs as of 31 December 2004: Number of Shares SIRs 1) Thorleif Enger 49, ,000 Daniel Clauw 24, ,000 Hallgeir Storvik 10, ,000 Tor Holba 2, ,000 Sven Ombudstvedt 2, ,000 Terje Bakken 31, ,000 Anne Grethe Dalane 3,133 90,000 Arne Cartridge 2,400 90,000 Kendrick T. Wallace 2) 15, ,000 1) Share Incentive Rights (SIRs). Rights in the share-based incentive program, are based on Yara shares' market performance in relation to an initial share price of NOK per share. Future compensation will be the difference between the actual share price and initial price multiplied by the number of rights in the program. See Note 05. 2) Including 100 ADRs (American Depositary Receipts). 82 YARA ANNUAL REPORT 2004

85 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA YARA INTERNATIONAL ASA PROFIT AND LOSS STATEMENT NOK million Notes Revenues 804 Other income 7 Operating Revenues 811 Raw materials and energy costs 33 Change in inventories of own production (2) Payroll and related costs 2,3 307 Depreciation and amortization 4,5 10 Other Operating expense 1,017 Operating Income (206) Financial income (expense), net Income before tax 164 Income tax expense 8 (88) Net income 75 Appropriation of net income and equity transfers: Dividend proposed Retained earnings (637) Total appropriation 75 YARA ANNUAL REPORT

86 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA YARA INTERNATIONAL ASA BALANCE SHEET NOK million Notes Assets Deferred tax assets 8 95 Other intangible assets 5 27 Intangible assets 122 Property, plant and equipment 4 10 Shares in subsidiaries 9 3,376 Intercompany receivables 4,189 Non-consolidated investees Prepaid pension, investments and other non-current assets 2, Financial non-current assets 7,729 Total non-current assets 7,861 Inventories Accounts receivable, less allowances 28 Intercompany receivables 15,477 Prepaid expenses and other current assets 127 Cash and cash equivalents 391 Total current assets 16,044 Total assets 23, YARA ANNUAL REPORT 2004

87 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA NOK million Notes Liabilities and shareholders' equity Share capital Treasury shares (5) Premium paid-in capital 3,703 Total paid-in capital 14 4,241 Retained earnings 4,287 - Treasury shares (201) Shareholders' equity 14 8,327 Accrued pension liabilities Other long-term liabilities 30 Long-term liabilities 344 Intercompany payables 375 Long-term interest bearing debt 4,176 Long-term debt 4,551 Bank loans and other interest-bearing short-term debt Current portion of long-term debt 121 Dividends payable 712 Intercompany payables 9,302 Other current liabilities 361 Current liabilities 10,683 Total liabilities and shareholders' equity 23,905 Oslo, 18 March 2005 Lone Fønss Schrøder Board member Jørgen Ole Haslestad Board member Åse Aulie Michelet Board member Leiv L. Nergaard Board member Arthur Frank Bakke Board member Charlotte Dyrkorn Board member Frank Andersen Board member Øivind Lund Chairperson Thorleif Enger President and CEO YARA ANNUAL REPORT

88 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA YARA INTERNATIONAL ASA CASH FLOW STATEMENT Actual NOK million Notes Operating activities: Net income 75 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,5 10 Net income of non-consolidated investees 7 15 Dividends received from non-consolidated investees 11 Deferred taxes 8 7 Loss (gain) on foreign currency transactions (101) Other (83) Working capital changes that provided (used) cash: Receivables (741) Inventories (2) Prepaid expenses and other current assets 431 Current liabilities (1,339) Net cash provided by operating activities (1,717) Investing activities: Purchases of property, plant and equipment 4 (5) Purchases of other long-term investments (86) Proceeds from sales of property, plant and equipment 10 Proceeds from capital reduction in subsidiary 200 Proceeds from sales of other long-term investments 1,773 Net cash used in investing activities 1,892 Financing activities: Loan proceeds 9,960 Principal payments (12,228) Purchase of treasury stocks 14 (206) Shareholder contribution 14 2,048 Net cash used in financing activities (426) Demerger Yara effect on cash flows 1) 706 Foreign currency effects on cash flows (65) Net increase (decrease) in cash and cash equivalents 391 Cash and cash equivalents at the start of period - Cash and cash equivalents at the end of period 391 1) Cash received at the demerger from Norsk Hydro ASA as of 25 March YARA ANNUAL REPORT 2004

89 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA YARA INTERNATIONAL ASA NOTES TO THE FINANCIAL STATEMENTS 01 Summary of significant accounting policies The financial statements of Yara International ASA are prepared in accordance with accounting principles generally accepted in Norway (N GAAP). Yara's general accounting principles are presented in Note 01 to the consolidated financial statements. Yara International ASA (initially AgriHold ASA) was established on November 10, 2003, for purposes of acting as the transferee company in the demerger of Hydro Agri from Norsk Hydro. Until the completion of the demerger, there were no subsidiaries or operational activity in Yara International ASA. The financial statements and the Notes to the financial statements in the 2004 Annual Report for Yara International ASA covers the period from the date of establishment, November 10, 2003 to December 31, Shares in subsidiaries and non-consolidated investees are in Yara International ASA's financial statements presented according to the cost method. Group relief received is included in dividends from subsidiaries. For information about risk management in Yara International ASA see Note 23 in Notes to the consolidated financial statements and the Risk Management discussion in the Operating and Financial Review section of this report. The information given in Note 18 in Notes to the consolidated financial statements on payments on long-term debt also applies for Yara International ASA. Yara International ASA provides financing to most of the subsidiary companies in Norway as well as abroad. The information given in Note 18 in Notes to the consolidated financial statements on payments on long-term debt also applies to Yara International ASA. 02 Employee retirement plans Yara International ASA is a part of the Yara Group pension schemes in Norway managed by Yara Pensjonskasse (Yara Pension fund). As of 31 December 2004, the number of active participants was 328 and the number of retirees 29. Further information about the employee retirement plans is given in Note 19 to the consolidated statement. Net periodic pension cost NOK million 2004 Defined benefit plans: Benefits earned during the year, net of participants' contributions 25 Interest cost on prior period benefit obligation 25 Expected return on plan assets (11) Recognized net (gain) loss 12 Amortization of prior service cost 3 Net periodic pension cost 54 Termination benefits and other 22 Total net periodic pension cost 76 Change in projected benefit obligation (PBO) NOK million 2004 Projected benefit obligation demerger Yara 25 March 2004 (687) Benefits earned during the year (25) Interest cost on prior period benefit obligation (25) Actuarial gain (loss) 39 Benefits paid 5 Projected benefit obligation at end of year (694) YARA ANNUAL REPORT

90 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA Change in pension plan assets NOK million 2004 Fair value of plan assets at 25 March Actual return on plan assets 9 Company contributions 20 Benefits paid (2) Fair value of plan assets at end of year 293 Status of pension plans reconciled to balance sheet NOK million 2004 Defined benefit plans: Funded status of the plans at end of year (401) Unrecognized (gain) loss 226 Unrecognized prior service cost (credit) 29 Net prepaid pension (accrued pension liability) recognized (146) Termination benefits and other (103) Total net prepaid pension (accrued pension liability) recognized (249) Amounts recognized in the balance sheet consist of: Prepaid pension cost 65 Accrued pension liability (314) Net amount recognized (249) Weighted-average assumptions at end of year (PBO): 2004 Discount rate 4.5 % Expected return on plan assets 5.5 % Rate of salary increase 2.5 % Rate of pension increase 2.0 % Weighted-average assumptions at beginning of year (NPPC): 2004 Discount rate 5.0 % Expected return on plan assets 6.0 % Rate of salary increase 3.0 % Rate of pension increase 2.5 % Investment profile of plan assets 2004 Equity instruments 27 % Bonds and other interest bearing instruments 67 % Cash and cash equivalents 5 % 88 YARA ANNUAL REPORT 2004

91 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 03 Remunerations and other Remuneration of the board of directors was NOK 1,312,500 in As President and Chief Executive Officer in Yara, Thorleif Enger s salary totalled NOK 2,850,000 for the period from 25 March to 31 December 2004, and other benefits totalled NOK 109,000. On an annual basis this equals NOK 3,800,000 and NOK 145,000, respectively. In addition, Thorleif Enger received a bonus in 2004 totalled NOK 3,000,000 in connection with the separation and listing of Yara, and he is entitled to a performance-based bonus for 2004 of up to 50 % of his base salary. The CEO is entitled to retire at 62 years of age with a pension benefit representing 70 % of his salary from the age 62 to 65, and 65 % of his salary thereafter. There is a mutual understanding between Thorleif Enger and the Board of Directors to prolong his position as CEO beyond the age of 62. Benefits earned during 2004 totalled NOK 1,044,000. On 18 June 2004, the Board approved a compensation program based on three incentive concepts. This is the basic bonus scheme, the performance-related pay for senior managers and the share incentive program for senior management. The basis for all three incentive concepts is that the company shows a positive development. The basic bonus scheme is triggered by the achievements of organizational units and teams. It is implemented and adapted with consideration of differing national practices and developed in close cooperation with local employee representatives. For senior managers a performance-related pay is established. Awards for this level can be from one to six months salary depending on management position and national practices. The bonus will be based on criteria similar to the basic bonus scheme, but with stronger emphasis on individual performance. For 2004, approximately 40 managers with substantial performance responsibility will have a bonus potential exceeding one month's salary. For the management group, the Chief Executive Officer and Chief Operating Officer are entitled to a maximum of six months salary, the Segment Heads, the Chief Financial Officer and Chief Legal Officer 3 months, and the Heads of HR and Communication 2 months salary. Twenty percent of any gross bonus payment for senior managers must be used to buy Yara shares in the market with a one-year lock-up period. A share incentive program is introduced for the senior management group - nine persons - based on the Yara share market performance. Refer to Note 05 to the consolidated financial statements for a description of the program. Partners and employees of Yara's independent auditors, Deloitte Statsautoriserte Revisorer AS, own no shares in Yara International ASA, or in any of its subsidiaries. For the parent company, Yara International ASA the audit fees in 2004 to Deloitte Statautoriserte Revisorer AS for ordinary audit was NOK 2,205,000. For the Norwegian subsidiaries, the fees in 2004 was NOK 985,000. Deloitte Consulting AS and Deloitte Advokatfirma DA, affiliate companies of Deloitte Statsautoriserte Revisorer AS in Norway, have provided no service to Yara during Fees to audit-related services were NOK 2,354, 000 for Yara International ASA, and NOK 86,000 for Norwegian subsidiaries. As of 31 December 2004 the number of employees in Yara International ASA was 272. The costs for these employees are: Actual NOK million Payroll and related costs: Salaries 235 Social security costs 29 Social benefits 7 Net periodic pension costs 76 Internal invoicing of payroll related costs (39) Sum 307 External commercial banks provide the Norwegian employees with a range of banking services, including unsecured personal loans at favorable rates of interest. Yara does not compensate the banks for these services. In connection with the replacement of transferred employee loans related to the demerger from Hydro, Yara provides a guarantee for all such loans as well as of new unsecured loans by the banks to the Norwegian employees. For most such employees, the amount guaranteed will not exceed NOK 100,000. For a very limited number of employees, the guaranteed amount may be increased to NOK 540,000. As of 31 December 2004, there were 159 such loans outstanding with an average balance of NOK 49,000. There were also 28 loans to more senior employees outside the Yara management with an average balance of NOK 156,000. The aggregate balance of all of the outstanding loans for which Yara are providing a guarantee is approximately NOK 12,1 million. YARA ANNUAL REPORT

92 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA The maximum term of any existing loan, or any loan that may be provided under the loan guarantee program, will be seven years. Most of the currently outstanding loans are for a shorter term. Yara managements ownership of shares and SIRs as of 31 December 2004: Number of shares SIRs 1) Thorleif Enger 49, ,000 Daniel Clauw 24, ,000 Hallgeir Storvik 10, ,000 Tor Holba 2, ,000 Sven Ombudstvedt 2, ,000 Terje Bakken 31, ,000 Anne Grethe Dalane 3,133 90,000 Arne Cartridge 2,400 90,000 Kendrick T. Wallace 2) 15, ,000 1) See Note 25 to Consolidated Financial Statements. 2) Including 100 ADRs The board of directors ownership of shares as of 31 December 2004: Number of shares Øyvind Lund 6,000 Åse Aulie Michelet 3,600 Lone Fønss Schrøder 1) 2,800 Jørgen-Ole Haslestad Leiv L. Nergaard 2) 36,923 Arthur Frank Bakke 3) 884 Charlotte Dyrkorn Frank Andersen 99 1) Including 2,800 shares owned by Schrøder Consult, a company 100 % owned by Lone Fønss Schrøder. 2) Including 5,000 shares owned by Leina AS, a company 100 % owned by Leiv L. Nergaard. 3) Yara provides a guarantee for a loan of NOK 41,900. The deputy board members ownership of shares as of 31 December 2004: Number of shares Geir Thorson Solvi 104 Nils-Egel Nilsen Sten Arntzen 2 04 Property, plant and equipment Machinery and Plant under NOK million Equipment Buildings construct. Other Total Cost: Cost Additions at demerger Yara 25 March Additions at cost Retirements (14) (14) Accumulated depreciation (23) (1) - - (24) Balance Depreciation in 2004 (2) (2) Useful life in years Depreciation 5-25 % 2-5 % % 90 YARA ANNUAL REPORT 2004

93 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 05 Intangible assets NOK million Other Intangibles Cost: Cost Additions at cost 35 Balance Depreciation: Balance Depreciation (8) Balance (8) Net Book value: Balance Balance Intangible assets are amortized on a straight-line basis over their benefit period. Yara policy is to amortize intangible assets up to a 10-year period using an amortization rate up to 10 % per year. If the value of an intangible asset is deemed to last less than 10 years, a shorter life is used. 06 Other NOK million Selling and administrative expense. 576 Rental and leasing 24 Travel expense 63 Other 6 Total Financial income and expense NOK million Dividends from subsidiaries including group relief 183 Non-consolidated investees 11 Write down shares 0-20 % (27) Interest from group companies 403 Other interest income 21 Interest paid to group companies (138) Other interest expense (95) Other financial income (expense) net 13 Financial income (expense), net 370 YARA ANNUAL REPORT

94 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 08 Income taxes Actual NOK million Current tax expense 81 Deferred tax expense 7 Income tax expense 88 Reconciliation of nominal statutory tax rate to effective tax rate NOK million Income before taxes 164 Expected income taxes at statutory tax rate 46 Non-deductible expenses 1 Dividend exclusion (8) Tax effect of income before tax Other, net (44) Income tax expense 88 Temporary differences Deferred tax Deferred tax NOK million ) Short-term items 4 2 Accrued expenses, long-term 19 7 Prepaid pension (18) (20) Pension liabilities Other long-term 2 33 Deferred tax assets ) For tax purposes, the demerger from Norsk Hydro ASA was effective 1st of January, Deferred tax assets are entered based on future earnings. Deferred income taxes, amounting to NOK 846 million, have not been provided for undistributed earnings of foreign subsidiaries, since those earnings are considered to be indefinitely invested. No deferred income taxes have been recognized on undistributed earnings of Norwegian subsidiaries and non-consolidated investees since such earnings can be distributed to the parent company as tax-free dividends. 92 YARA ANNUAL REPORT 2004

95 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 09 Shares in subsidiaries Total share Book value Percentage of capital of the Company name: shares owned company (1,000's) (NOK 1,000's) Subsidiaries owned by Yara International ASA Yara Russia AS 100 NOK 3,750 3,750 Yara Industrial AS 100 NOK 15,100 49,416 Ceylon Oxygen Ltd LKR 67,500 18,912 Yara China Ltd. 100 HKD 50 - Yaraship AS 100 NOK 79,800 79,800 Yara Guatemala S.A. 100 GTQ 8,515 24,258 Yara Colombia Ltda. 100 COP 4,842,549 16,749 Hydro Agri Russland AS 50 NOK 21,200 21,200 Yara Argentina S.A. 100 USD 33, ,704 Yaraship Services AS 100 NOK 1,039 1,039 Yara Hellas SA 100 EUR 1,264 7,437 AS Djupvasskaia 100 NOK 1,000 3,523 Yara Norge AS 100 NOK 400,000 1,057,569 Fertilizer Holdings AS 100 NOK 10, ,000 Hydro Agri Rus Ltd 100 RUB 54,158 - Yara North America Inc. 100 USD 1, ,948 Yara Asia Pte Ltd 100 SGD 230,104 1,114,364 Yara IEC AG 100 EUR 131 1,076 Total 3,375,745 Subsidiaries owned by Fertilizer Holding AS Yara Holding Danmark AS 100 DKK Yara Holding Sverige AB 100 SEK 172, ,065 Yara Formates AS 100 NOK 30,000 28,031 Adubos Trevo S.A BRL 90, ,945 Yara Carribean Ltd. 100 USD 59, ,064 Yara UK Ltd 100 GBP 49, ,297 Yara Holding Canada, Inc. 100 CAD 15,000 77,910 Yara Insurance Ltd. 100 EUR 1,000 97,364 Yara Holding Netherlands 100 EUR 19 3,930,828 Yara AS 100 NOK 1,000,000 4,000,000 Total 9,818,058 The foreign currency designation indicates country of domicile. Percentage of shares owned equals percentage of voting shares owned. A number of the above mentioned companies also own shares in other companies as specified in their annual reports. 10 Shares in non-consolidated investees NOK million except ownership Percentage owned Book value Name (equals voting rights) Country at Abonos del Pacifico, S.A % Costa Rica 18 Phosyn Plc % Great Britain 20 Talconor AS % Norway - Total 38 YARA ANNUAL REPORT

96 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 11 Specification of balance sheet items NOK million 2004 Prepaid pension, investments and other non-current assets: Other investments 52 Prepaid pension 65 Other non-current assets 9 Total 126 Inventories: Raw materials 2 Finished goods 18 Total 20 Bank loans and other short-term interest-bearing debt: Bank overdraft (188) Total (188) 12 Guarantees NOK million 2004 Assets used as security: Machinery and equipment, etc. 1 Total 1 Guarantees (off-balance sheet): Guarantees of debt 6 Commercial guarantees 1,826 Public guarantees 991 Total 2,823 Yara International ASA provides guarantees arising in the ordinary course of business including Letters of Credit, Performance Bonds and various payment or financial guarantees. See Note 21 in Notes to the consolidated financial statements for further information about guarantees. Contingent liabilities related to the demerger from Norsk Hydro ASA Under the Norwegian Public Limited Companies Act, Yara International ASA may be contingently liable for obligations established by Norsk Hydro ASA prior to the demerger, unless the right to enforce against Yara any rights to payments (or other rights) has been specifically waived by the party holding the right. The process of obtaining such waivers has been ongoing throughout the year and will continue in At the end of 2004, Yara International ASA remains contingently liable for approximately NOK 0.5 billion of Hydro's external loans and debt securities. Of that total, approximately NOK 0.3 billion matures in 2005 and NOK 0.2 billion in The amount of outstanding guarantees for which Yara International ASA remains contingently liable is approximately NOK 3.8 billion, while the remaining liability for Hydro's debt to its subsidiaries is approximately NOK 0.2 billion. Hydro also has unfunded pension liabilities. To the extent such liabilities have accrued prior to the consummation of the demerger, Yara International ASA is contingently liable for such liabilities as a matter of the joint and several liability provided by Norwegian law. Hydro's unfunded pension liabilities, calculated in accordance with Norwegian GAAP and US GAAP, amounted to approximately NOK 2 billion as of 31 December YARA ANNUAL REPORT 2004

97 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 13 Derivative instruments and risk management Risk management in Yara and the use of derivative instruments are described in Note 23 to the consolidated statement. Yara International ASA has the following outstanding forward currency contracts as of 31 December 2004: Amounts in million Buying Notional Selling Notional Maturity NOK currency amounts currency amounts date value AUD 1 NOK CAD 3 NOK CZK 47 EUR EUR 51 GBP EUR 67 NOK EUR 2 PLN EUR 43 SEK (1) EUR 156 USD GBP 2 CAD GBP 5 EUR (3) GBP 8 USD NOK 200 DKK (2) NOK 9 SEK NOK 360 USD SGD 3 USD THB 156 USD USD 15 CAD USD 52 EUR (9) USD 6 GBP USD 31 NOK (5) USD 18 NZD USD 3 SEK (1) USD 78 THB 3, (23) Fair value of currency forwards recorded on the balance sheet as of 31 December 2004: NOK million Currency forwards 2004 Assets 64 Liabilities (47) YARA ANNUAL REPORT

98 FINANCIAL STATEMENTS YARA INTERNATIONAL ASA 14 Number of shares outstanding, shareholders, equity reconciliation etc. Yara International ASA was established on 10 November The company was established with a share capital of NOK 108,610,470 consisting of 63,888,512 shares at NOK 1.70 per share. As of 31 December 2004 the company has a share capital of NOK 543,052,403 consisting of 319,442,590 ordinary shares at NOK 1.70 per share. As of 31 December 2004 the company had purchased 3,001,400 treasury stocks at a cost of NOK 205,900,164. For further information on these issues see Note 3 to the consolidated financial statement. Shareholders holding one percent or more of the total 316,441,190 shares outstanding as of 31 December 2004 are listed below based on information in the Norwegian securities' registry system (Verdipapirsentralen): Name Number of shares Ministry of Trade and Industry 115,674,848 National Insurance Fund, Norway 13,697,775 State Street Bank 1) 13,083,612 Morgan Stanley & Co 1) 10,214,258 Morgan Guaranty Trust ADR-division 2) 9,346,412 Fidelity Funds-Europe 7,854,500 Fidelity Low-Price Fund 6,857,053 Lehman Brothers Inc. 1) 5,065,300 Capital Research 4,196,800 Vital Forsikring ASA 3,985,053 Euro Pacific Growth Fund (Capital Research) 3,851,605 Morgan Stanley 1) 3,683,892 Bank of New York 1) 3,656,400 1) Client accounts and similar. 2) Representing American Depositary Receipts. Paid in Retained Total share- NOK million capital earnings holder s equity Shareholders equity ,048 2,048 Demerger Yara ,198 5,000 7,198 Net income Dividend proposed (712) (712) Cash flow hedges (77) (77) Purchase of treasury stock (5) (201) (206) Shareholders equity ,241 4,086 8, YARA ANNUAL REPORT 2004

99 AUDITORS REPORT TO THE ANNUAL GENERAL MEETING OF YARA INTERNATIONAL ASA INDEPENDENT AUDITORS' REPORT FOR 2004 We have audited the financial statements of Yara International ASA and its subsidiaries as of 31 December 2004, showing a net income of NOK 75 million for the parent company (for the period 10 November 2003 to 31 December 2004) and a net income of NOK 2,860 million for the group (for the period 25 March 2004 to 31 December 2004). We have also audited the information in the Board of Directors' report concerning the financial statements, the going concern assumption, and the proposal for the allocation of net income. Financial statements comprise the balance sheet, the profit and loss statement, the statement of cash flows, the accompanying Notes and the group accounts. These financial statements, which are presented in accordance with accounting principles generally accepted in Norway, are the responsibility of the Company's Board of Directors and the Company's Chief Executive Officer. Our responsibility is to express an opinion on these financial statements and on certain other information according to the requirements of the Norwegian Act on Auditing and Auditors. Until the completion date of the demerger on 24 March 2004, the Yara business was an integrated business of Norsk Hydro; consequently, as indicated in Note 2 to the consolidated financial statements, the pro forma financial statements of Yara International ASA and its subsidiaries have been based on the carve-out financial statements for the Yara business, derived from the consolidated financial statements and accounting records of Norsk Hydro, and reflect allocations based on management's assumptions, as described in Note 2 to the consolidated financial statements. The objective of the Pro forma financial statements, which comprise the balance sheet, the profit and loss statement, the statement of cash flows, and the accompanying Notes, is to show what the significant effects on the historical financial information might have been had the demerger occurred at an earlier date. However, the pro forma financial statements are not necessarily indicative of the results of operations or related effects on the financial position of Yara International ASA and its subsidiaries that would have been attained had the above-mentioned demerger actually occurred earlier. We have audited the carve-out financial statements for the Yara business, which form the basis for the pro forma financial statements of Yara International ASA and its subsidiaries for the years ending 31 December 2003 and We have audited the carve-out profit and loss statement for the period 1 January 2004 to 25 March 2004 which combined with the actual profit and loss statement for the period 25 March 2004 to 31 December 2004 form the basis for the pro forma profit and loss statement of Yara International ASA and its subsidiaries for the year ending 31 December We have also examined the pro forma adjustments included in the pro forma financial statements for Yara International ASA and its subsidiaries for the years ending 31 December 2004, 2003 and These pro forma financial statements are the responsibility of the Company's Board of Directors and the Company's Chief Executive Officer, and the pro forma adjustments are based upon management's assumptions as described in Note 2 to the consolidated financial statements. Our responsibility is to express an opinion on the pro forma financial statements based on our audits and examination. We conducted our audits of the financial statements in accordance with the Norwegian Act on Auditing and Auditors and auditing standards generally accepted in Norway. Auditing standards generally accepted in Norway require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and auditing standards generally accepted in Norway, an audit also comprises a review of the management of the Company's financial affairs and its accounting and internal control systems. We believe that our audits provide a reasonable basis for our opinion. We conducted our audits of the carve-out financial statements, the inclusion of the pro forma adjustments and the proforma financial statements in accordance with auditing standards generally accepted in Norway. We believe that our audits of the pro forma financial statements provide a reasonable basis for our opinion. In our opinion, the financial statements (pages 47 96) are prepared in accordance with the law and regulations and present fairly, in material respects, the financial position of the Company as of 31 December 2004 and the results of its operations and its cash flows for the period ended 31 December 2004, in accordance with accounting principles generally accepted in Norway; the Company's management has fulfilled its duty to maintain the Company's accounting process in such a proper and well-arranged manner that the accounting process is in accordance with the law and accounting practices generally accepted in Norway; and the information in the Board of Directors' report (pages 30 33) concerning the financial statements, the going concern assumption, and the proposal for allocation of net income is consistent with the financial statements and complies with the law and regulations. In our opinion, management's assumptions provide a reasonable basis for presenting the significant effects directly attributable to the abovementioned demerger, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma financial statements (pages 47 82) reflect the proper application of those adjustments to the audited carveout financial statements as of 31 December 2004, 31 December 2003 and 31 December 2002 and the results of its operations and its cash flows for the three years ended 31 December 2004, in accordance with accounting principles generally accepted in Norway. Oslo, 18 March 2005 Deloitte Statsautoriserte Revisorer AS Ingebret G. Hisdal State Authorized Public Accountant, (Norway) YARA ANNUAL REPORT

100 NON-GAAP MEASURES USE OF NON-GAAP MEASURES In the discussion of operating results, Yara refers to certain non-gaap financial measures including EBITDA and CROGI. Yara s management makes regular use of these measures to evaluate the performance, both in absolute terms and comparatively from period to period. These measures are viewed by management as providing a better understanding both for management and for investors of the underlying operating results of the business segments for the period under evaluation. Yara manages long-term debt and taxes on a group basis. Therefore, net income is discussed only for the Group as a whole. Yara s management model, referred to as Value Based Management, reflects management s focus on cash flow-based performance indicators. EBITDA, which Yara defines as income/(loss) before tax, interest expense, foreign exchange gains/losses, depreciation, amortization and writedowns, is an approximation of cash flow from operating activities before tax and net operating capital changes. EBITDA is a measure that in addition to operating income, also includes interest income, other financial income, and results from non-consolidated investees. It excludes depreciation, writedowns and amortization, as well as amortization of excess values in nonconsolidated investees. Yara s definition of EBITDA may differ from that of other companies. EBITDA should not be considered as an alternative to operating income and income before tax as an indicator of the company s operations in accordance with generally accepted accounting principles. Nor is EBITDA an alternative to cash flow from operating activities in accordance with generally accepted accounting principles. Yara management uses CROGI (Cash Return On Gross Investment) to measure performance. CROGI is defined as gross cash flow, divided by average gross investment and is calculated on a 12-month rolling basis. Gross cash flow is defined as EBITDA less total tax expense, excluding tax on net foreign exchange gains/ losses. Gross Investment is defined as total assets (exclusive of deferred tax assets, cash, cash equivalents and other liquid assets) plus accumulated depreciation and amortization, less all shortterm interest-free liabilities, except deferred tax liabilities. The CROGI definition was slightly revised in second quarter 2004, as cash, cash equivalents and other liquid assets were taken out from gross investments, and total tax was adjusted for tax on net foreign exchange gains/losses. All CROGI figures included in this report were calculated with the revised definitions. In order to track underlying business developments from period to period, Yara s management also uses a variance analysis methodology, developed within the Company ( Variance Analysis ), that involves the extraction of financial information from the accounting system, as well as statistical and other data from internal management information systems. Management considers the estimates produced by the Variance Analysis, and the identification of trends based on such analysis, sufficiently precise to provide useful data to monitor our business. However, these estimates should be understood to be less than an exact quantification of the changes and trends indicated by such analysis. Reconciliation of Operating Income to Gross Cash Flow Pro forma Pro forma Pro forma NOK million Operating Income 3,584 2,751 2,270 Equity in net income of non-consolidated investees Interest Income Net gain on securities (6) 1 1 Dividends from 0-20% companies Earnings before interest expense and tax (EBIT) 4,523 3,503 2,526 Depreciation 1,208 1,147 1,183 Amortisation of excess value of non-consolidated investees Earnings before interest, tax and depr/amort (EBITDA) 5,765 4,671 3,817 Income tax less tax on net foreign exchange gain (-loss) (954) (965) (739) Gross Cash Flow 4,811 3,706 3, YARA ANNUAL REPORT 2004

101 NON-GAAP MEASURES CASH RETURN ON GROSS INVESTMENT YARA Reconciliation of Net Income after minority interest to Gross Cash Flow 2004 Pro forma Pro forma Pro forma NOK million Net Income after minority interest 3,761 2,186 1,894 Minority interest 20 (3) (11) Interest expense and foreign exchange gain/loss 403 (348) 294 Depreciation 1,208 1,147 1,183 Amortization of excess value of non-consolidated investees Tax effect on foreign exchange gain (-loss) Gross Cash Flow 4,811 3,706 3,079 Reconciliation of Total assets to Gross Investments 12 months average Pro forma Pro forma Pro forma NOK million Total assets 27,044 25,159 23,725 Cash and cash equivalents (1,269) (1 043) (718) Other liquid assets (27) (122) (38) Deferred tax assets (1,035) (736) (205) Other current liabilities (6,674) (5 387) (5,734) Accumulated depreciation and amortization 18,080 16,996 16,569 Gross investment 12 months average 36,119 34,866 33,598 Cash Return on Gross Investment (CROGI) Reconciliation of Operating Income to EBITDA Pro forma Pro forma Pro forma NOK million Operating Income 3,584 2,751 2,270 Non-consolidated investees Interest income Selected Financial Items (4) 2 38 EBIT 4,523 3,503 2,526 Depreciation and Amortization 1) 1,242 1,168 1,291 EBITDA 5,765 4,671 3,817 1) Including amortization of excess value in non-consolidated investees. Reconciliation of EBITDA to Income before Tax and Minority Interest Pro forma Pro forma Pro forma NOK million EBITDA Downstream 2,068 1, EBITDA Industrial EBITDA Upstream 3,379 2,249 1,130 EBITDA Other and Eliminations (370) -99 (58) EBITDA Yara 5,765 4,671 3,817 Depreciation (1,208) (1,147) (1,183) Amortization of excess value in non-consolidated investees (34) (21) (108) Interest expense (266) (311) (339) Capitalized interest Net foreign exchange gain(-loss) Other financial income/expense, net (68) (62) (47) Income before tax and minority interest 4,926 3,155 2,820 YARA ANNUAL REPORT

102 IFRS IMPLEMENTATION IMPLEMENTATION OF IFRS Yara International ASA and its subsidiaries currently prepares its consolidated financial statements in accordance with generally accepted accounting principles in Norway (N GAAP). From 1 January 2005 Yara is required to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). For the purpose of presenting comparative financial information, the implementation effects of IFRS will result in a restatement of the balance sheet as of 1 January 2004, except for the effects of IAS 32 and IAS 39, which will be implemented in the balance sheet as of 1 January The implementation effects of IFRS presented below is prepared on the basis of the standards and interpretations that management expects will be in force on 31 December The IFRS standards are subject to an ongoing review process, that may lead to amendments to the accounting standards or to interpretative guidance. The numbers presented must thus be regarded as preliminary. The transition to IFRS will also lead to changes in the classification within the profit & loss and balance sheet statements. Key financial figures will also be impacted. Yara will update the restated financial information for any changes to the standards or interpretative guidance when changes occur. The numbers in the tables are unaudited. Majority share- Net Income after Recorded Currency Majority shareholders equity minority interest directly to translation holders equity Preliminary IFRS implementation effects Proforma 1 Jan equity 2004 effects Dec 2004 NGAAP 9,595 3,761 (1,954) (688) 10,714 IFRS implementation effects: Pensions 1) (1,014) (834) Plant maintenance shut downs 2) 509 (6) (10) 493 Deferred taxes 3) 137 (26) (20) (6) 85 Gain on sale of foreign subsidiaries 4) (26) 26 Goodwill amortisation 5) 4 4 Dividend 6) Stock based compensation 7) (4) (4) IFRS 9,228 3,794 (1,166) (686) 11,170 Implementation of IAS 32 and IAS 39 on 1 January ) (10) IFRS 1 January ,160 Net Income after minority interest Preliminary IFRS implementation effects IFRS Actual 2004 NGAAP 2,854 IFRS implementation effects: Provisions for pensions 1) 68 Plant maintenance shut downs 2) (6) Deferred taxes 3) (20) Gain on sale of foreign subsidiaries 4) (32) Goodwill amortisation 5) 3 Dividend 6) Stock based compensation 7) (4) IFRS 2,864 Implementation of IFRS does not lead to any material changes to the cash flow statements. 1) Yara has decided to use the exemption under IFRS1, which implies that the unrecognised actuarial gains and losses are directly booked to equity in the transition to IFRS. Furthermore, the unconditional part of unrecognised past service costs are recorded directly to equity at the date of implementation. In the future, Yara will present its pension liabilities at fair value in the balance sheet. Actuarial gains and losses are recorded directly to equity. 2) Accruals for major plant maintenance shut downs were recorded under N GAAP. Provisions for plant maintenance shut downs are not permitted under IFRS. Subsequent costs related to plant maintenance shut downs are capitalised if the recognition criterias under IFRS are met, and depreciated over the period to the next planned plant maintenance shut down. 3) The main changes to deferred taxes is explained by changes in temporary differences resulting from other IFRS implementation effects. In addition, deferred taxes related to elimination of profit in inventories are adjusted to reflect the tax rate of the receiving country. 4) Yara has decided to use the exemption under IFRS 1 which allows to reset the cumulative currency translation effects to zero. Gains and losses related to sales of subsidiaries in 2004 have been restated accordingly. 5) Goodwil is not amortised under IFRS, but tested for impairment at least once a year, and written down if impaired. Goodwill amortisation under N GAAP are adjusted for. 6) For NGAAP, dividends proposed at the end of the year which will be paid in the following year are recorded as a reduction to equity and as debt. Under IFRS, dividends are accrued when dividends are declared. 7) For NGAAP, the expense related to the share incentive programme has been calculated based upon the intrinsic value method. Under IFRS, the share incentive programme is recorded at fair value in accordance with IFRS2. 8) Yara has chosen to use the option under IFRS1 to apply IAS 32 and IAS 39 from 1 January The change is related to embedded derivatives, which are recorded at fair value in IFRS. 100 YARA ANNUAL REPORT 2004

103 OPERATIONAL DATA OPERATIONAL DATA Thousand tonnes, except price information Purchase of raw materials 1) Rock phosphate 1,300 1,250 na Potassium 1,550 1,500 na Production of ammonia (NH 3 ) 5,205 4,992 4,908 Yara s own production 4,277 4,132 4,061 Yara s share of non-consolidated investees production 2) Production of fertilizer, excl. bulk blends 13,096 12,655 11,947 Yara s own production 12,260 11,890 11,159 Yara s share of non-consolidated investees production 2) Sales including third-party products 3) 21,900 22,200 22,200 Europe 11,900 11,500 11,100 Outside Europe 10,000 10,700 11,100 Fertilizer prices average monthly calculations USD / tonne Urea fob Prilled Black Sea Ammonia fob Caribbean CAN cif Germany Energy cost (weighted-average US $ / MMBtu) 4) ) Purchased for consumption in Yara plants, including blending in Trevo. 2) Including Qafco (25%), Tringen (49%). 3) Fertilizer materials and associated nitrogen chemicals. 4) Yara consumption, including proportional share of non-consolidated investee companies. YARA ANNUAL REPORT

104 BOARD OF DIRECTORS BOARD OF DIRECTORS ØIVIND LUND - CHAIRMAN OF THE BOARD LONE FØNSS SCHRØDER JØRGEN OLE HASLESTAD ÅSE AULIE MICHELET LEIV L. NERGAARD ARTHUR FRANK BAKKE CHARLOTTE DYRKORN FRANK ANDERSEN 102 YARA ANNUAL REPORT 2004

105 BOARD OF DIRECTORS <<< ØIVIND LUND. Dr. Lund is the President and Country Manager of ABB Holding A.S., Turkey, a company engaged in the business of power and automation technologies. He served as Senior Vice President and Group Function Manager for ABB Asea Brown Boveri Ltd. in Switzerland from 2001 until 2003, and prior to that he was President and Chief Executive Officer of ABB A.S., Norway, from 1998 to Dr. Lund held senior management positions with EB National Transformer AS in Norway, with Tanalec- Arusha Ltd. in Tanzania and with National Industri AS. Dr. Lund holds a Master of Science in Electrical Engineering and a Ph.D. in Electrical Engineering and an Industrial Economist degree from the Norwegian School of Management. Dr. Lund is a member of the Board of Directors of Norske Skog ASA. <<< ÅSE AULIE MICHELET. Ms. Michelet serves as the President of Amersham Health AS now part of GE Healthcare and Executive Vice President Opeations of Amersham Health. Prior to that, she has held various management and executive positions within Nycomed and Nycomed Amersham. Ms. Michelet holds a Master of Science in Pharmacy from the University of Oslo. She is a member of the Boards of Directors of Orkla ASA. <<< CHARLOTTE DYRKORN. Ms. Dyrkorn has been a Hydro employee since She is employed in the accounting department of the Industrial segment in Oslo. She is also the leader of the union in that location and has been in this position for the past two years. She was educated at the Norwegian School of Commerce. <<< LONE FØNSS SCHRØDER. Ms. Schrøder is on the Boards of Directors of a number of public companies and per president of Wallenius Lines. From 1982 through 2002, Ms. Schrøder held various senior management responsibilities with A.P. Møller-Maersk A/S, one of the world s largest shipping and oil companies. Ms. Schrøder holds a master of science in law and economics. She is chairman of Kværner ASA, deputy chairman of Aker Asa, and board member of Vattenfall AB and DSB. <<< LEIV L. NERGAARD. Mr. Nergaard has been an advisor to corporate management of Hydro since mid Prior to that he was the President of Norsk Hydro Germany and Senior Vice President, EU Coordinator, for Hydro from From 1991 until 2002, Mr. Nergaard was Executive Vice President and Chief Financial Officer of Hydro and, prior to that, he held various senior management positions within Hydro from Mr. Nergaard holds a degree in business and economics from the Norwegian Graduate School of Economics and Business Administration. He is a member of the Boards of Directors of Storebrand ASA (Chairman from 2000), Rieber & Søn ASA (Chairman since 2000), Joma Chemicals AS (Chairman since 2004) and Tinfos AS. <<< FRANK ANDERSEN. Mr. Andersen has been a Hydro and Yara employee for 31 years. He has been active in employee union matters at the Glomfjord facility since 1980 and was the second leader of the employees union at Glomfjord from 1994 until 2002, when he was elected leader of the union. He is also a member of the local council on industrial policy. <<< ARTHUR FRANK BAKKE. Mr. Bakke has been a Hydro and Yara employee for 31 years. He has been the local union representative at the Herøya site in Porsgrunn since He is also the Chairperson of the Yara European Work Council that represents the Yara employees in Europe. <<< JØRGEN OLE HASLESTAD. Mr. Haslestad is the Group President of Siemens Industrial Solutions and Services, a Group of Siemens AG, and has held this position since From 1994 until 2001, he held various managing director positions with Siemens AG and its subsidiaries in Asia and in the United States. Before joining Siemens, he was Managing Director of Kongsberg Offshore a.s from 1989 until 1994 and held various management and technical positions with that company beginning Mr. Haslestad received a Master of Science in Mechanical Engineering from NTH, Trondheim, Norway. He is a member of the Board of Directors of Tandberg ASA. YARA ANNUAL REPORT

106 MANAGEMENT AND ORGANISATION MANAGEMENT AND ORGANISATION AC >> DC >> << TB SO >> << TE KW >> AGD >> << HS << TH 104 YARA ANNUAL REPORT 2004