Borregaard is the world’s leading company in the field of wood-based speciality chemicals, in addition to holding strong positions in the ingredients, fine chemicals and energy industries. Over more than a century of operations, the company has developed unique expertise and offers a range of increasingly specialised value-added products. Borregaard is an international company and has production plants and sales offices in the main industrial markets.

MAIN EVENTS IN 2006	FOCUS IN 2007
Good profit performance for the lignin and energy businesses. High raw material prices and oil-related costs. Production problems for speciality cellulose in Switzerland. Positive impact from improvement programmes.	Improve profitability for speciality cellulose. Innovation programmes to secure market positions and increase value creation. Continue improvement programmes to compensate for a challenging foreign exchange situation and high timber and energy prices.

Borregaard’s unique competence and long-term focus on wood-based chemicals have positioned the company as the world’s biggest supplier of lignin-based binding and dispersing agents and a global leader in selected segments of the speciality cellulose market. The manufacture of vanillin, yeast products and bio ethanol ensures high utilisation of raw materials and provides a platform for a broader product portfolio, which includes food ingredients. Borregaard also holds attractive positions on the electric power market and as a supplier of fine chemicals for the pharmaceutical industry. The company has production plants and sales offices in most of the important industrial markets in Europe, Asia, America and Africa.

During 2006 Borregaard has carried out acquisitions and entered into long-term agreements to strengthen the company’s positions in strategically important areas. Borregard works systematically to ensure continuous improvement by implementing a broad range of measures aimed at reducing costs and increasing revenues. Borregaard’s business in Sarpsborg (Norway) is implementing a programme to invest NOK 280 million in order to satisfy requirements for a new environmental licence. These investments will be completed in 2007 and will result in a significant reduction in energy consumption.

In March 2006 a discharge of fuel oil occurred at the plant in Sarpsborg and Borregaard was reported to the authorities for the incident. In March 2006, the Norwegian Competition Authority secured evidence from Borregaard in connection with a matter concerning a minor product segment on the Norwegian market, but has not yet reached a conclusion.

RESULTS

Borregaard’s operating revenues for 2006 totalled NOK 4,658 million, which is equivalent to underlying¹ growth of 10 %. Operating profit before amortisation amounted to NOK 366 million, up from NOK 299 million in 2005. This rise in profit is primarily due to significantly better results in the energy and lignin businesses. The Ingredients & Pharma businesses also posted improved results, while the profitability of the speciality cellulose operations was considerably weakened. For Borregaard as a whole, the year was characterised by better market conditions for cellulose, lignin and aroma products, very good profitability for the energy business and positive effects from the improvement programmes. These factors were counteracted by production problems in Switzerland, higher raw material and energy costs and the reduced effect of currency hedges.



On average, exchange rates for the currencies that are most important for Borregaard (USD and EUR) were on a par with 2005, but the effect of earlier currency hedge contracts entered into at favourable exchange rates was significantly reduced. Furthermore, high oil-related costs (energy, freight and certain raw materials) and soaring timber prices put pressure on margins, particularly for speciality cellulose.

SPECIALITY CHEMICALS

Borregaard’s speciality chemicals business is based on utilising the various components in timber as raw materials for highly processed products. The speciality chemicals business consists of Borregaard LignoTech and Borregaard ChemCell.

With production plants in 11 countries, Borregaard LignoTech is the world’s leading supplier of lignin-based binding and dispersing agents. The business area achieved higher profit than in 2005, primarily due to increased sales volumes, higher prices and a better product mix, which offset higher raw material prices and oil-related costs (freight and energy). In 2006 the lignin operations in Vargön, Sweden were wound up after the plant lost its local source of raw materials. However, total capacity was increased through the acquisition of the Brazilian manufacturer, Melbar, and the distribution agreement with Vyborg in Russia. Strong demand, particularly for products for the construction industry, led to a scarcity of lignin raw material and a consequent need to prioritise various products and markets.

Borregaard ChemCell is the leading European supplier of speciality cellulose for chemical applications and a global leader in selected niche markets. The business area has production facilities in Norway and Switzerland. Despite positive contributions from improvement programmes, profit declined significantly in 2006. This can primarily be ascribed to the situation at the Swiss plant, which had technical problems during parts of the year resulting in lower cellulose production and high costs, as well as to sharply rising timber prices. Production in Norway was good. The cellulose market was better in 2006, with higher prices and increased demand in important segments. The business area continued to pursue its policy of specialisation and signed major new contracts for key products. The ethanol business reported higher profit due to high production volumes and good prices.

INGREDIENTS & PHARMA

Borregaard’s Ingredients & Pharma business supplies advanced products that meet high quality and hygiene standards.

Since 1 January 2006 Borregaard has grouped its activities in the food ingredients and selected animal feed segments in a new business area, Borregard Ingredients. This area has its own production plants in Norway and Switzerland and comprises aroma products (vanillin and ethyl vanillin), omega-3 oils and yeast/yeast extracts. Overall profit from the ingredients business was higher than in 2005, particularly in the aroma chemicals segment where sales were higher and prices better. Profitability in the yeast business improved, but remained weak. There is considerable market interest in omega-3 products, but profit in 2006 reflected the high costs incurred during the expansion stage. To ensure growth in its production of omega-3 oils, the company signed a long-term contract for supplies of raw materials, and plans to build a new production plant in Ålesund (Norway).

Borregaard Synthesis is a leading supplier of fine chemicals for X-ray contrast media and other selected niche markets in the pharmaceutical industry. Operating profit was somewhat higher than the year before, primarily because a combination of restructuring effects and favourable market conditions resulted in higher profitability for the diphenol business in Italy. In 2006 the fine chemicals plant in China was sold. The fine chemicals business in Norway reported slightly lower profit due to the higher costs of input factors and lower delivery volumes.

ENERGY

Borregaard Energy’s activities consist of the production and supply of power and trading on the Nordic power market. Production facilities are located in Sarpsborg, Moss and Kvinesdal (Norway). Power supplies are also secured through long-term agreements. In 2006 Borregaard Energy’s own plants produced 502 GWh, compared with 501 GWh in 2005 (normal yearly production 475 GWh), and had total power supplies of 1,444 GWh, compared with 1,457 GWh the year before. At the start of 2006, the business increased its supply of power by 5 GWh by acquiring the minority shareholding in the Mossefossen power plant. The good operating profit achieved in 2006 is ascribable to high sales volumes in the market at good prices and a very positive contribution to profit from financial power trading. For the year as a whole, Borregaard Energy’s own run-of-the-river power plants produced high volumes as a result of heavy precipitation and substantial inflow towards the end of the year. The business area also had a significant contract-based supply of power in 2006. Contract-based volumes will be substantially lower in 2007.

RISK FACTORS

Borregaard is exposed to risk relating to exchange rate fluctuations (particularly USD), and the prices of energy (thermal energy and electric power) and strategic raw materials. Moreover, the types of process industry plants operated by the company naturally entail production risk.

Work on risk assessment was intensified in 2006, particularly with a view to obtaining an overall picture of the risk exposure of the company’s factories in Norway and Switzerland. Work is also in progress on strengthening awareness of commercial risk.

PRODUCTS AND APPLICATIONS

Speciallity chemicals Lignin: Additives, such as flow regulating agents, for use in concrete, textile dyestuffs, ceramics, crop protection chemicals, batteries and oil drilling. Binding agents for animal feed, briquetting and gravel roads. Speciality cellulose: Speciality cellulose for products used in the construction and petroleum industries and in the manufacture of food products, tablets, cosmetics, filters and personal hygiene products, paint, varnish and printing ink. Other cellulose grades are used in textiles, plastics and paper. Bio ethanol (produced by the fermentation of wood sugars): Among other used for technical applications in the pharmaceutical industry, paint, varnish and car care products. Ingredients & Pharma Ingredients: Vanillin products, omega-3 oils and yeast products for use in food products and selected animal feed products. Pharmaceutical products: Intermediates for X-ray contrast media (diagnostic applications) and medicines. Diphenols: Intermediates for aroma chemicals, agrochemicals, photo chemicals and pharmaceutical products and applications. Energy Electric power: Power production and financial trading in power.

¹ Excluding acquisitions and disposals and currency translation effects.