Section
Segment

Financial risk

Segment

The treasury division is entrusted with analysing and managing Landsvirkjun’s risks in order to stabilise operating return by reducing operating fluctuations. In the last few years there have been systematic efforts in order to reduce the Company’s risks. Financial risk is divided into market risk, liquidity risk and counterparty risk. The Company’s market risks are mainly aluminium price risk, interest rate risk and foreign exchange risk.

Section
Segment

Market risk

Aluminium price risk

The Company is exposed to market risk due to possible aluminium price fluctuations as around one third of its income is linked to aluminium prices. The Company has therefore entered into derivative agreements in order to secure its income base and reduce fluctuations. Such agreements consist in most cases of fixing aluminium prices at a certain level. The Company can therefore lose income if the aluminium price increases, but at the same time better cash flow is guaranteed should aluminium price decrease. Treasury division may hedge up to 100% of the aluminium price risk for the next year and proportionally less over the next years but is not limited by minimum hedges. Around 50% of estimated cash flow in 2016 and 5% of estimated cash flow in 2017 has been hedged.

The aluminium price risk has reduced considerably as since the year 2009 the ratio of the Company’s revenues linked to aluminium prices has decreased from 2/3 to 1/3 of revenues.

Section
Segment

Interest rate risk

Landsvirkjun faces interest rate risks as the Company has interest bearing assets and liabilities. The Company’s liabilities carry both fixed and floating interest rates and interest rate derivatives are used in order to manage interest rate risk. The Company’s risk relates to a possible increase in floating interest and an increased interest expense. At year-end 2015 the proportion of loans with floating interest rates was 51% compared to 57% at year-end 2014.

The risk relating to an increase in interest rates has been reduced considerably in the last few years, since the proportion of fixed interest rates has increased from 16% to 49% during the years 2009 to 2015.

Segment
Section
Segment

Foreign exchange risk

Foreign currency risk is the risk of loss due to unfavourable changes in foreign exchange rates. Landsvirkjun’s foreign exchange risk is due to cash flow, assets and liabilities in addition to all general transactions in other currencies than the functional currency. The Company’s functional currency is the USD and therefore foreign exchange risk arises from the cash flow and open balances in currencies other than the USD.

The Company’s reporting risk related to changes in exchange rate arises mainly due to its debts in EUR, which are mainly long-term loans. The ratio of USD in the debt portfolio has increased from 30% to 62% from the year 2009. The graph below shows interest bearing long-term liabilities by currencies without SWAP agreements.

Segment
Segment

The Company’s income is mainly in USD. Other income is in ISK and NOK but foreign exchange risk due to those currencies is limited due to netting in the cash flow in ISK and income in NOK is relatively low.

Section
Segment

Liquidity risk

Liquidity risk consists of risk of losses should the Company not be able to meet its obligations at maturity date. The Company limits liquidity risk with effective liquidity management by ensuring that there is sufficient cash flow at each time in order to  meet the Company’s obligations. The Company’s liquidity balance is monitored and the emphasis is placed on having sufficient cash position and access to Revolving Credit Facilities inorder to limit such risk.

Landsvirkjun has used different types of funding in order to ensure access to capital and maintain flexible funding possibilities. In past years, financing has mostly taken place through a government guaranteed Euro Medium Term Note Programme (EMTN).

  • At year-end 2015, the balance of loans under the EMTN with government guarantee was USD 1.3 billion (2014: USD 1.6 billion). The total amount the Company can borrow under the programme is USD 2.5 billion.
  • At year-end 2015, the balance of loans under the EMTN without government guarantee was USD 115 million (2014: USD 30 million). The total amount the Company can borrow under the programme is USD 1.0 billion.
Segment
Segment

The Company’s risk related to refinancing is reduced with a well organised maturity profile and long loan terms. The weighted average life of the loan portfolio is 5.1 years and the proportion of loans with maturity within 12 months is 11.1%.

Cash flow provided by operating activities, a well organised maturity profile with strong liquidity and access to credit facilities secure the Company’s liquidity at least throughout the year 2017.

Section
Segment

Credit risk

Credit risk is the risk that a counterparty to an agreement does not comply with provisions of the agreement. Landsvirkjun’s counterparty risk arises first and foremost from the Company’s power contracts, derivative contracts and cash and cash equivalents. Though the amounts involved are considerably high, the risk is limited by the Company´s requirements for counterparty quality.

Section
Segment

Appendix

Here you can download Landsvirkjun’s financial statements for the year 2015. This includes Landsvirkjun’s entire Financial Statement in Acrobat (pdf) and key figures in Excel (xls).