Section
Segment

Managing financial risk

The treasury function is entrusted with analysing, managing and providing information regarding Landsvirkjun’s financial risks. The Company's financial risk is divided into market risk, liquidity risk and counterparty risk. The Company’s market risk consists mainly of three risk categories:

  • Aluminium price risk due to fluctuations in global market price of aluminium
  • Interest rate risk due to the Company's liabilities
  • Foreign exchange risk due to liabilities and cash flow
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Segment

Market risks

Landsvirkjun has been focused on reducing market risk in the last few years. For this purpose, the ratio of USD and fixed interests has been significantly increased.

Efforts have been made to reduce the ratio of aluminium linked revenue and an agreement between Landsvirkjun and Norðurál was renewed during the year. The renewed contract will enter into effect in November 2019 and is linked to the market price of electricity on Nord Pool instead of the aluminium price in the current agreement.

Furthermore, efforts have been made during the year to renew framework contracts for derivatives, so called ISDA agreements, and new derivative agreements are executed without state guarantee. Further efforts will be made in the year 2017 to reduce Landsvirkjun's market risk.

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Segment

Aluminium price risk

The Company is exposed to market risk due to possible aluminium price fluctuations since about one fourth of its income is linked to aluminium prices. Thus, the Company has entered into derivative agreements in order to secure its income base and reduce fluctuations. Such agreements consist in most cases of fixing aluminium price at a certain level. Therefore, the Company can lose income if the aluminium price goes up, but can at the same time guarantee income should aluminium prices come down. Around 50% of 2017 estimated cash flow and 12% of 2018 estimated cash flow has been hedged. At year-end 2016, fair value of the hedges was positive by USD 0.2 million (2015: USD 5.0 million).

The risk related to aluminium prices has reduced significantly and the ratio of revenue linked to aluminium prices has dropped from about 2/3 to about 1/4 of the income since 2009.

Segment
Section
Segment

Interest rate risk

Landsvirkjun faces interest rate risk as the Company has interest bearing assets and liabilities. The Company’s liabilities carry both fixed and floating interest rates and interest rate derivatives and currency swaps are used in order to manage interest rate risk. The Company’s risk consists of a possible increase in floating interest rates on loans which can lead to an increase in finance expenses.

The interest rate risk has decreased significantly in recent years but the ratio of loans with fixed interest rates has increased from 25% to 60% between 2010 and 2016.

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Section
Segment

Foreign exchange risk

Foreign exchange risk is the risk of loss due to unfavourable changes in foreign exchange rates. Landsvirkjun’s foreign exchange risk is due to cash flows, assets and liabilities in addition to all general transactions in other currencies than the functional currency.

Landsvirkjun's functional currency is the USD and a foreign exchange risk therefore arises from the cash flow and open balances in currencies other than the USD. Currency risk due to amortisation and interest payments in EUR over the next years has been limited with derivative agreements.

The Company’s reporting risk related to changes in exchange rate arises mainly due to its liabilities in EUR and ISK which are mainly long‐term loans. The ratio of USD has, since 2010, increased from 35% to 63% in the Company's loan portfolio.

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 mainly in ISK and NOK but foreign exchange risk due to those currencies is limited by reason of 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 due date. Landsvirkjun limits liquidity risk by ensuring that there is sufficient cash at each time in order to be able to meet obligations. In order to keep balance between liabilities and expected revenues an emphasis is placed on securing liquidity in the form of cash and access to revolving credit facilities.

Landsvirkjun has used different types of funding to ensure access to capital and maintain flexible funding possibilities. In past years, financing has mostly taken place through the Company's state guaranteed Euro Medium Term Note Programme (EMTN).

  • At year-end 2016, the balance of loans under the EMTN with state guarantee was USD 1 billion (2015: USD 1.3 billion). The total amount can at maximum be USD 2.5 billion. 
  • At year-end 2016, the balance of loans under the EMTN without state guarantee was USD 115 million (2015: USD 115 million). The total amount can at maximum be USD 1.0 billion.
Segment
Segment

The Company’s risk related to refinancing is reduced with a well spread maturity profile and long loan terms of outstanding loans. Weighted average life of interest bearing liabilities is 5.3 years and the proportion of loans with maturity within 12 months is 10.5%.

Section
Segment

Counterparty risk

Counterparty 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 in relation to the Company’s power contracts, derivative contracts as well as cash and cash equivalents. The amounts involved can be considerably high, but the risk is limited by the Company's requirements for counterparty quality.

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Segment

Supporting documents

You can download the Financial Statements for 2016 in electronic form here. The documents contain the financial statements as a whole in Acrobat (pdf) document and the key figures in an Excel (xls) document. Alternatively, you can download the Annual Report in Acrobat (pdf).