Market risk

Aluminium price risk

The Company is exposed to market risk due to possible aluminium price fluctuations as around a quarter 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 the aluminium price at a certain level. Therefore, the Company can lose income if the aluminium price goes up, but at the same time guarantees income should the aluminium price come down. About 64% of the estimated cash flow of 2018 and 22% of 2019 has been hedged. At year-end 2017, fair value of the hedges was negative by USD 16.1 million (2016: positive USD 0.2 million).

Interest rate risk

Landsvirkjun faces interest rate risk as the Company has interest bearing assets and liabilities. The Company’s interest bearing assets and 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 fair value of interest rate swaps was negative by USD 0.7 million at year end 2017 (2016: negative by USD 3.4 million). The Company’s risk consists of a possible increase in floating interest rates on loans which can lead to an increase in finance expenses.

At year end 2017, the proportion of loans with fixed interest rates including swap agreements was 68% (2016: 60%). At year end 2017, the estimated market value of the Company’s long‐term liabilities was USD 173 million higher than their book value (2016: USD 151 million higher) discounted by the underlying currencies yield curve without spread.

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 flow, assets and liabilities in addition to transactions in other currencies than the functional currency.

Landsvirkjun’s functional currency is the USD and therefore a foreign exchange risk arises from the cash flow and open balances in currencies other than the USD. 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 due to netting in the cash flow in ISK and income in NOK is relatively low. Currency risk due to amortisation and interest payments 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 debt in EUR and ISK which are mainly long‐term loans. The following table shows Landsvirkjun’s open balance in currencies other than the functional currency.

The graph below shows interest bearing long-term liabilities by currencies without SWAP agreements.

Liquidity risk

Liquidity risk consists of risk of losses should the Company not be able to meet its obligations at maturity date. Landsvirkjun limits liquidity risk with effective liquidity management by ensuring that there is sufficient cash at each time in order to be able to meet obligations. In order to maintain the balance between liabilities and expected revenues an emphasis is placed on a secure liquidity position in the form of cash and access to revolving credit facilities.

The Company’s cash and cash equivalents amounted to USD 127 million at year end 2017 (2016: USD 145 million) but when taking into account undrawn short term credit facilities (USD 250 million and ISK 12,000 million) and undrawn long term credit facilities amounting to USD 56 million Landsvirkjun has access to a total of USD 548 million (2016: USD 617 million). Cash flow from operations, well organised maturity profile with strong liquidity, and access to credit facilities secure the Company’s liquidity at least throughout the year 2019.

Credit 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 due to the Company’s energy contracts, derivative contracts and cash and cash equivalent. Though the amounts involved can be considerably high, the risk is limited by the Company´s requirements for take or pay clauses in power agreements and also through requirements for counterparty guarantees. Landsvirkjun requires that counterparties have an investment grade credit rating when it comes to keeping cash and cash equivalents and entering into derivative contracts.