Financial risk
Risk management analyses, manages and monitors Landsvirkjun’s risks in order to reduce operating fluctuations. It has been a goal for the last few years to reduce the Company’s risks. Financial risk of Landsvirkjun is divided into market risk, liquidity risk and counterparty risk.
Market risk
The Company’s market risks are mainly aluminium price risk, interest rate risk and foreign exchange risk.
Aluminium price risk
The Company’s exposure to risk due to possible aluminium price fluctuations is substantial as around 30% of Landsvirkjun’s income is linked to the aluminium price. Thus, Landsvirkjun has entered into derivative agreements in order to secure its income base and reduce fluctuations. Around 50% of 2015 estimated cash flow and 20% of 2016 estimated cash flow has been hedged.
The aluminium price risk has diminished considerably as since the year 2009 the ratio of the Company’s revenues linked to aluminium prices has decreased from 51% to 31%.
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 are used in order to manage interest rate risk. Interest bearing financial liabilities with floating interest rates are higher than interest bearing financial assets and therefore, the Company’s risk consists of possible increase in interests and increased interest expenses. At year end 2014 the proportion of loans with floating interest rates was 57% compared to 59% at year end 2013.
The risk relating to higher interest rates has diminished considerably the last few years, since the proportion of fixed interest rates has increased from 16% to 43% during the years 2009 to 2014.
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 flows, 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 a foreign exchange risk arises from the cash flow and open balances in currencies other than the USD.
It is Landsvirkjun’s policy to reduce foreign exchange risk by increasing the weight of USD in the Company’s loan portfolio. This policy has been implemented systematically and the last two years Landsvirkjun has entered into agreements changing loan agreements from EUR to USD for the amount of EUR 190 million. Since 2009 the proportion of USD in the loan portfolio has increased from 30% to 59%.
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. Currency risk due to amortisation and interest payments in EUR over the next years has been limited with derivative agreements.
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 be able to meet the Company’s obligations. In order to limit such risk, the Company’s liquidity balance is monitored and the emphasis is placed on having sufficient cash position and access to Revolving Credit Facilities. At year end 2014, the Company had access to undrawn Revolving Credit Facilities in the amount of USD 200 million but the Company's Revolving Credit Facilities in the amount of ISK 10,500 million had been fully drawn upon.
In order to ensure access to capital and maintain flexible funding possibilities, Landsvirkjun has used different types of funding. In past years, financing has mostly taken place through a state guaranteed Euro Medium Term Note Programme (EMTN).
- At year end 2014, the balance of loans under the EMTN with state guarantee was USD 1.6 billion compared to USD 1.8 billion in 2013. The total amount the Company can borrow under the programme is USD 2.5 billion.
- At year end 2014, the balance of loans under the EMTN without state guarantee was USD 30 million compared to USD 30 million in 2013. The total amount the Company can borrow under the programme is USD 1.0 billion.
The Company’s risk related to refinancing is reduced with an even maturity profile and longer loan terms of outstanding loans. Weighted average life of the loan portfolio is 5.4 years and the proportion of loans with maturity within 12 months is 11.4%.
The Company’s cash and cash equivalents amounted to USD 207 million at year end 2014 compared to USD 288 million in 2013, but when taking into account undrawn credit facilities the Company has access to a total of USD 407 million. Cash flow from operating activities, well organised maturity profile with strong liquidity, and access to credit facilities secure the Company’s liquidity at least throughout the year 2016.
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 due to the Company’s energy contracts and derivatives contracts used for risk management purposes. Though the amounts involved are considerably high, the risk is limited with the Company´s requirements for counterparty quality.
Landsvirkjun has set a benchmark for derivatives which involves that no derivative agreements are made with financial companies that have a lower rating than A- from Standard and Poor’s or a comparable rating from other recognised credit rating agencies. Before entering into energy contracts the financial standing of the relevant companies and their parent companies is thoroughly reviewed, if applicable.
Appendix
Here you can download Landsvirkjun’s financial statements for the year 2014. This includes Landsvirkjun’s entire Financial Statement in Acrobat (pdf) and key figures in Excel (xls).
