The objectives of risk management are to analyse, manage, and monitor Landsvirkjun’s risks in order to stabilise operating return by reducing operating fluctuations. 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, interest rate risk and foreign exchange risk.
Aluminium price risk
The Company is exposed to substantial risk due to possible aluminium price fluctuations as around 40% 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. Around 50% of the 2014 estimated cash flow and 25% of 2015 estimated cash flow has been hedged.
Aluminium price risk has reduced significantly since 2009, the proportion of revenue linked to the price of aluminium has decreased from 66% to 40%.
Interest rate risk
Landsvirkjun is exposed to 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 hedge against interest rate risk. Interest bearing financial liabilities are higher than interest bearing financial assets and the Company’s risk therefore consists of a possible increase in interests and increased interest expenses. At year-end 2013, the proportion of loans with floating interest rates was 59% compared to 64% at year-end 2012.
In the past years, interest rate risk has decreased significantly as the proportion of fixed interests has increased from 16% to 41% in the years 2009 to 2013.
Revenues from energy sales
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 payment 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 a foreign exchange risk arises from cash flow and open balance in currencies other than the USD.
Landsvirkjun aims to reduce the foreign exchange risk by increasing the weight of USD in the Company's loan portfolio. In the past two years, Landsvirkjun has been systematically reducing foreign exchange risk and has for that purpose entered into agreements to change the terms of loans from EUR to USD, in the amount of EUR 190 million. Since 2009, the USD proportion in the loan portfolio has increased from 30% to 54%.
Interest bearing long-term debt
The Company’s income flow 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 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 with the Company’s obligations. In order to limit such risk, the Company’s liquidity balance is monitored and emphasis is placed on having a sufficient cash position and access to Revolving Credit Facilities.
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 been facilitated via a Euro Medium Term Note Programme (EMTN). At year-end, the balance of loans under the EMTN was USD 1.82 billion but the total amount that the Company can borrow under the programme is USD 2.5 billion.
In the year 2013, Landsvirkjun signed a new EMTN framework agreement on international bond issue, without state guarantee. The total amount of the framework agreement is USD 1 billion. At year-end, the balance of loans under the EMTN without state guarantee was around USD 30 million.
Debt Maturity Profile
The Company’s risk related to refinancing is reduced with a well distributed maturity profile and long terms of outstanding loans. The weighted average life of the loan portfolio was 6.3 years and the proportion of loans with maturity within 12 months was 6.5%.
In the year 2013, an agreement was reached with the holder of a bond to abolish a provision which granted the holder the annual right to call in the bond. Landsvirkjun had up until then defined the bond as short -term loans, due to the provision but following the change it will be recognised among long term debt. The bond amounts to EUR 50 million and final maturity is in March 2020.
The Company’s cash and cash equivalents amounted to USD 288 million at year-end, 2013 but when taken into account undrawn credit facilities (USD 200 million and ISK 10,500 million) and undrawn long-term loans in the amount of USD 10.7 million the Company has access to a total of USD 590 million. Takeing into consideration cash flow from operation the Company believes that access to liquid assets is ensured until year-end, 2015.
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 entered into for hedging 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 energy contracts are made the financial standing of the relevant companies and their parent companies are thoroughly reviewed, if applicable.
Here you can download the financial statements of Landsvirkjun for the year 2013.