Landsvirkjun Financial Statements 2015 Presentation 22 February 2016 Hordur Arnarson, Chief Executive Officer Rafnar Larusson, Chief Financial Officer
Agenda: Current status Hordur Arnarson, CEO Financial statements 2015 Rafnar Larusson, CFO Outlook Hordur Arnarson, CEO
Current status Hordur Arnarson CEO
Highlights of the year 2015 record volume sold by Landsvirkjun Positive results in a demanding business environment Sold volume (TWh) › Record volume sold, demand consistently increasing 13.9 13.2 13.1 12.9 12.8 12.8 12.5 › Stable revenues and EBITDA despite a demanding market environment › Cash flow covers investments Net debt continues to decrease 2009 2010 2011 2012 2013 2014 2015 › Net debt 2015 decreases by USD 205m from 2014 Net debt below USD 2 billion › First time below USD 2,000m since 2005 Net debt (m.USD) › Decreased by about USD 840m since 2009 2,824 2,674 2,503 2,436 2,429 2,190 1,985 Landsvirkjun without government guarantee back to investment grade › Standard & Poor‘s: BBB - 2009 2010 2011 2012 2013 2014 2015
Demanding business environment Stable revenues Stable revenues despite declining aluminium prices USD/MT m.USD 3000 436 438 423 421 408 378 Effect of aluminium prices on revenues consistently reduced 2000 › About a third of revenues linked to aluminium prices (2009 about 2/3) 1000 2010 2011 2012 2013 2014 2015 › New contracts and increase in sales not linked to Operating revenues Aluminium Price aluminium prices Decline in market prices Source: Bloomberg Decline in market prices 2015/2010 › Aluminium and metal prices have declined 38% Coal 100 › Other markets have also declined Aluminium 24% › Energy prices, coal, gas and oil Nord Pool 60% › Price of carbon emission LME Index 26% 0 2010 2011 2012 2013 2014 2015
Diverse customer base Wholesale – 20% of Landsvirkjun‘s volume Companies Industry – 80% of Landsvirkjun‘s volume Households Landsvirkjun does not sell directly to households 6
Electricity prices to wholesale and industry Average wholesale price ISK/kWh Prices to wholesale have been stable 4.8 4.7 4.4 4.4 4.2 4.2 4.0 4.0 4.0 3.9 › At 2015 price level, wholesale price is lower than in 4.4 4.3 4.0 3.9 3.6 2006 and 2007 3.4 3.2 3.1 3.0 2.9 › Electricity generation is about 1/3 of end consumer price 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015 Price level Nominal price Average price to industry including transmission USD/MWh Prices to industry have decreased 30.8 29.9 28.7 27.1 26.2 25.7 25.8 25.9 24.5 › Decrease in price of aluminium 19.5 › Norwegian krona depreciation 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 7
Financial statements 2015 Rafnar Larusson CFO
Stable operating results m.USD 438 436 423 421 408 378 345 332 329 321 322 298 Despite a demanding business environment, revenues and expenses have been stable An increase in sold volume has counterbalanced decreased aluminium prices 2010 2011 2012 2013 2014 2015 Operating revenues EBITDA 9
Strong return from core operations + 45% Improvement in core operations has a direct impact on Landsvirkjun’s cash generation › One time revenue recognition of USD 17m in 2014 due to an agreement with Rio Tinto Alcan m.USD 147 Interest payments decreased by USD 18m 131 122 USD between years 106 104 90 › In line with debt reduction 2010 2011 2012 2013 2014 2015 Profit before unrealised financial items 10
Cash utilized for investments and amortisation of loans 109 -77 249 -333 m.USD -11 207 -1 142 Cash and cash eq. Cash flow from Investing New loans Amortisation of Dividends paid to Other changes Cash and cash eq. at 01.01.2015 operating activities long term loans owners at 31.12.2015 activities 11
Cash flow covers investing activities Cash flow from operating activities Investing activities 267 258 Cash flow from operations has been 249 236 234 strong in the last few years 230 Cash flow from operations is about 60% m.USD of revenues 149 123 108 Cash flow from operations covers 88 investing activities 77 › Prerequisite for continuing decrease of 54 debt 2010 2011 2012 2013 2014 2015 % CFO of 61% 61% 58% 61% 53% 59% revenues 12
Net debt below USD 2,000m Significant debt reduction 44.7% Net debt below USD 2,000m for the 33.9% first time since 2005 Government guarantees have been m.USD significantly reduced 2,674 2,503 2,436 2,429 › Debt reduction 2,190 1,985 › New financing without government guarantee Equity ratio 44.7% 2010 2011 2012 2013 2014 2015 › Highest in Landsvirkjun‘s history Net debt Equity ratio 13
Underlying return on equity Return on equity volatile despite stable core Underlying return on equity* Return on equity operations › Caused by fluctuations in unrealised financial items 14.0% 5.7% 4.9% 4.6% 3.7% 4.1% 4.0% Underlying return on equity can be estimated by a 2.3% 1.8% simple approach which is based on profit before 4.9% 4.7% 4.7% 3.3% 1.6% unrealised financial items and after a 36% income tax -2.3% › Underlying return on equity is stable and improving Return on equity should preferably be higher -21.5% 2008 2009 2010 2011 2012 2013 2014 2015 * Based on profit before unrealised financial items and a 36% income tax 14
Key financial ratios improving 9.0x 7.6x Positive trend in key financial ratios 7.4x 7.3x 6.6x › Debt reduction 6.2x › Improving EBITDA 4.6x 3.8x 3.7x Interest coverage has improved in line 3.5x 3.3x 3.1x with debt reduction and lower nominal interest rates 2010 2011 2012 2013 2014 2015 Net debt / EBITDA Interest coverage (EBITDA/net interest expenses) 15
Credit rating upgraded to investment grade AAA AA+ AA Credit rating without government AA- guarantee is upgraded to investment grade: BBB- A+ › Debt reduction A › Decreasing market risk A- Investment grade › Stable operations in a demanding BBB+ business environment BBB BBB- Approaching market peers, which are 2 to 3 grades above Non-investment grade BB+ BB BB- Source: Standard & Poor ‘s
Outlook Hordur Arnarson CEO
Global energy demand growing Total global energy demand Global energy demand growing and changes in the energy sector › Threats to energy security of nations + 20,000 TWh › Energy prices currently low but expected to increase + 20,000 TWh Other › Increasing pollution Landsvirkjun’s aim is to offer competitive terms for electricity with long term agreements, Transportation favorable prices and unparalleled security of supply › Long term agreements and unparalleled security of supply provide Landsvirkjun with a competitive Industry edge 2012 2025 2040 Source: International Energy Agency
Industrial demand in Iceland exceeds supply Landsvirkjun is currently not able to meet total industrial demand Nordural Rio Tinto (Century Alcan Aluminum) › Confirms competitiveness compared to other countries Elkem High demand for Becromal › Risk and power prices are deciding factors for Househol electricity in Iceland ds determining which companies are offered electricity Industry Fjardaral Service New customers commencing operations (Alcoa) Other › United Silicon 35 MW in 2016 Source: National Energy Authority in Iceland › PCC 58 MW in 2017 30MW Strong increase in sales to data centers › The Icelandic market now around 30 MW Strong growth in data Annual growth in wholesale around 6 - 12 MW centers 2011 2012 2013 2014 2015 2016 2017 › Equivalent to one geothermal turbine every 5 years Source: Landsvirkjun estimates
Investing activities Theistareykir geothermal power plant › Utilises geothermal heat in Northeast Iceland › Power 90 MW, generation capacity 738 GWh/year › Conservative development of a sustainable geothermal power generation › In operation in autumn 2017 Expansion of Burfell hydro power plant › Utilizes increased runoff due to global warming New power station Burfell power station › Power 100 MW, generation capacity about 300 GWh/year › No new dams or reservoirs › In operation in spring 2018 20
Renegotiations with customers Renegotiations with important customers in progress Energy price Elkem Iceland Prices after the the competition legislation › Original contract from 1975 New and renegotiated contracts Nordural Prices before the competition › Original contract from 1997 legislation 2004 Energy sales in Iceland subject to competition law
Ability to pay dividends: Future outlook Use of funds 2010 - 2015 Dividend Core operations of Landsvirkjun continue to improve Investing Focus on attaining an adequate debt leverage and activites having ready access to favourable long term Amortisation financing without a government guarantee of loans › Ability to pay dividends is limited while debt is being reduced Future use of funds External and internal conditions affect when Landsvirkjun will be able to increase dividend payments Increasing › Optimistic that in 2 to 3 years dividend payments ability to pay can be increased with continuing improvements in Investing dividends operations activites › The aim is to increase dividend payments from ISK Amortisation 1.5 billion to 10-20 billion per year of loans 22
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