Financial Statements 2017 Presentation February 16th, 2018 Hordur Arnarson, Chief Executive Officer Rafnar Larusson, Chief Financial Officer
Agenda: Financial Statements 2017 Rafnar Larusson, CFO Record breaking year in energy production and operating performance Hordur Arnarson, CEO
Financial Statements 2017 Rafnar Larusson CFO
Highlights of the year 2017 14.3 TWh 5% 153 mUSD 30% Record breaking year in energy sales Profit before unrealised financial items never been higher › Power generation records set at five power stations › Highest revenues in the Company´s history › Successful operations for most customers › External conditions beneficial and positive outlook 5.9x leverage 0.6x 278 mUSD 21% Strong cash flow covers investing activities Financials are strengthening › Extensive construction period at › Net debt to EBITDA ratio decreases Theistareykir and Burfell II finishing › Dividend capacity increases in the near future › One of Landsnet´s most extensive investment year 4
Highest revenues in company history 2017 highlights › Highest revenue year and record energy 483 production 438 436 423 421 420 408 › Operating expenses increase in part due to expensed maintenance projects 346 345 332 329 321 322 302 Trend in recent years mUSD › Operating revenues have been stable despite fluctuations in aluminium prices and foreign currencies › Operating expenses have increased. Mainly due to general salary developments and an increase in product and contractor costs 2011 2012 2013 2014 2015 2016 2017 › Effects of the Icelandic krona balances out in revenues and expenses, providing a natural Operating revenues EBITDA hedge 5
Returns from core operations historically high 2017 highlights 153 › Highest return from core operations 147 › Mainly due to higher revenues 131 122 118 › 9 mUSD one-off impairment loss in 106 104 geothermal heat mUSD Trend in recent years › The return from core operations has improved over the last years, excluding 2016 › Interest expenses decrease in line with reduced debt › About 40 mUSD lower in 2017 compared 2011 2012 2013 2014* 2015 2016 2017 to 2011 (before capitalized interest costs) Profit before unrealised financial items * ) One time revenue recognition of USD 17m in 2014 due to an agreement with Rio Tinto Alcan 6
Cash flow covers investing activities Cash flow from operating activities has covered investing activities in recent years › Investing activities about 1 billion USD over the 278 267 period 258 254 249 236 234 230 Budarhals hydro power plant became operational in 2014 172 Two power stations under construction mUSD concurrently 149 123 › Theistareykir 108 › Turbine 1 (45 MW ) commissioned in Nov. 2017 88 77 › Turbine 2 (45 MW) expected to be commissioned in the second quarter of 2018 › Burfell II › Commissioned mid year 2018 2011 2012 2013 2014 2015 2016 2017 Cash flow from operating activities Investing activities Extensive construction period coming to an end 7
Cash flow used mostly for investing activities in 2017 As the construction period comes to an end, cash flow over the next years will largely be used for reducing debt -254 278 209 -228 mUSD 0 -14 -10 145 127 Cash and Cash flow Investing New loans Amortisation Dividend Other Cash and cash eq. at from activities of long term paid to changes cash eq. at 01.01.2017 operating loans owners 31.12.2017 activities 8
The highest equity ratio in the Company‘s history Net debt › Net debt increased in 2017 mainly due to 45.8% negative foreign exchange changes (75 mUSD) › Negative foreign exchange change about 54 mUSD 35.8% incl. derivative agreements › Continued emphasis on debt reduction State guarantees on interest bearing loans mUSD significantly reduced 2,503 2,436 2,429 2,190 2,043 1,985 1,960 › New debt without state guarantees › Old loans with a state guarantee maturing › 66% of the loan portfolio with a state guarantee 2011 2012 2013 2014 2015 2016 2017 Equity ratio 45.8% Net debt Equity ratio › Highest in Landsvirkjun‘s history 9
Key financial ratios improving Both ratios have strengthened significantly with debt reduction 7.6x 7.4x 7.3x Overall development of ratios heading 6.6x 6.5x 6.2x in the right direction 5.9x › Short-term goal is to get below 5x net 5.5x debt to EBITDA 5.1x 4.6x 3.8x 3.5x 3.3x 3.1x 2011 2012 2013 2014 2015 2016 2017 Net debt / EBITDA Interest coverage (EBITDA/net interest expenses) 10
Market risk management Actions Operating revenues Interests Debt Aluminium risk reduced with use of derivatives and through renegotiations and contracts with new customers 16% 30% 34% › Renegotiated contract with Nordural 2009 USD342m USD92m USD3.0bn effective in 2019 with power price linked to Nord Pool 70% 66% 84% › Contract with Elkem extended to 2029 (contract price in arbitration) Interest rate risk reduced with increased ratio of fixed interest rates through 10% 19% derivatives and new funding 32% 2017 Foreign exchange rate risk reduced with USD483m USD79m USD2.2bn derivatives and new funding in USD 68% 81% Derivatives used to manage market risk 90% › Counterparties are international banks Other Aluminium Fixed Floating USD Other with limited counterparty risk Reduced aluminium risk Reduced interest rate risk Reduced foreign exchange risk 11 Ratio for operating revenues in 2009 is shown without derivative agreements, other ratios include derivative agreements
Investment grade and approaching peer companies AAA Credit rating of Landsvirkjun without a state AA+ guarantee is Investment grade, BBB AA Major influences for higher credit rating AA- Investment grade › Decreased debt A+ › Reduced market risk A › Stable operations A- Peer companies within the Nordic Countries BBB+ › Credit ratings are similar BBB (2018) › Approaching peers in key ratios BBB- BB+ Speculative BB (2013) BB- Source: Corporate websites and S&P Global Ratings 6.02.2018 12
Record breaking year in energy production and operating performance Hörður Arnarson forstjóri
At Landsvirkjun, we consistently endeavour to maximise the potential yield and value of the natural resources we have been entrusted with, in a sustainable, responsible and efficient manner
Record year in energy sales and power generation Energy sales (TWh) Energy sales were 14,325 GWh 14.3 › An increase of 700 GWh from 2016, thereof 13.9 13.6 13.2 13.1 12.8 12.8 604 GWh came from energy intensive users An extensive construction period ends in mid 2018 › Theistareykir and Burfell II power stations › A total of 1,038 GWh will be brought online › In November 2017 the first turbine at 2011 2012 2013 2014 2015 2016 2017 Theistareykir was commissioned › Budarhals power station (585 GWh) commissioned in 2014 1.6 TWh brought online from the three new power plants › About a 12% increase in generation capacity 15
The power stations Power generation records set at five power stations › Fljotsdalur, Sigalda, Budarhals, Sultartangi og Steingrimsstod HSAP* assessment of Fljotsdalur power station › The assessment revealed operations at Fljotsdalur were rated outstanding regarding the sustainable utilisation of hydropower Older power stations still going strong › Ljosafossstod at Sog turned 80 years old Blanda power station received the Blue Planet award › Utilisation was 97.5% › Awarded by the International Hydropower Association, IHA * e. Hydropower Sustainability Assessment Protocol, HSAP 16
Energy market in Iceland Energy producers sell to energy intensive users and wholesale Icelandic energy market is split into customers › Energy intensive market › Wholesale- and retail market Wholesale market Landsvirkjun sells to: One transmission company › Energy intensive users (80%) Retail sales companies buy Energy intensive market energy in the wholesale market › Wholesale market (20%) and sell in the retail market Landsvirkjun does not sell into the Retail market retail market One transmission company Energy price in Iceland to energy Six distributors intensive users no longer the lowest Retail customers Energy intensive users 17
Customers – Aluminium plants Aluminium plants are Landsvirkjun´s largest customers › They had in general a good operating year in 2017 Aluminium prices were historically low in 2016 but increased in 2017 › Average price increased 23% from 2016 to 2017 Nordural Grundartanga Renegotiated with Rio Tinto Alcan in 2010 Aluminium price (USD/MT) 3,000 › Contract price linked to US CPI instead of aluminium prices 2,600 2,200 Renegotiated with Nordural in 2016 1,800 › Contract effective in 2019 1,400 › Contract price linked to the market price of 1,000 electricity at Nord Pool instead of aluminium 2010 2011 2012 2013 2014 2015 2016 2017 2018 prices 18
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