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Finances

2017 was Reykjavik Energy Groups's first operating year after the Plan. Under the Plan, which was in effect between 2011-2016, a culture of restraint in operations was implemented with increased time and effort put into decisions about every investment. The results of the Plan substantially exceeded objectives and the operating results for 2017 demonstrate that the change in culture is long-lasting. Operating costs show a year-on-year decrease between 2016 and 2017 and a number of favourable external conditions yielded good operating results for the Group. 

Efficiency is one of OR's values which is particularly applicable to the company's finances, which now are healhty. We use guidelines to aim towards financial goals which promote that OR and it subsidiaries;

  • have sound finances,
  • operate under an acceptable risk profile,
  • offer fair prices for services,
  • pay owners dividend from their assets.

Reykjavík Energy, which is entirely owned by municipalities, considers that sound finances promote the UN's sustainable development goal of sustainable cities and communities.

Revenues, Expenses and Results

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Revenues, Expenses, EBITDA og EBIT

Stability characterises main metrics in Reykjavik Energy's finances over the past few years. Restraint in operations, which characterized the years of the Plan between 2011-2016, is persistent. The rise in revenues is primarily due to an increase in sales, although various tariffs for Veitur Utilities were lowered in 2017. EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBIT stands for earnings before interest and taxes.

EBITDA

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EBITDA

Reykjavik Energy Group's operational margin has been stable and sound over the past years. The operational margin must, among other things, support the investments of the companies in the Group. Operations require substantial investments to be able to maintain the utility systems and power plants, tend to new customers and meet increased demands placed on operations. Here is the margin as a percentage of total revenue.

Interest Coverage

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Interest coverage

This performance indicator demonstrates how capable the company is of honouring its interest expense obligations. The company's owners have put forward conditions to pay out dividend which stipulates that cash from operations plus interest expenses shall be at least 3.5 times higher than interest expenses. Reykjavik Energy fell short of that target in the immediate aftermath of the financial crisis, but exceeded it from 2010 onwards.

Net Debt

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Net debt

With improved operations and results in the past years, the debt burden of Reykjavik Energy has diminished quite considerably. The heaviest debt load was at the end of 2009. At that time, net debt amounted to ISK 226.4 billion, thus net debt has been reduced by more than ISK 100 billion at the end of 2017. Net debt is interest-bearing debt excluding interest-bearing assets.

Net Debt / Net Cash From Operating Activities

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Net debt / Net cash from operating activities

This performance indicator shows the ratio between net debt and cash at the end of the year. The indicator shows how many years it would take for the company to pay net debt with cash if it were only used to pay down debt.

ROCE

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ROCE

Reykjavik Energy's Owners Policy provides for the implementation of a performance indicator that shows returns on the capital which the owners have invested in operations (Return on Capital Employed). It should, at the very least, exceed the company's financing costs in addition to a reasonable risk premium. OR's Board of Directors has put forward goals for the Group as a whole and work is underway to establish performance indicators for each operating factor.

Did you know?

OR's owners have put forward conditions in operations that must be met before paying out dividend. Those are related to liquidity, equity ratio and current ratio. 

Current Ratio

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Current ratio

The Plan's success and other measures to strengthen the company's cash position have improved the current ratio and the liquidity position is strong. Reykjavik Energy's objective is to have a current ratio that is no lower than 1, which is one of the conditions for paying out dividends to the owners. This means that the company must have a sufficient cash flow to meet obligations for the next 12 months.

Equity Ratio

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Equity ratio

The equity ratio indicates how much debt a company has compared to its assets. The total assets of Reykjavik Energy were estimated at ISK 310.8 billion at the end of 2017. OR's objective is to ensure that the equity ratio does not go below 35% - 40% in the long-term.

Cash Flow

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Cash flow

In the profit and loss account and balance sheet of each company are many calculated figures that should give a clear picture of operations during a specific period and position at the end of it. However, the cash flow overview provides a clearer view of the real cash flow and which factors have an impact on the company's cash position in the period. Furthest to the left one can see the cash position at the beginning of 2017 and, to the right, cash and cash equivalents, marketable securities and deposits at the end of the year.

Credit Rating

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Credit ratings are important for companies that do business with international financial institutions. The purpose of the rating is to give creditors an objective assessment of a company's financial standing and future prospects. The credit ratings of Reykjavik Energy and other Icelandic companies can never surpass the sovereign rating of Iceland. The owners' guarantee on OR's loans have a positive impact on the company's rating. Reykjavik Energy is currently rated by three agencies: Moody's, Fitch Ratings and Reitun Rating Iceland.

Moody's Fitch Ratings Reitun
Long term Ba2 BB+ i.AA3
Outlook Positive Stable Positive
Date June 2017 March 2018 May 2017

Currency Risk

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Estimated currency flow

Reykjavik Energy‘s currency risk is mainly due to borrowing in foreign currencies and foreign revenues from Reykjavik Energy‘s subsidiary ON Power due to electric sales in USD. Reykjavik Energy‘s risk policy includes limits on possible currency imbalance in operations and on the balance sheet. Forward contracts are entered into with the aim of reducing the risk of unfavorable exchange rate fluctuations. The graph shows the estimated cash flows of foreign currencies for the next few years. 

Interest Rate Risk

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Interest rate risk

Higher interest rates pose a risk for Reykjavik Energy‘s operations and balance sheet. This risk has been mitigated in the past few years by fixing interest rates with interest rate swaps. The columns show to what degree the overall liabilities for each year have fixed rates. Reykjavik Energy‘s risk of higher interest is now insubstantial.

Aluminum Price Risk

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Aluminum price risk

Reykjavik Energy executes aluminum hedge contracts to hedge aluminum linked revenues against sharp declines in aluminium prices. Hedges are executed for a few years ahead and the graph shows to what extent revenues have been hedged. The board of directors decides the upper and lower limit of the aluminium hedge ratio. 

Cash Position

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Cash position according to published forecast

Stress test assumptions TWI ISK index CPI Aluminum price (USD/tn) Increase of foreign interests (%)
Intitial value 162 447 2087 0%
Final value 275 542 1300 3%
Change over 24 months 70% 30% -38% 3%

Liquidity stress tests are conducted by Reykjavik Energy. The approved financial budget and forecast are the underlying benchmarks that are stress tested by applying unfavorable developments of external variables. The variables include exchange rates, aluminium prices, domestic inflation and interest rates. The stress test involves very adverse fluctuations in all external variables. The graph shows Reykjavik Energy‘s ability to withstand such developments.

Currency Risk on Balance Sheet

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Currency risk on balance sheet

Reykjavik Energy‘s foreign assets exceeded the company‘s foreign debt at year end 2017. The reason is that the operational currency of Reykjavik Energy subsidiary, ON Power, is in USD. ON Power assets are greater than all Reykjavik Energy’s liabilities in foreign currency.