The operating currency of the company was converted from Icelandic Kroners (ISK) to US Dollars (USD) at the beginning of the year. This will be the first year that Landsnet’s annual accounts are published in USD. Earnings before interest, taxes and depreciation are virtually unchanged between years. Operations are built on a solid foundation and this year’s losses can mostly be explained by the strengthening of the ISK and its impact on financial expenses.
A large step was taken in refinancing and debt restructuring of Landsnet this year when an agreement was concluded with the parent company on a payment on a start-up loan, followed by an agreement to convert the remaining balance of the loan to USD.
The Company raised funds by issuing unsecured notes in the amount of 200 million USD on the United States Private Placement market. Approximately 80% of Landsnet’s long-term debt was consequently denominated in USD and 20% in other currencies. These changes to the loan portfolio serve to substantially reduce future currency risk and the risk of inflation with regard to operating results and the balance sheet.
Highlights of the 2016 financial statements (USD)
Thirteen million USD losses
Landsnet suffered losses of 13 million USD in 2016, compared with a profit of 30.4 million USD in the previous year. Earnings before interest and taxes (EBIT) were 49.7 million USD, compared with 56.8 million USD in 2015 which can mostly be attributed to higher depreciation levels as a result of the re-valuation of assets in 2015. Operating revenue amounted to 129.7 million USD, an increase of 7 million USD between years. Revenue from energy intensive users decreased by 2.6 million USD this year and can mostly be attributed to a decrease in prices.
Revenue from transmission to distribution system operators was up by 5.2 million USD this year. The tariff for distribution system operators was increased twice this year, whereas the supply to consumers with interruptible service contracts was reduced.
Revenue from the sale of ancillary services and from charges for transmission losses increased by ISK 3.9 million USD between years. The tariff for ancillary services was increased by 4.5% on the 1st of January. The tariff for energy losses was raised by 12%. The tariff increases were due to higher purchasing prices for these items, as the tariffs are determined on a cost-price basis, with a 1.5% margin.
Operating expenses, excluding depreciation and amortisation, were 50.6 million USD, an increase of 6.8 million USD between years. This increase was primarily due to higher purchasing prices for ancillary services and energy losses, which amounted to 4.1 million USD.
Depreciation amounted to 29.5 million USD, an increase of 7.3 million USD between years and was mostly due to the re-valuation of assets carried out at the end of 2015.
Net financial expenses for 2016 were 66.2 million USD, compared with 19,0 million USD in 2015, an increase of 47.2 million USD between years. The Company’s funding was mostly denominated in ISK, or 90% of the loan portfolio. Interest expenses amounted to 45.2 million USD as the ISK strengthened by 13% against the USD. The loan portfolio at year-end and is now mostly denominated in USD, or approximately 80%.
A large step taken in re-financing
Total assets amounted to 770.8 million USD at year-end 2016, compared with 794.6 million USD from the previous year. Fixed assets accounted for 735.4 million USD, compared with 709.8 million USD at year-end 2015. Fixed assets in operation were valued at 665.1 million USD at year-end, compared with 666.9 million USD at year- end 2015.
Long-term liabilities and obligations amounted to 425.8 million USD whereas short-term liabilities amounted to 36.6 million USD at year-end 2016. Long-term liabilities and obligations amounted to 435.9 million USD whereas short-term liabilities amounted to 34.9 million USD at year-end 2015. Annual repayments of long-term liabilities amounted to 7.4 million USD and two instalments were paid on a loan from the parent company, or a total of 143.9 million USD.
The issuance of unsecured notes on the United States Private Placement market in the amount of USD 200 million was finalised before the end of the year. Concurrently, Landsnet paid an indexed ISK loan from the parent company, with the remaining balance converted to USD and maturing in 2020.
The financing and debt restructuring of the balance is part of a change to the composition of loans and transferring them to the Company's functional currency to reduce the exchange rate and inflation risk. Half of this amount was issued and finalised in December, with the other half to be completed in March 2017. The average interest rate of the issue is a fixed rate of 4.56%.
Net assets amounted to 308.4 million USD in 2016 including share capital in the amount of 45.5 million USD according to the balance sheet. Net assets amounted to 323.8 million USD in 2015. The equity ratio was 40% at year-end 2016 compared with 40.7% at year-end 2015.
First dividend payments to owners
Net cash from operating activities amounted to 52.4 million USD in 2016, compared with 61.5 million USD in 2015. Working capital from operations, excluding financial items and taxes, amounted to 79.2 million USD, compared with 79 million USD in 2015. Investment activities amounted to 42 million USD and capital movements amounted to 55.8 million USD. Net cash at the end of 2016 amounted to 18.3 million USD and decreased by 45.4 million USD during the year. Payments of long-term liabilities and loans excess new borrowings amounted to 52.6 million USD. Dividends were paid to the Company’s owners for the first time, amounting to 3.2 million USD.
Purchasing and inventory control
The year was busy in regards to procurement matters, due to increased construction work at the Company and because of large-scale and very complex projects in the north-eastern part of Iceland. Twenty-seven tenders were released this year which is comparable to the total number released in 2015.
A review was conducted on procurement processes at the Company and new procurement requirements were introduced in the third quarter, as well as the completion of general terms of delivery. Inventory management focused on increased automation in processes and bar code and handheld computers were introduced in the warehouse at the Company’s HQ.
Revenue cap and tariffs
Landsnet operates in accordance with the Electricity Act No. 65/2003. Under Article 12 of the Act, the National Energy Authority (NEA) determines a revenue cap for Landsnet, which decides a tariff for its services in accordance with the cap.
This is a dual system: The transmission of electricity to distribution companies and transmission to power-intensive users. The revenue cap is set for five years at a time, taking into account the Company's historical operating expenses, depreciation of fixed assets, taxes and allowed profitability, decided annually by the National Energy Authority. The Company shall determine the tariff for its services in accordance with the set revenue cap: In ISK for Icelandic distributors and in USD for power intensive users.
The previous revenue cap period has now been settled and a new period began in 2016 and will be valid until 2020. Landsnet’s authorised profit for 2016 was released in April and the revenue cap for the period 2016 to 2020 was set in May. The decisions of the National Energy Authority on profitability can be seen in the table below, after tax.
Changes to the transmission tariff for distributors
Allowed earnings are an important consideration in the revenue cap decision making process and subsequently in decisions made regarding the transmission tariff. The transmission tariff for distributors was increased twice in 2016: By 10% on the 1st of January and by 13% on the 1st of December.
The changes to the tariff can mostly be attributed to the settlement of the revenue cap for 2015 and the new revenue cap introduced for 2016. The decision was made not to utilise the revenue cap for 2016 in order to counter price increases, but final calculations on the revenue cap for distribution in 2015 found that the accumulated accrued income of the Company exceeded the permissible revenue (10% of the revenue cap). The decision process on the revenue cap for 2016, regarding the allowed return on assets, also revealed an increase in the current tariff. The tariff increases in 2016 were therefore twofold, but the transmission tariff for distribution companies had only risen once in five years before that, or by 9% in 2013.
The accompanying chart shows the development of tariffs for distribution system since 2011.
Transmission tariff for power intensive users decreased
The tariff for power intensive users decreased by 9% on the 1st of July based on a decision from the National Energy Authority on the revenue cap for power intensive users and the criteria for authorised revenue limits. Allowed return on assets are an important consideration in the revenue cap decision making process and subsequently in decisions made regarding the transmission tariff. The estimated revenue cap for power intensive users was higher for 2016 than the conclusions made by the National Energy Authority and the tariff was therefore decreased to reflect this change.
The accompanying graph shows the development of tariffs for power intensive users since 2011.
Tariff increase for ancillary services
Ancillary services are the services Landsnet provides to maintain operational security and balance between supply and demand of electricity at any given time. The tariff increased by 4.5% at the beginning of 2016 to meet increased prices on regulating power which is the power Landsnet procures to balance differences between the forecast and the actual overall energy use in the electrical network.,
This includes spinning reserves, additional power that a production unit with automatic frequency control is capable of producing without notice and guaranteed regulating power to operate a balancing energy market and reserve power.
Landsnet obtains resources from processing companies and access to power generation at distribution networks in order to fulfil these statutory obligations. Long-term contracts which ensured the availability of 100 MW of electricity every year expired this year and a new agreement was reached with Landsvirkjun on spinning reserves of 40 MW at the power stations at Blanda, Þjórsá and Tungnaá. Regulating power (40 MW) was also guaranteed and 40 MW for non-spinning in the regulated power market for the period May 2016 to April 2017. The average price of balancing power in the regulated power market was ISK 3,843, and the price distribution is shown on the accompanying pie chart.
Landsnet is committed to meeting its legal obligations in order to ensure safety and security of its employees, customers and equipment. Landsnet’s financial position must remain solid and the company must be able to perform core functions in harmony with the environment and society. The objective of risk assessment is to ensure continuous operation under any circumstances that may arise and to try to secure an acceptable performance, at any given time, with regard to underlying risk factors in operations. A major factor in Landsnet’s approach to risk is the fact that the company provides an essential service to society. Accordingly, the Company’s risk appetite and risk tolerance are low.
New risk assessment system
A new risk assessment system was implemented at the Company this year to meet the requirements of ISO standards. The risk factors that can arise in the Company's operations are defined as well as their potential impact on operations. Organised mitigation measures were also defined to prevent or minimise the impact of these risks and monitor their development.
Landsnet estimates risk in operations according to a defined plan. The risks are assessed according to severity, but Landsnet’s main financial risk factors are operational risk and financial risk.
The types of risk covered by the assessment include operational risk, counterparty risk and financial risk.
- Operational risk is defined as the risk of negative impact on Landsnet’s performance. This includes aspects relating to generation fed into the grid, the grid itself, information and surveillance systems, management, the legal environment, contracts, etc.
- Counterparty risk is the risk of a counterparty to a financial or other commercial agreement failing to meet its obligations thereunder.
- Financial risk primarily concerns financial aspects of the Company’s activities, i.e. the risk of financial losses on both on- and off-balance-sheet items, including as a result of changes in the market price of such items. This includes changes in interest rates, exchange rates and inflation. Landsnet’s defined financial risk consists of market risk, liquidity risk, exchange rate risk and inflation risk.
Efforts were made to reduce market risk by refinancing and repaying a start-up loan from Landsnet's parent company, which was indexed and in ISK. The refinancing and debt restructuring of the loan is in USD and has therefore moved the Company closer to the objective of achieving a normal distribution of payments over the long-term repayment process.
Changes to energy purchases due to grid losses
The tariff for losses, distributors and power intensive users is published in ISK and increased by 12% at the beginning of 2016. It takes into account the purchase price, as well as a 1.5% charge to meet the cost of administration. The Company is obliged to supply electricity to replace grid losses.
Energy costs due to losses have risen in recent years on the one hand, as a result of increased transmission losses alongside increased electricity consumption and on the other hand as a result of the rise in average prices on tenders. The average price of electricity, purchased by the Company to meet losses, increased by 17% between years based on tender processes in the autumn of 2015. A tender process in the autumn of 2016, to meet losses for the first half of 2017, led to further increases (from 4,447 ISK / MWh to 4,965ISK / MWh), or equivalent to a 12% average increase. Offers were not secured for all the energy auctioned in 2015 and 2016.
An electronic procurement process and a framework agreement will be introduced for electricity sales covering several years at a time in response to this and will then be offered electronically for a shorter period of time. This will results in more effective feedback on prices to market participants and greater flexibility, efficiency and efficiency of procurement.