Past investment put Landsvirkjun on solid financial footing

Past investment laid the foundation for dividends and helped Landsvirkjun stop relying on state guarantees for its loans, Jóhannes Geir Sigurgeirsson writes in a contributed article published by mbl.is.

From 1995 to 2007, the power company undertook the largest construction programme in its history, more than doubling its production capacity through new electricity sales agreements with large users. The work was financed with cash from operations and loans guaranteed by the state.

Paying dividends during that period would not have been responsible, Sigurgeirsson argues, as borrowing temporarily reduced the company’s equity. He says the projects later enabled dividend payments and left Landsvirkjun no longer needing state guarantees for its loans.

By the end of the construction period, the company’s debt ratio was lower than forecast at the outset, the article says. Based on the electricity contracts then in place, Landsvirkjun could have repaid its debts within a few years if it had stopped building, Sigurgeirsson writes.

The article also traces the company’s approach to electricity prices for large users. When Jóhannes Nordal initiated Landsvirkjun’s establishment in the 1960s, the plan was to attract a large foreign customer to secure demand for power from new plants. That would help build a strong electricity generation and transmission system that could also serve ordinary users. Reliable, long-term power at a competitive price suited the needs of aluminium companies, Sigurgeirsson writes.

In 2008, under chief executive Friðrik Sophusson, Landsvirkjun’s board decided not to make any further new sales agreements with aluminium companies. Although prices were low at first, the company’s policy was to seek increases when renewing contracts with energy-intensive industries. Sigurgeirsson says his review found that, adjusted using the US consumer price index, electricity prices for aluminium companies had doubled between the first agreement and 2008. The contracts were denominated in US dollars.

The agreement with Alcoa Fjarðaál, the largest electricity contract in Landsvirkjun’s history, was signed for 40 years, with a review clause after 20 years and a link to aluminium prices. The terms were controversial and involved some risk, Sigurgeirsson writes, but given conditions in the aluminium market, he says it is difficult to see how an agreement could have been reached on another basis.