Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698061070354.pdf (Liberia)
Landsvirkjun Háaleitisbraut 68 103 Reykjavík Iceland Tel: + (354) 515 9000 Fax: + (354) 515 9007 landsvirkjun@lv.is www.landsvirkjun.com L a n d s v i r k j u n ’ s A n n u a l R e p o r t 2 0 0 8 Annual Report 2008 The photographs in this report are by Thorvaldur Örn Kristmundsson.

Cover Page.

1 Hnausaver, central highlands Hekluhraun lava field, south Iceland Page.

4–5 Eystri Rangá river, south Iceland Page.

19 Hveravellir, central highlands Page.

20–21 Grænavatn lake, central highlands Page.


52–53 Thjórsá river, south Iceland Pipar DESIGN PRINTING Svansprent SUPERVISION Thorsteinn Hilmarsson Hanna Marinósdóttir ISO 27001 Content The year at a glance .

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Board of Directors .

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From the Chairman of the Board and Managing Director Operation of power stations.

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Power production and sales .

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Marketing .

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Research .

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Preparations for construction.

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Kárahnjúkar Hydropower Project .

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Finance .

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Risk management .

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Financial statement 2008 .

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2 3 6 HIGHLIGHTS OF THE ANNUAL ACCOUNTS ELECTRICITY PRODUCTION, PURCHASES AND SALES Profit (loss) .

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(344.5) millj.

USD 459.3 millj.

USD Total production .

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12,345 GWh Cash gen. by operating activities .

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184.4 millj.

USD 138.5 millj.

USD With hydropower .

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11,866 GWh 2008 2007 2008 Liabilities.

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3,242 millj.

USD 3,542 millj.

USD Electricity purchases.

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With geothermal power .

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479 GWh 402 GWh Owners’ equity .

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1,377 millj.

USD 1,600 millj.

USD Sales to general market.

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2,418 GWh Equity ratio .

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29.8% 31.1% Sales to power-intensive industries .

10,330 GWh Sales increase.

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43.2% 2007 8,481 GWh 7,963 GWh 518 GWh 422 GWh 2,645 GWh 6,258 GWh 12.8% 1 The year at a glance A power contract, for a data centre to be The Jökulsárveita diversion, an important Full-time positions in 2008 built at Keflavík Airport, was concluded part of the Kárahnjúkar project, was taken In 2008, Landsvirkjun’s permanent staff with Verne Holdings at the end of February.

into use in October.


From then on, water worked for a total of 180 man-years, a re- According to the contract the data centre from the rivers Jökulsá in Fljótsdalur and duction of 32 man-years from the previous will buy 25 MW (210 GWh annually), with Kelduá flowed through the machines of year.

It must be kept in mind, however, that energy use increasing in phases to 2012.

Fljótsdalur station.


33 Landsvirkjun employees transferred over to Landsvirkjun Power on 1 January In March, Landsvirkjun’s IT division was The end of October saw the expiry of the 2008.

Man-years worked by temporary certified according to the ISO 27001 stan- MoU between Landsvirkjun, Alcoa and staff were approximately 30, a reduction dard on information security management.
Theistareykir on co-operation with respect of approximately 6 man-years from the Landsvirkjun is the tenth undertaking in to preparatory work for geothermal plants previous year.

Iceland to receive ISO 27001 certification in Thingeyjarsýsla (north Iceland) and and the first company outside the field of the construction of an aluminium smelter A total of 195 young students were hired by information technology and finance.

at Bakki near Húsavík.

The option of Landsvirkjun in the summer of 2008.


Of renewing the MoU will be examined next these, 179 performed conventional summer In April, a Memorandum of Understand- year.

Landsvirkjun and Theistareykir ehf.

tasks, while 16 were university students ing (MoU) was signed by Landsvirkjun and are now free of any obligations to Alcoa as involved in various other types of work.

Greenstone ehf.

on the purchase of electric- regards energy sales in this area.
ity for a server farm in Thorlákshöfn, south Iceland.

Power requirement will be up to There were several serious malfunctions at 50 MW.

short intervals in the power transformers of Sultartangi Station at the end of 2007.

Re- At the end of June, Alcoa and Landsvirkjun pairs went on throughout 2008, with mixed signed an agreement wherein Alcoa agreed results due to persistent malfunctions.

The to support the Icelandic Deep Drilling purchase of new transformers has been Project at Krafla.
According to the agree- finalised, and it is anticipated that they will ment, Alcoa will contribute USD 3.5m to be brought on-line in October 2009 and the drilling of Landsvirkjun’s first pilot hole February 2010.

Temporary repairs to the at Krafla to a depth of 4.5 km.

old transformers are expected to ensure the operation of the station until then.

At the beginning of August, the decision was made to continue work on the Búdar- háls Hydropower Plant which had been postponed in 2002.
Invitations to tender for machinery and electrical equipment were issued, and tender documents for construc- tion work were prepared.

Due to the pres- ent uncertainty in international financial markets and difficulties in the Icelandic financial market, bids for machinery and electrical equipment will not be opened until July 2009.

2 Board of Directors A new Board of Directors, appointed by the Minister of Finance, took office at the 2008 Annual General Meeting.
Mr. Ingimundur Sigurpálsson, Chairman Ms. Bryndís Hlödversdóttir, Vice-Chairman Mr. Gylfi Árnason Mr. Páll Magnússon Ms. Jóna Jónsdóttir ALTERNATES: Ms. Katrín Ólafsdóttir Mr. Valdimar Hafsteinsson Ms. Vigdís M. Sveinbjörnsdóttir Mr. Thórdur Sverrisson Executive Committee Managing Director : Mr. Fridrik Sophusson Office Manager and Deputy Managing Director : Mr. Agnar Olsen Heads of Division: Finance : Mr. Kristján Gunnarsson (Mr. Stefán Pétursson from 1 Dec.) Energy : Mr. Einar Mathiesen Human Resources : Ms. Sigthrúdur Gudmundsdóttir Information Technology : Mr. Bergur Jónsson Corporate Communications : Mr. Thorsteinn Hilmarsson 3 From the Chairman of the Board and the Managing Director Landsvirkjun has inevitably been affected currently, access to liquid funds is that Landsvirkjun’s balance sheet but have no by the international credit crisis and the much more important due to the global effect on cash flows.
The operating perfor- current difficulties in the Icelandic econo- economic crisis.

The company has access mance in any one year does not reveal the my.

Nevertheless, the company’s financial to liquid funds and funds from operations full picture, while the performance over position is sound.

Landsvirkjun is the which enables it to meet all commitments several years gives a better view.

largest electricity producer in Iceland with throughout 2010.

There will be some bor- quality clients.
Moreover, Lands virkjun is rowing requirements for the years 2011 to The construction of the Kárahnjúkar no longer exposed to the construction risks 2013 that will need to be covered, although Project, often referred to as the largest posed by the Kárahnjúkar Power Project, after this period, it is anticipated that the construction project in Icelandic history, as it has been fully completed, with pro- flow of funds from Landsvirkjun’s activi- has been completed, and it is therefore duction capacity exceeding expectations.
ties will be largely sufficient to meet all appropriate to examine whether and how commitments, provided that no new large the project had an effect on the Icelandic At the beginning of 2008, Landsvirkjun investment projects are entered into.

economy.

Landsvirkjun’s investments as adopted the US dollar as the company’s regards the project had, in fact, only a functional currency on the basis of It is important to point out that despite the minimal effect on the Icelandic economy.
the International Financial Reporting operating losses in 2008, Lands virkjun’s The investment in Kárahnjúkar involved, Standards (IFRS), as approximately 70% cash generation has been improving in for the most part, purchases of equip- of the company’s income, and a large recent years.

This best describes Lands- ment from overseas and considerably proportion of its debts, is denominated in virkjun’s ability to pay its debts.

more foreign manpower and contractors that currency.
As a result, Landsvirkjun than originally anticipated.

As a result, has not been as adversely affected by the The operating losses of the Landsvirkjun it is completely incorrect to say that the enormous negative exchange rate effects group may be attributed to two main Kárahnjúkar project caused the economic that Icelandic companies have generally causes.

The first is Landsnet’s operating overheating which in the end led to the suffered after the collapse of the króna.

environment.
environment.

The fundamental reason for Icelandic economic difficulties.

Since Lands virkjun’s domestic income and this is the income mechanism to which the expenditures are well balanced, Lands- authorities have restricted Landsnet, the Since it was established, Landsvirkjun has virkjun’s currency exchange risk vis-à-vis national grid operator and Landsvirkjun’s been a driving force behind progress in the Icelandic króna is minimal.

subsidiary.

It is clear that the authorities the Icelandic economy.
The past fourteen must re-examine the framework, and in years have been a unique development Landsvirkjun’s liquidity position is good particular the income framework for elec- period for the company.

The company given the circumstances, and efforts are tricity transmission and distribution.

has almost continuously been involved in made in all the company’s operations investments, and its electricity output has to ensure that this remains the case.

The other cause of the operating losses tripled.


The company has been able to Fortunately, the company was well is that the embedded derivatives related finance the development with cash from prepared for the present conditions.

Since to Landsvirkjun’s sales agreements have operations and extensive borrowings on construction on the Kárahnjúkar Project decreased substantially between years.

excellent terms.
excellent terms.

Landsvirkjun has not began, Landsvirkjun has laid emphasis The price of aluminium drives the price received any equity injection from its own- on ensuring access to liquid assets from of electricity in Landsvirkjun’s agreements ers who provide the company with indirect operations and through revolving credit with aluminium plants.

The agreements guarantees of collection.


facilities for the precise reason of avoiding were valued much higher at the end exposure to liquidity difficulties if markets of 2007 when aluminium prices were The company’s construction projects and closed temporarily as has often been high, than at year-end 2008, following related power-intensive industrial projects the case.
To begin with, this was due to a sharp downturn in global aluminium have often led to increased economic considerable commitments relating to the prices.

These changes are attributed to the growth during economic downturns.
6 huge construction project underway, while profit and loss account and from there into Landsvirkjun’s ability to undertake new projects is much reduced at present, seeks investors to develop power-intensive surable goal setting in all operations, and not least due to Iceland’s poor position.

industries in Iceland.


The aluminium Landsvirkjun has over the past few years Foreign financial institutions and ratings industry has created solid foundations for been given several awards for outstanding companies are following the company’s the operation of Landsvirkjun.

It is vital work practices.


There is no doubt that this investment plans closely, and due to cur- that we use these foundations to diversity work will sustain the company in the pre- rent conditions, it is deemed inadvisable to into innovation and advanced technolo- vailing difficult circumstances and make it undertake new commitments.

However, gies.

This is why Landsvirkjun has focused better prepared to take on challenges.
Landsvirkjun still has the ability to embark on agreements and negotiations with on developments in the present economic companies such as data centres and silicon The focus in Landsvirkjun’s internal downswing provided that new long-term refineries that have shown an interest in activities is currently on the development funding can be obtained.

starting up such operations in Iceland.


By of safety, health and working environment the middle of 2009, a plant manufacturing management together with improved pro- These days, we are all feeling the crunch, foil for capacitators will begin operations in vision of information and clearer require- and economic activities in the world seem Akureyri, thus creating approximately 100 ments in environmental matters as well as to be in a downward spiral.
The ability of new jobs and using six times the electricity strengthening the company’s relationship companies to invest is at an all-time low, as that the Eyjafjördur area, north Iceland, with society.

Mention may be made that loan markets are very difficult and various has been using.

Agreements have been Landsvirkjun has adopted carbon account- types of operations are being discontinued reached with the first data centre, which ing and has set itself the goal of becoming in many places.
It is interesting to note will hopefully begin operating in southwest carbon neutral.

Defined requirements that the aluminium smelters in Iceland Iceland in the near future.

continue to operate at full capacity even have been established for contractors as regards environmental issues.
These are though their owners are downsizing all Landsvirkjun’s employees have, in recent stated in all the company’s published over the globe and laying off thousands of years, spent a great deal of effort on tender documents.

This includes requiring employees.

On the one hand, this is due to strengthening the company’s infrastruc- contractors to keep green accounts in their the economic operations of the aluminium ture by developing targeted and disciplined work for Landsvirkjun.
The company has smelters’ in Iceland, and on the other, due working practices.

As a result, the compa- developed and distributes free software to to their electricity purchase obligation, ny has received certification in accordance keep such accounts.
Success at Landsvirk- or “take or pay” clauses in the long-term with the ISO 9001, ISO 14001 and ISO jun is measured on the basis of economical, contracts Landsvirkjun and others have 27001 standards for quality management, environmental and social yardsticks, since with them.

environmental management and informa- we strive to operate in the spirit of sustain- tion security respectively.

Moreover, the able development.


Landsvirkjun competes in the sale of company produces internationally certified electricity in international markets and green electricity.

Account is taken of mea- 7 Operation of power stations The year was a record year in power The operation of Landsvirkjun’s power sta- was made to purchase new transformers production and sales at Landsvirkjun.

tions was successful during the year despite to replace the old ones.
The purchase has Installed capacity in Landsvirkjun’s sta- continued malfunctions in the Sultartangi been finalised, and the new transform- tions increased by more than 50% during Station.

Unanticipated disturbances in ers are expected to be brought on-line in the course of the year when the Fljótsdalur Landsvirkjun’s power stations were 71, as October 2009 and February 2010. station was brought online at the begin- compared to 70 the previous year.

There ning of the year.


The station completed its were serious malfunctions at short intervals Landsvirkjun has set the goal that all units first whole year of operation without any in the power transformers of Sultartangi in the company’s power stations should significant start-up troubles and produced Station at the end of 2007.

The malfunc- be available for operation 99% of the year, over 4,700 GWh as anticipated.
tions were so serious that the Station’s not including scheduled maintenance pe- Monitoring and maintenance in the during the year.

The Station’s energy pro- due to the above malfunctions.

However, operation of the stations went according duction was 310 GWh during the year, as the machines were available for 94.5% of energy production was severely curtailed riods.

This goal was not achieved in 2008 to implemented plans.

In order to ensure compared to 903 GWh in 2007.

The basic the time.
The basic the time.

successful and effective operations, all of cause of the malfunctions has been traced Landsvirkjun’s stations operate according to transformer oil used for insulation in the Landsvirkjun currently operates eleven to the national electricity security manage- transformers.

It has been discovered that hydropower plants, two geothermal plants ment system (RÖSK) and Landsvirkjun’s certain substances in the oil have caused and one fossil fuel plant for back-up.
integrated certified quality and environ- corrosion in the transformers’ insulation.
mental management system, which is Due to uncertainties regarding the lifetime based on ISO 9001 and ISO 14001. of the transformers after repair, a decision LANDSVIRKJUN’S ENERGY SALES IN 1966–2008 Power-intensive industries General market GWh 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 8 Power production and sales Landsvirkjun’s electricity production ry electricity to public utilities decreased LANDSVIRKJUN’S POWER STATIONS distributed through the Landsnet national by approximately 14.4%, while increasing grid was 12,346 GWh during 2008.
This by 65.1% to power-intensive industries.

Hydropower stations 1,797 MW is an increase by 46% from 2007.

The Full delivery of electricity to Fjardaál was share of hydropower in energy produced achieved during the year, and this ac- by Landsvirkjun is just over 96%, while counts for most of the increase.

geothermal power contributes some 4%.


Iceland’s total electricity production was Furthermore, Landsvirkjun purchased 16,467 GWh, of which Landsvirkjun’s 402 GWh of electricity from Reykjavík En- share is approximately 75%, an increase of ergy and Hitaveita Sudurnesja for resale to 3% from the previous year.

Landsvirkjun’s power-intensive industries.


Lands virkjun’s share of hydropower electricity production total energy acquisition in 2008 was was 96.3%, and its share of geothermal 12,748 GWh, or 43.2% more than in 2007. electricity production was 12.5%.

In Ice- land, 75.5% of electricity is produced using Landsvirkjun’s electricity sales in 2007 hydropower and 24.5% using geothermal amounted to 12,748 GWh.

Sales of prima- power.
Fljótsdalur Búrfell Hrauneyjafoss Blanda Sigalda Sultartangi Vatnsfell Írafoss (Sog) Laxá Steingrímsstöd (Sog) Ljósafoss (Sog) Geothermal stations Krafla Bjarnarflag Fossil fuel station Straumsvík 690 MW 270 MW 210 MW 150 MW 150 MW 120 MW 90 MW 48 MW 28 MW 26 MW 15 MW 63 MW 60 MW 3 MW 35 MW 35 MW Total installed capacity 1,895 MW LANDSVIRKJUN’S POWER STATIONS Laxá Krafla Bjarnarflag Blanda Fljótsdalur Hrauneyjafoss Sultartangi Vatnsfell Sog Búrfell Sigalda 9 Marketing The wholesale market amount to 212 GWh per year once in full planned to reach an agreement on the cost Landsvirkjun has six customers in the operation, with an option for twice that sharing for geothermal prospecting before general electricity market.
Increased amount.

It is anticipated that the first part 1 November 2008.

No agreement was competition in the retail market is begin- of this electricity will be supplied from reached before this date, and as a result, ning to manifest itself, and other entities Búdarháls Station and the second from the MoU lapsed.

Nevertheless, the parties than Landsvirkjun are beginning to offer new power stations on the River Thjórsá.

decided to continue to work together on electricity on a wholesale basis.
the investigations relating to environmen- By the autumn of 2008, it was revealed tal issues and licensing, while postponing Landsnet planned to establish a spot that there would be considerable delays in further discussions on a power contract to market for electricity during the year, but start-up of Becromal’s plant for manufac- the second half of 2009.

Following these this was delayed due to economic unrest.
turing aluminium foil for capacitators in changed circumstances, Landsvirkjun and Landsvirkjun is involved in an advisory Akureyri, due to delays in construction.

Theistareykir decided to join forces in ex- group which was established to prepare The plant is expected to begin operations ploratory talks with other parties who had and develop the spot market.

by the middle of 2009. voiced an interest in purchasing electricity in the north of Iceland.
These talks began All of Landsvirkjun’s stations underwent Negotiations with Rio Tinto Alcan were at the end of the year.

re-certification by the German company conducted throughout the year for the TÜV SÜD to the effect that Lands- delivery of electricity for an expansion of virkjun’s energy production is produced the Straumsvík smelter.

The production from renewable energy sources.


The certi- will be increased by increasing the electric fication has been used, among other things, current through the plant’s pots.

This will for the sale of green certificates.

Green be done from 2011 to 2014.

Landsvirkjun certificates are a sales product within intends to construct the Búdarháls Hydro the EU and are intended to stimulate Station to ensure this delivery.
This in- energy production using renewable energy creased sale of electricity to the aluminium resources.

plant will be approximately 650 GWh per year.

Moreover, negotiations with Nordur- Power-intensive industries ál were conducted throughout the year for The start-up of the aluminium plant of the delivery of an additional 50 MW to the Alcoa Fjardaál in Reydarfjördur was com- aluminium plant at Grundartangi.

Discus- pleted at the beginning of the year.


Despite sions were also conducted with various delays, the start-up was a complete success parties planning to construct a silicon- and in accordance with expectations.

In refining plant, a data centre and silicon mid 2008, an agreement was reached metal factories in the south of Iceland.

with Alcoa Fjardaál for increased energy delivery to the tune of 340 GWh per year.
The MoU with Alcoa for the sale of This power will be used to increase the electricity to an aluminium plant at Bakki flow of power through the pots and will be near Húsavík from geothermal stations in affected in 2008 and 2009.

Thingeyjarsýsla district in north Iceland was renewed in June 2008.
The MoU pro- In February, a power contract was con- vides for the participation of Alcoa in the cluded with the company Verne Holdings, costs incurred in research into the relevant which intends to operate a data centre geothermal fields and that the parties at Keflavík airport.

Delivery of this elec- will complete negotiations for electricity 10 tricity will commence in 2009 and will purchase by the end of 2009.
The parties Research Landsvirkjun is involved in a range of Energy and climate change research projects every year, the goal of Since 2002, Landsvirkjun has participated which is to lay solid foundations for the in joint Nordic research into changes in company’s future development and to river discharges attributable to climate secure operation of its power system.

In change.
In change.

Based on current forecasts of rising 2008, Landsvirkjun provided information temperatures, the run-off from glaciers will about potential power projects to be evalu- increase substantially in the future.

The ated in the second stage of the Master- current phase of the research programme plan for Hydro and Geothermal Energy “Climate and Energy Systems”, which will Resources in Iceland.
Representatives of last from 2008 to 2011, involves a number the company participated in the work on of institutions and experts with diverse the Masterplan, which once completed backgrounds.

The current phase focuses will provide a comprehensive overview of on possible climate changes in Iceland and potential future power development op- the Nordic countries in the coming decades tions in Iceland.

and their impact on water resources and energy production.
As part of this work, Iceland Deep Drilling Project Landsvirkjun is estimating the increase in For several years, Landsvirkjun, Reykjavík run-off to the company’s power plants from Energy and Hitaveita Sudurnesja have 2010 to 2050.

If these forecasts are realised, been engaged in research into whether extensive changes may be expected and the it would be possible to find supercritical energy in run-off could increase on aver- geothermal fluid in the companies’ current age about 25% until 2050.
It is vital that production areas, as well as investigating Landsvirkjun is prepared for these changes, the practicality of utilising such fluids for will be able to protect itself from risks and energy generation.

The National Energy has the capacity to take advantage of the Authority, Alcoa and most recently Statoil- possibilities of increased run-off.

For this Hydro of Norway have now become par- reason, operation and simulation models ties to the Iceland Deep Drilling Project.
of Landsvirkjun’s power system are used The Project, moreover, has received grants to take into account such increased run-off from international research funds.

In 2007, scenarios.

it was decided that the first well of the project should be drilled at Landsvirkjun’s Job creation resulting from research Krafla area.
The drilling began in 2008, and preparations initially as a 90 m deep hole, 90 cm in In recent years, Landsvirkjun has paid diameter, and then a narrower hole down an annual average of ISK 2,400 millions to 800 m. Plans have been made to use the (2008 price levels), to consultants and largest and most powerful drill rig in Ice- research institutions for research, design, land to continue in March 2009 and drill preparations and supervision of new power the hole to a depth of up to 4,500 m by the projects, renewal of older facilities and end of June 2009.
After investigations of monitoring of operating areas.

Lands- the chemical composition of the geother- virkjun has thus encouraged the develop- mal fluid and the thermal properties of ment of knowledge in mostly Icelandic the well, a pilot plant is to be designed engineering firms and in the institutions and set up for a few years of experimental involved in research relating to the envi- generation.

ronment and water systems.


11 Preparations for construction Hydropower projects in the south were carried out in connection thereto.
Around the middle of summer, the Minis- of Iceland These included optimization of type and ter for the Environment ruled that a joint Four power projects are planned in arrangement of dams and equipment, environmental impact assessment should southern Iceland in the near future: The layout of waterways and development of be performed for the power projects, the Búdarháls project on the River Tungnaá cost estimates as well as issues relating to planned transmission installations and and three projects on the lower stretch of ice and silt in the River Thjórsá.
the aluminium plant at Bakki.

Lands- the River Thjórsá – the Hvammur, Holt virkjun and Theistareykir withdrew the and Urridafoss projects.

Geothermal power plants in north- scoping document for the power projects PLANNED INSTALLED CAPACITY OF NEW POWER PROJECTS IN SOUTHERN Landsvirkjun and Theistareykir ehf.

con- environmental impact of research drilling.


tinued work on research, environmental The Icelandic National Planning Agency ICELAND impact assessments and other preparations ruled, during the latter part of the year, east Iceland and instead began work on assessing the MW GWh/year areas in the Thingeyjarsýsla district.

Prep- cluded in the joint assessment.

At the same relating to power plants in geothermal that research drilling did not need to be in- Búdarháls .

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Hvammur .

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130 585 665 415 980 arations continued in accordance with the time, work on assessing the environmental MoU between Alcoa, Landsvirkjun and impact of up to three exploratory holes Theistareykir ehf.

from 2006, anticipating in Gjástykki was initiated.
The aim is to energy sales to Alcoa’s planned aluminium begin work on the environmental impact Total 345 2,645 plant at Bakki.

The plant at Bakki is as- assessment of a new Krafla Power Station sumed to have an annual production and the Theistareykir Power Station in All four projects have undergone environ- capacity of 250,000 tonnes and will need 2009. mental impact assessment and been an installed power capacity of approxi- approved.

Other licensing is still ongoing mately 400 MW.


The MoU was renewed except for Búdarháls where all permits for in July subject to an agreement being construction have been obtained.

reached later in the year on Alcoa’s cost participation in exploratory drilling in Preparatory construction work on the 2009 and 2010.

By the end of October, it Búdarháls project was begun in 2002 but was clear that no such agreement would was subsequently postponed.

Invitations to be reached.


Nevertheless, the companies tenders for electro-mechanical equipment decided to continue preparations while re- STATUS OF POWER STATIONS AND PREPARATIONS FOR CONSTRUCTION for Búdarháls project and the three other ducing planned cost of exploratory drilling.

• Landsvirkjun operates a 60 MW power station at projects in the lower stretch of the River Krafla.

Proposals have been made to increase its Thjórsá were advertised in 2008.
The re- Three geothermal pilot holes were drilled capacity up to 150 MW.

sulting bids are scheduled to be opened in in the Krafla area during the year.

Drill- • Landsvirkjun operates a 3 MW power station at mid-2009.

In 2008, work was carried out ing results indicate that a great deal of heat Bjarnar flag.

Environmental impact assessment for on preparing tender documents for civil is in the entire area and that energy can be a new 90 MW power plant on this site is completed construction work.
The documents are al- found below the depth of 2000 m. How- with a positive result and steam has already been most complete, and the invitation to tender ever, the fluid at that depth is difficult to acquired for its first stage.

may be advertised as soon as a decision to utilise due to unfavourable chemical com- • Landsvirkjun owns approximately one-third of the go ahead with the project has been made.

position.

One new pilot hole was drilled shares in Theistareykir ehf.
The company is inve- at Theistareykir, and in addition, an older stigating the geothermal area at Theistareykir, the The largest single preparatory project hole was side-tracked and re-drilled with proposed site of a 200 MW power project.

Steam has carried out during the year was the tender great success.

The Theistareykir area ap- already been acquired for the first stage of the project.
design of new power plants on the River pears to be extremely favourable for energy • Investigations into the geothermal area at Gjástykki 12 Thjórsá.

A large number of diverse tasks production.

are under way.

Kárahnjúkar Hydropower Project Summary into operation in October 2007, four and lenging project that both Icelanders and Construction of the Kárahnjúkar hydro- a half years after construction began at foreigners followed closely.
On the other electric project has, for the most part, Kárahnjúkar and seven months behind the hand, there was considerable public debate been completed.

Nevertheless, there were initial schedule.

By the end of November on the project for environmental and 400-500 workers employed on the project 2007, 5 of 6 units were in full operation, political reasons.

site for the greater part of 2008.

As a result, only seven weeks behind the original a short account should be given of the schedule.
The initial delay in energy The project began with the approval by project as a whole.

delivery from the power station was caused an overwhelming majority in parliament by delays that occurred when one of the and with the corresponding approval of The idea of harnessing the river Jökulsá fullface tunnel boring machines used to the municipalities in question.

Moreover, in Dal ( Jökla) is more than 50 years old.
bore the headrace tunnels was stopped surveys showed that the majority of the Moreover, considerable efforts were spent for six months in an area heavily fissured nation approved of the project.

Those on research into the area in the 1990s.

and permeable.
and permeable.

Despite these difficulties, who opposed of the project, however, were At year-end 2001, the Minister for the power was delivered on time to the alu- prominent in the debate throughout the Environment ruled in the environmental minium plant of Alcoa in Reydarfjördur project period.
impact assessment that the project should from the national grid, on 1 April 2007, be approved subject to a number of condi- and the aluminium plant was in full opera- In addition to the environmental aspects, a tions.

In the same year, a contract was tion by early 2008. made with a group of consultants on the great deal of attention was brought to the camp facilities and wages of foreign work- project design.
The total cost of the Kárahnjúkar Hydro- ers, the return on investment, geological power Project exceeded the budget by 7%.

conditions and research, fissures, possible Construction at Kárahnjúkar began in Additional costs were caused mainly by leaks and impact on the earth’s crust, and 2002 with the improvement of roads in adverse geological conditions at the Kára- some discussion even came up on whether the highland areas.
During the same year, hnjúkar dam site and in part of the headra- the filling of the reservoir could lead to the largest project components were put ce tunnel.

Moreover, several changes were a volcanic eruption.

During the summer out to tender, i.e.

the construction of the made to the design of the installations of 2005 and 2006, there were protests in Kárahnjúkar dam and headrace tunnels during construction.
However, the output the area, work was halted a few times and (40 km) from the dam to the powerhouse, of the power plant is now estimated about equipment was damaged.
Political debat- the construction and installation of electro- 10% more than originally planned due to ers suggested, among other things, that the mechanical equipment and the construc- lower headlosses in the headrace tunnel filling of the Hálslón reservoir should be tion of an underground powerhouse in and better efficiency of the turbine units.

delayed while geological conditions were Fljótsdalur (the Fljótsdalur station).

investigated further.


Others proposed that Despite various construction difficulties, the height of the dams should be lowered Work at the project site began in the spring the project as a whole can be considered a considerably.

All of the above had to be of 2003 following the signing of the power success.
The construction time was short, responded to by providing information, contract with Alcoa and the contract with particularly when taking into account substantiate decisions and correcting a the Italian company Impregilo for the the remoteness and high elevation of the wide variety of misunderstandings.

construction of the Kárahnjúkar dam and area and total lack of infrastructure at the Landsvirkjun made the decision, at the the headrace tunnels.

beginning of construction.


very beginning, to inform the public as fully as possible about all aspects of the The filling of the Hálslón reservoir began Communications and public project.

This was considered to lead to in September 2006, and by autumn 2007, relations efforts informed discussions and opinions based the reservoir had reached its full height On one hand, the Kárahnjúkar Hydro- on facts and on personal experience of the (625 m above sea level).
The first generat- power Project attracted intense attention project area.

An information centre was es- ing unit in Fljótsdalur station was taken as a technologically important and chal- tablished in Végardur in Fljótsdalur valley, 13 and viewing platforms were installed near The dams at Kárahnjúkar have success- To the east of Jökulsá in Fljótsdalur, the work areas.
Registered visits to Végardur fully met all criteria established in their rivers Kelduá and Grjótá will be harnessed during the project were over 70 thousand, design.

Leakage under the dams are only by means of the Hraunaveita diversion and and many more visited the area to person- a fraction of that expected, and subsidence ally familiarise themselves with the project.

of fills and movements in concrete joints A spokesperson was employed, and the are well within design limits.
Subsidence diverted to Ufsarlón pond by canals and tunnels.

The River Kelduá has a 7 km2 reservoir.

This work was completed for Icelandic media covered the progress of and horizontal displacements in the reser- the most part at the end of the year, while the project extensively.

Overseas, media voir area have been very small.

final finishing work, removal of camps and and technical magazines also followed the temporary site installations will wait until progress with great interest.
Information The Jökulsárveita and Hraunaveita the summer of 2009. on progress was provided in real-time on a diversion website that received between 100 and 200 In 2008, work on the Kárahnjúkar project Fljótsdalur powerhouse thousand visits per year.
Documentaries consisted, for the most part, of work at the Various finishing work was carried out were produced and shown twice a year on Jökulsárveita and Hraunaveita diversion both inside and outside the Fljótsdalur the National Broadcasting Service (RUV), which contributes about 25% of the flow to Powerhouse.

Demand on the power station and foreign channels such as Discovery the power station.
Landsvirkjun took most steadily increased during the first few Channel and National Geographic made of the work there over at the beginning of weeks of the year until the Alcoa Fjardaál their own documentaries which received the year due to financial difficulties of the aluminium plant reached full operational considerable interest worldwide.

Employ- contractor.

The project was thus kept go- capacity.


ees of Landsvirkjun and consultants gave ing for a few months until a new contractor several presentations on the Kárahnjúkar took over in the spring.

project at international conferences.

More- Testing of the electro-mechanical equip- ment in the Fljótsdalur Powerhouse was over, an international technical seminar The boring of the Jökulsá tunnel with a full completed during the year.
At the end of was held on the project in September 2007. face tunnel boring machine was completed the year, minor improvements were made on 9 April.

The intake pond in Jökulsá in by the manufacturer to the runner of all Communications and public relations Fljótsdalur, Ufsarlón pond, was filled in six turbines.

These now stand up to test- efforts for the Kárahnjúkar project were September.
The Jökulsá diversion tunnel ing well beyond the rated power in each more extensive than for any other project is 13.5 km long from Ufsarlón pond to the turbine, which is 115 MW.

in Iceland.

Landsvirkjun is convinced that intersection with the headrace tunnel from this was invaluable and in line with best Hálslón reservoir, 8.5 km of which are Landsvirkjun has always taken good care practice for open discussion on such large excavated with a full face boring machine.
of the environment in the vicinity of its undertakings.

Criticism was answered After completion of the tunnel excavation power stations.

At the beginning of the with information and objective, well-bal- in April, various finishing work in the project Landsvirkjun asked for propos- anced reasoning, and every effort was tunnels continued as well as work on gate als for works of art to be installed at the made to avoid disputes.
structures at the tunnel intersection and Fljótsdalur station and at Kárahnjúkar.

work on the Ufsarstífla dam and the intake The first winning proposal was installed Construction work in 2008 installations at Ufsarlón pond.

This work in 2008.
This work in 2008.

This is the work Eilífdardraumur Hálslón reservoir area was completed in the autumn, so Ufsarlón (Eternal Dream) by Ólafur Thórdarson, Work was carried out on creating a plunge pond was filled in September and the an Icelandic artist and architect working pool downstream of the Kárahnjúkar dam Jökulsá tunnel was taken into operation in New York.

The Eilífdardraumur is a to neutralise the power of the spillway in October.
Work was carried out at the floating work of art on the power plant’s waterfall.

A concrete threshold will be con- Hraunaveita diversion until Christmas, tailrace canal.

It is highly visible from the structed across the riverbed downstream while finishing work in that area will wait access road to the station.

of the pool.

This work will be completed in until the summer of 2009.

14 the summer of 2009.

Finance The financial statements of Landsvirkjun increased by 28.7% from the previous year.
Financial expenses in excess of financial are prepared in accordance with Inter- Other operating expenses decreased by income amounted to USD 660.6 million national Financial Reporting Standards 5% between years.

(IFRS) as adopted by the EU in accor- in the year 2008, while in the year 2007, financial income in excess of financial dance with law.

According to IFRS, the According to this, the group’s EBIT in the expenses amounted to USD 445.6 million.
company shall determine its functional year 2008 increased by USD 64.9 million The change between years amounts to currency and the result is that the USD compared to the previous year.

EBITDA a total of USD 1.1 billion and is mainly became the prevailing currency in the increased by USD 88.5 million between explained by foreign exchange difference company’s operation as of the beginning of years and amounted to USD 351.5 million and fair value changes in embedded de- year 2008. for 2008.
This amount is significant as it rivatives related to the company’s electric reveals much about the company’s ability power sales contracts, which are related to The loss for the year 2008 amounted to cover interest payments and installments world market price of aluminium.

During to USD 344.5 while there was a profit on long-term loans.
The following table the year 2008, foreign exchange difference amounting to USD 459.3 million the pre- shows EBITDA as a percentage of long- was negative by USD 128.6 million but vious year.

Foreign exchange difference in term loans including the following year’s was positive by USD 224.1 million in the the year 2008 was negative by USD 128.6 installment on long-term loans (in USD year 2007.
Fair value changes of deriva- million and negative fair value changes in million): derivative agreements amounted to USD 310.9 million.

In the year 2007, foreign Year (EBITDA) Long-term Liabilities Percentage tives were, as previously stated, negative by USD 310.9 million while positive by USD 362.2 in the year 2007. exchange difference was positive by USD 224.1 million and positive fair value chang- es in derivative agreements amounted to USD 362.2 million.
Return on equity was negative by 21.5% in the year 2008 while positive by 40.2% in the year 2007.

Foreign exchange difference and fair value 2008 2007 2006 2005 2004 351.5 263.0 240.7 155.5 145.3 2,975.3 3,083.1 2,765.0 1,828.8 1,563.4 11.8% 8.5% 8.7% 8.5% 9.3% In the year 2008, tax income amounted to USD 70 million, while in the year 2007 income tax expense amounted to USD 167.4 million.
Balance sheet changes are for the most part unrealised, Interest expenses during the year 2008 The group’s assets amounted to a total of which should be taken into consideration amounted to USD 177.8 million compared USD 4,619.2 million at year-end 2008 in the evaluation of the company’s return.
to USD 92.2 million in the year 2007. and are divided into non-current assets to Average nominal interest on long-term the amount of USD 4,374.1 million and Income statement loans was 4.51% compared to 4.69% the current assets to the amount of USD 245.1 The group’s operating income amounted previous year.

Interests on capital relating million.

Total assets amounted to USD to USD 452 million in the year 2008, to projects under construction are capital- 5,142.3 million in the previous year.
In which is an increase by 22.6% from the ised until the assets in question are ready the year 2008, the company’s embedded previous year.

Increase in operating for use.

During the year 2008, capitalised derivatives decreased by USD 482 million.

income is mainly a result of sales to Alcoa interest expenses amounted to USD 7.3 Fjardaál in east Iceland.

million compared to USD 69.4 million the At year-end 2008, Landsvirkjun’s equity previous year.

amounted to USD 1,376.8 million.


The The group’s operating expenses amounted to USD 206 million in the year 2008 com- RATIOS pared to USD 187.8 million the previous year.

Among operating expenses, deprecia- Ratios 2004 2005 tion of fixed assets weighs the most and Interest coverage (EBITDA/interest expense) .

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1.10 2.18 2006 1.72 2007 1.96 2008 1.41 amounted to USD 105.5 million compared RCF / Net debt .

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4.56% 5.02% 5.20% 4.49% 6.19% to USD 82 million in 2007.

They have thus Debt / EBITDA .

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25.5 23.3 17.0 16.0 8.1 15 company’s equity ratio was 29.8% com- ment during both years is for the most year passed.

Upon the fall of the Icelandic pared to 31.1% the previous year.

Equity part due to the Kárahnjúkar Project.


banks the company’s access to new foreign decreased by USD 223.4 million from the Investment in non-current assets is mostly loan capital was effectively cut off.

At the previous year.


The difference is, on the one financed with loans with borrowings in same time, demand for loan capital has de- hand, mainly due to a loss to the amount the year 2008 amounting to USD 449.9 creased as current projects are small, cash of USD 344.5 in 2008 million and on the million compared to USD 517.3 million from operation has increased and liquidity other hand revaluation of subsidiaries’ the previous year.

Dividend paid to owners is sufficient.


fixed assets to the amount of USD 116.3 amounted to USD 7.8 million in the year million.

2008 compared to USD 8.1 million the In 2003, Landsvirkjun syndicated a USD The company’s long-term liabilities, in- cluding next year’s installments, amounted Financing previous year.

200 million Revolving Credit Facility with its relationship banks.
The loan was intended to be available if international to a total of USD 2,975.3 million at Landsvirkjun’s liquidity position at the bond markets would close down temporar- year-end 2008 compared to USD 3,083.1 beginning of year 2008 was good and the ily, as has happened often in the past.

In million the previous year.


The liabil- company benefitted from good condi- the year 2005, the loan was refinanced ity component of derivative agreements tions in capital markets for the main part and increased to USD 400 million and amounted to USD 145.6 million at year- of 2007.

Borrowings in the year 2008 loan duration was extended to the year end 2008 compared to USD 166.4 million amounted to USD 450 million compared 2012.
Landsvirkjun now benefits from the at year-end 2007. to USD 517 million in the year 2007.

In revolver and at year-end the undrawn and total, ten private placements were issued, accessible amount was USD 350 million.

Statement of cash flows the first on 15 February and the last During the year 2008, cash flow from 25 Sept ember, or right before the fall of Landsvirkjun has always been aware of its operating activities that can be used for the big Icelandic commercial banks.
Of refinancing risk and strives to distribute investments and for repayment of dept these placements, four were in USD, four loans maturities evenly over a longer pe- amounted to USD 184.4 million.

Cash in EUR and two in JPY.

The tenor of the riod.

Landsvirkjun acted according to this income amounted to USD 456 million loans were from one up to fifteen years and policy in the financing of the Kárahnjúkar compared to USD 348.3 million the the average loan term was six years.

The Project.
The Project.

The company is therefore well previous year.

Operating expenses paid loan terms were favourable and by far bet- prepared to meet temporary loan capital amounted to USD 112.5 million in the ter than the credit spread of the Icelandic crises.

Indications show that available year 2008 compared to USD 89.6 million State at the same time.

All were issued capital at year-end, cash from operation the previous year.
Cash from operation under the company’s EMTN programme and the aforementioned revolver will excluding interests increased therefore and the terms were on average 65 basis enable Landsvirkjun to meet all current by USD 84.8 million between years.

Net points over Libor or Euribor swap rates.

liabilities through the year 2010, provided cash outflow due to financial expenses that no new major investment projects will amounted to USD 159.1 million in the In fact, the worldwide financial crisis be undertaken.
It seems as though the loan year 2008 compared to USD 120.2 million started mid year 2007 when access to loan capital crisis will remain for some time.

in the year 2007, taking also into account capital reduced considerably compared The situation can be expected to start outflow due to hedges to the amount of to the previous years.
The effect thereof improving in the first half of 2010 and con- USD 60.4 million, which remains the same was limited on Landsvirkjun’s financing, ventional sources of finance will become amount from the previous year.

however, which was quite good during available again.
It is unlikely, however, Capital expenditure paid in the year 2008 markets deteriorated greatly in the year were before the financial crisis, but Lands- related to non-current assets amounted 2008 and Landsvirkjun experienced virkjun now benefits from having issued to USD 374.8 million compared to USD difficulties in obtaining access to loan long-term bonds on very favourable terms.

the year 2007.

Conditions on loan capital that loan terms will be similar to what they 16 532.5 million the previous year.
Invest- capital and loan margins increased as the Risk management Landsvirkjun lays great emphasis on con- Aluminium price risk despite unfavourable external conditions.

tinuous control and effective financial risk Landsvirkjun’s income is to a great part At the end of December, the fair value of management and plans its risk manage- dependent on world market price of the aforementioned hedge contracts was ment accordingly.
The risk management aluminium and there is considerable risk positive by USD 98 million, the contracts policy is set out by the Board of Directors inherent with a possible decrease in the being effective over the next six years.

of Landsvirkjun where the benchmark in price of aluminium.

In order to reinforce each risk category is defined.
Decisions the income base related to aluminium According to International Financial and the supervision regarding operation price, the risk management may hedge up Reporting Standards, the part of electric of risk management are entrusted to a to 100% of next year’s aluminium price power sales contracts related to the price of risk management committee.

The risk risk and proportionally less for the follow- aluminium is defined as embedded deriva- management committee consists of the ing ten years.
This has partly been done tives.

Therefore, the fair value of embed- Managing Director, his deputy and the with derivative contacts, which are aimed ded derivatives is sensitive to changes in Financial Director.

The Managing Direc- at reducing effects of aluminium price the price of aluminium.

Fair value changes tor is chairman of the risk management downturns on operating income.

Such of embedded derivatives are recognised in committee.
contracts consist, in most cases, in fixing the company’s income statement and affect aluminium price at a certain level.

It is its return and equity.

Fair value determi- Daily operation of risk management is in thus obvious that the company missed out nation of embedded derivatives allows for the hands of the Head of Risk Manage- on income during the first six months of uncertainty in future price of aluminium ment.
The main objectives of risk manage- the year when aluminium price increased in relation to the duration of the contracts.

ment are to analyse, manage and monitor rapidly.
During the second half of the With this approach, and the aforemen- Landsvirkjun’s risks in order to stabilise year, aluminium price has on the other tioned derivative contracts, Landsvirkjun operating income by reducing the impact hand decreased considerably and now the reduces fluctuations in the company’s of fluctuations due to exchange rate, inter- same contracts have begun to provide net return due to changes in the forward est and aluminium price changes.
Risk cash inflow and the company’s realised price of aluminium.

Aluminium price management reports to the risk manage- price is thus higher than the market price hedges are thus, on the one hand, aimed ment committee and Landsvirkjun’s Board of aluminium.
Due to those contracts, at contributing to a more stable and secure of Directors on a regular basis, in which among others, the company’s expected cash flow, and on the other, to create a the company’s risks and results of risk cash flows over the next years is acceptable counterbalance to embedded derivatives.

management are evaluated.


Landsvirkjun’s financial risk MARK TO MARKET VALUE OF HEDGES AND EMBEDDED DERIVATIVE IN ALUMINIUM With active risk management, the Com- pany strives to reduce uncertainty regard- ing cash flows risk and financial standing and monitors that operating targets are met.

The main financial risks are related to fluctuations in the world market price of aluminium, interest rate risk, currency risk and liquidity risk.
Furthermore, Lands- virkjun’s financial risks involve counter- party risk.

Counterparty risk in contracts has been limited by the company’s quality requirements for counterparties.
USD Million 1,000 800 600 400 200 0 -200 -400 Hedges Embedded derivative Total 31.12.2005 31.12.2006 31.06.2007 31.12.2007 30.06.2008 31.12.2008 17 However, the hedges are only a part of Landsvirkjun has entered into interest rate the Board of Directors at each time, but for the extent of embedded derivatives, so the swaps aimed at reducing the company’s that purpose the company uses currency hedge is therefore not perfect.

A decrease interest expenses and risk over a longer swaps and options.
Risk management in the price of aluminium will, based on period.

The fair value of the contracts is may also ensure a fixed rate of cash flow unchanged presumptions, negatively affect recognised in the company’s income state- against the functional currency for up to the company’s operating results due to ment as a hedge relationship between the three years with forward agreements and changes in price evaluations of embedded agreements and the underlying loans has options.

derivatives.

not been defined.


At the end of December At the end of December, the fair value of was negative by USD 10.7 million.

rency risk can be found in note 52 to the embedded derivatives in electric power company’s financial statements.
2008, the fair value of interest rate swaps Further information on the company’s cur- sales contracts was positive by USD 170 Further breakdown of the company’s inter- million, the contracts being effective for est rate risk can be found in note 53 to the Liquidity risk up to 40 years.

This entails a decrease by company’s financial statements.

Access to liquid resources for companies USD 497 million from the previous year.
Taking into account the effect of hedging, Currency risk has rarely, if ever, been as important as now.

In a changed environment, access the negative effect of aluminium prices on Landsvirkjun faces currency risk due to a to financial resources has become limited the operating income was approximately difference in cash inflow and outflow by and costly.

It is of no matter that the USD 268 million before taxes.

currencies and loan portfolio combina- company’s loans are guaranteed by its tion.
Risk in cash flow is mainly related to owner and its equity ratio and cash bal- Further information on embedded deriva- income on electric power sale to industrial ance is good.

tives and derivative contracts related to users, installments and interest payments aluminium can be found in note 51 to the on foreign loans, and foreign purchases.

Landsvirkjun has for a long time aimed at company’s financial statements.
Risk in the balance sheet is mostly re- having secure access to liquid assets corre- lated to possible value fluctuations in the sponding to the average of the Company’s Interest rate risk company’s loan portfolio against the USD net liquidity need for six months.

In order Landsvirkjun is exposed to interest rate between reporting periods, as 30% of the to ensure continuing access, the company risk due to interest bearing assets and loan portfolio is unhedged.
However, risk has carefully reviewed all operating factors liabilities with fixed or variable interests in relation to changes in the loan portfolio concerning liquid resources, in addition for various length of time.

Interest bearing is limited based on the benchmark set by to reducing investments.

Landsvirkjun’s liabilities are significantly higher than interest bearing assets and the company’s benefit lies in minimising interest expense.
CURRENCY COMPOSITION IN LOAN PORTFOLIO At year-end, the proportion of loans with variable interests was around 80% compared to 76% at year-end 2007.

This is quite favourable for the company as in- terests have decreased considerably during the last months reducing Landsvirkjun’s finance expenses.

Based on historical cor- relation of aluminium price and interest rates and how these factors affect cash flow, this hedge can be identified as a natural 80% 70% 60% 50% 40% 30% 20% 10% 0% 18 hedge.
Without swaps With swaps With swaps and options (min) With swaps and options (max) USD EUR GBP JPY CHF ISK financing has always been handled in such tion over the next two years secures the limited with the company’s requirements a way that dates of maturity are reason- Company sufficient liquidity until the end for counterparty quality.

Landsvirkjun ably distributed and in accordance with of year 2010. underlying investments.
The company’s has set a benchmark for derivatives so that no derivative agreements are made with refinancing and liquidity risk has therefore Further breakdown of the company’s financial companies that have a lower rat- been limited with even distribution of use- liquidity standing can be found in note 54 ing than A- from Standard and Poor’s or a ful lives of loans.

to the company’s financial statements.


comparable rating from other recognised At year-end 2008, Landsvirkjun’s cash Counterparty risk credit rating agencies.
Before energy contracts are made on massive energy and cash equivalents amounted to around Landsvirkjun’s counterparty risk arises sales, the financial standing of the relevant USD 125 million but the company also first and foremost due to the company’s en- companies and their parent companies are had access to a revolving credit facility of ergy contracts with industrial users and de- thoroughly reviewed, if applicable.

USD 350 million.

In total, the company rivatives entered into for hedging purposes.
has guaranteed access to liquid resources Such contracts are only entered into with A breakdown of counterparty risk can be to the amount of USD 475 million.

These financial companies.

Though the amounts found in note 55 to the company’s finan- resources along with cash flow from opera- involved are considerably high, the risk is cial statements.
19 Endorsement by the Board of Directors and Managing Director Landsvirkjun’s objective is to operate in the energy which is now in operation, and capitalised interest From the beginning of year 2007, the Company is sector and to engage in other business and financial expenses are therefore lower than in the previous a partnership owned by the State and Eignarhlutir operations according to the decision of the Board of years.

According to the income statement, the loss ehf.

Eignarhlutir ehf.
Eignarhlutir ehf.

is entirely owned by the State.

Directors at each time.

The Company’s consolidated of the year amounted to USD 344.5 million while the The State owns a 99.9% share in the Company and financial statements include, in addition to the parent previous year returned a profit on operation to the Eignarhlutir ehf.

0.1%.

company, five subsidiaries, Landsnet hf., Landsvirkjun amount of USD 459.3 million.

Power ehf., Fjarski ehf., Hraunaveita ehf.


and Icelandic The city of Reykjavik and the town of Akureyri provide, Power Insurance Ltd.

In addition, the parent company Landsvirkjun has entered into derivative agreements together with the state, a guarantee of collection for has one sub-subsidiary, Íslensk jardhitatækni ehf.

in order to manage risk in the Company’s operation.

all obligations of Landsvirkjun, entered into before the Agreements have been made to hedge interest rate end of year 2006.
From the beginning of year 2007, The financial statements of Landsvirkjun for the year risk and foreign currency risk.

In addition, derivative the State and Eignarhlutir ehf.

provide a guarantee of 2008 are prepared in accordance with International agreements have been made in order to hedge risk collection for all of Landsvirkjun’s obligations entered Financial Reporting Standards (IFRS) as adopted due to fluctuations in world market price of aluminium into after that date.
The Company’s payments due to by the EU.

According to IFRS, the Company shall as a part of operating income is based thereon.

The guarantees for long-term loans amounted to USD 7 determine its functional currency and the conclusion Company has also made agreements in order to million in the year 2008. is that the USD is defined as the functional currency in benefit from short-term fluctuations in the currency the Company’s operation as of the beginning of year market.
Positive fair value of hedge agreements in Statement of the Board of Directors and the 2008. order to ensure the Company’s revenue amounted Managing Director to USD 98 million at year end 2008.

The fair value According to the best knowledge of the Board of Di- The Group’s operating income amounted to USD 452 of other derivative agreements at year end 2008 was rectors and the Managing Director, the financial state- million in the year 2008 compared to USD 368.8 mil- negative by USD 108.3 million.
The fair value of ments are in accordance with International Financial lion the previous year.

Operating expenses amounted embedded derivatives in energy sales agreements Reporting Standards as adopted by the EU and it is the to USD 206 million in the year 2008 but amounted with aluminium plants, less fair value of embedded opinion of the Board of Directors and the Managing to USD 187.8 million in the year 2007.
Accordingly, derivatives in energy purchase agreements, is positive Director that the financial statements give a fair view of the Company’s operating profit amounted to USD and their fair value is assessed at the total of USD the Company’s assets, liabilities and financial position 246 million in the year 2008 compared to USD 181 169.7 million at year end 2008. as at December 31, 2008 and the Company’s results million the previous year.
The operating recovery is and changes in cash in the year 2008. explained by increased sales of electricity due to the Equity at year end 2008 amounted to USD 1,376.8 commissioning of the Kárahnjúkar power plant and million according to the balance sheet and the Furthermore, it is the opinion of the Board of Directors higher energy prices.
Company’s Board of Directors will propose to the and the Managing Director that the financial state- Company’s Annual General Meeting that the loss of ments and the Endorsement by the Board of Directors Financial expenses in excess of financial income the year shall be recognised as decrease in equity.
for the year 2008 give a fair view of the Company’s amounted to USD 660.6 million in the year 2008, The Company’s Board of Directors proposes that no results, financial position and development and while in the year 2007, financial income in excess of dividends shall be paid for the year 2008 but other- describe the main risk factors faced by the Company.

financial expenses amounted to USD 445.6 million.


wise refers to the notes to the financial statements for The change between years amounts to a total of USD further changes in equity.

1.1 billion.

The difference between years is mainly The Board of Directors and the Managing Director hereby confirm these consolidated financial state- explained by a change in net income on financial Landsvirkjun was in many ways well prepared for ments with their signature.
assets and liabilities in addition to increased interest the financial crisis which has been prevailing in both expenses.

Recognised change in net income on international markets and mainly the Icelandic market financial assets and liabilities is negative by USD from September 2008.

The Company’s financial 494.1 million but was positive in the year 2007 by position is satisfactory as is liquidity due to good USD 531.6 million.
This is mainly explained by fair cash balance and access to a revolving credit facility, value changes in embedded derivaties related to sales which the Company syndicated in the international Reykjavík, 20 March 2009. agreements with power intensive industries caused by markets in 2005.

Landsvirkjun is no longer exposed a decrease in world market price of aluminium during to construction risk after the Kárahnjúkar power The Board of Directors: the latter half of the year.
Furthermore, a decrease in plant was taken into operation and the Company has Ingimundur Sigurpálsson positive foreign exchange difference due to long-term not made any committments regarding new large Bryndís Hlödversdóttir loans and foreign exchange loss on long-term receiv- projects.

The Directors of Landsvirkjun believe that Gylfi Árnason ables is caused by the decrease in the exchange rate the Company will be able to meet its obligations over Jóna Jónsdóttir of the ISK against the USD.
the next 24 months, despite no access to new loan Páll Magnússon capital during that time.

The parent company will not 22 Interest expenses increased due to an increase in undertake further large scale projects unless financing Managing Director: long-term loans related to Kárahnjúkar power plant, is guaranteed with new long-term loans.

Fridrik Sophusson Amounts in USD thousands.


Independent Auditor’s Report To the Board of Directors and owners Auditor’s Responsibility the reasonableness of accounting estimates made of Landsvirkjun Our responsibility is to express an opinion on by management, as well as evaluating the overall these financial statements based on our audit.

We presentation of the financial statements.


We have audited the accompanying financial state- conducted our audit in accordance with International ments of Landsvirkjun, which comprise the balance Standards on Auditing.
Those standards require that We believe that the audit evidence we have obtained sheet as at December 31, 2008, and the income state- we comply with relevant ethical requirements and plan is sufficient and appropriate to provide a basis for our ment, statement of changes in equity and cash flow and perform the audit to obtain reasonable assurance audit opinion.
statement for the year then ended, and a summary of whether the financial statements are free of material significant accounting policies and other explanatory misstatement.

Opinion notes.
Opinion notes.

In our opinion, the financial statements give a true and An audit involves performing procedures to obtain fair view of the financial position of Landsvirkjun as at Management’s Responsibility for the Financial audit evidence about the amounts and disclosures December 31, 2008, and of its financial perfor- Statements in the financial statements.
The procedures selected mance and its cash flows for the year then ended in Management is responsible for the preparation and depend on the auditor’s judgement, including the as- accordance with International Financial Reporting fair presentation of these financial statements in sessment of the risks of material misstatement of the Standards as adopted by the EU.

accordance with International Financial Reporting financial statements, whether due to fraud or error.

In Standards as adopted by the EU.
This responsibility making those risk assessments, the auditor considers includes: designing, implementing and maintaining internal control relevant to the entity’s preparation and internal control relevant to the preparation and fair fair presentation of the financial statements in order presentation of financial statements that are free to design audit procedures that are appropriate in the Reykjavik, 20 March 2009. from material misstatements, whether due to fraud or circumstances, but not for the purpose of express- error; selecting and applying appropriate accounting ing an opinion on the effectiveness of the entity’s KPMG hf.
policies; and making accounting estimates that are internal control.

An audit also includes evaluating the Jón Eiríksson reasonable in the circumstances.

appropriateness of accounting principles used and Reynir Stefán Gylfason Amounts in USD thousands.

23 Income Statement for 2008 Operating revenues Power sales .

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Transmission .

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Other income .

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Operating expenses Energy production costs .

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Transmission costs .

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Cost of general research .

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Other operating expenses .

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Operating profit .

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Financial income and (financial expenses) Interest income .

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Interest expenses .

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Net income (expenses) on financial assets and liabilities .

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Associated companies .

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(Loss) profit before taxes .

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Notes 25 5 28 6 6 7 35 29 2008 388,368 53,268 10,391 452,027 120,710 36,435 8,073 40,826 206,044 245,983 15,390 177,742 ) 494,111 ) 4,100 ) 660,563 ) 414,580 ) ( ( ( ( ( 2007 298,445 63,601 6,777 368,824 94,324 41,775 19,657 32,003 187,760 181,064 ( ( 6,279 92,197 ) 531,625 69 ) 445,638 626,702 Income tax .

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10,30 70,048 ( 167,444 ) Net (loss) profit for the year .

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( 344,532 ) 459,258 Attributable to: Owners of the parent company .

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Subsidiaries minority interest .

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( ( ( 293,384 ) 51,148 ) 344,532 ) ( 463,756 4,498 ) 459,258 24 Amounts in USD thousands.

Balance Sheet December 31, 2008 Assets Non-current assets Property, plant and equipment .

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Projects under construction .

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Intangible assets .

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Derivative financial instruments .

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Associated companies .

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Shares in other companies .

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Long-term notes receivable .

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Deferred tax asset .

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Total non-current assets Current assets Inventories .

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Accounts receivables and other receivables .

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Derivative financial instruments .

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Cash and cash equivalents .

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Total current assets Notes Total assets 4,619,220 5,142,303 Equity and liabilities Equity Owners’ contributions .

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Revaluation account .

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Translation difference .

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Other equity .

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Equity of the owners of the parent company Minority interest .

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Total equity Long-term liabilities Long-term debt .

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Accrued pension liabilities .

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Obligation due to demolition .

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Derivative financial instruments .

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Current liabilities Accounts payable and other short-term liabilities .

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Current maturities of long-term debt .

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Derivative financial instruments .

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Total liabilities 42 43 43 44 46 12,47 13,34 48 45 13,34 ( 586,512 116,268 33,670 ) 686,384 1,355,494 21,298 1,376,792 2,789,261 22,118 3,936 123,971 2,939,286 95,537 186,008 21,597 303,142 3,242,428 586,512 0 687 ) ( 985,861 1,571,686 28,459 1,600,145 2,735,753 38,153 7,212 105,191 2,886,310 247,277 347,329 61,242 655,848 3,542,158 Amounts in USD thousands.
Total equity and liabilities 4,619,220 5,142,303 25 Statement of Equity from January 1, 2007 to December 31, 2008 Changes in equity year 2007 Equity at 1 January 2007 .

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Equity at 31 December 2007 .

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Owners’ contribution Revaluation Translation Other Minority account difference equity Total interest Total equity 586,512 0 ( ( 687 ) 0 530,169 1,116,681 687 ) ( 463,756 463,756 ( 687 ) 463,756 463,069 ( 586,512 0 ( ( 8,065 ) ( 8,065 ) 687 ) 985,861 1,571,686 ( 26,591 1,143,272 687 ) 4,498 ) 459,258 4,498 ) 458,571 6,366 6,366 8,065 ) ( 28,459 1,600,145 Changes in equity year 2008 Equity at 1 January 2008 .

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Income tax effect of revaluation .

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Loss for the year 2008 .

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Depreciation transferred .

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Dividends paid .

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Equity at 31 December 2008 .

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586,512 687 ) 985,861 1,571,686 138,831 ( 20,825 ) 0 ( ( 32,982 ) 28,459 1,600,145 ( 32,982 ) ( 19,055 ) ( 52,037 ) 74,167 212,998 138,831 11,125 ) ( 31,950 ) ( 20,825 ) ( 51,148 ) ( 344,532 ) ( 293,384 ) ( 293,384 ) ( 7,161 ) ( 215,521 ) 118,006 ( 32,982 ) ( 293,384 ) ( 208,360 ) ( 0 0 ( 7,831 ) 7,831 ) 21,298 1,376,792 586,512 116,268 ( 33,670 ) 686,384 1,355,494 1,738 7,831 ) ( 1,738 ) ( ( 26 Amounts in USD thousands.
Statement of Cash Flows for 2008 Operating activities Cash received from customers .

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Cash expenses .

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From operation excluding interest .

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Interest income received .

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Interest expenses and foreign exchange difference paid .

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Hedge disbursements .

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Cash flow from operating activities Investment activities Kárahnjúkar project - hydropower station .

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Transmission .

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Development costs .

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Purchased shares .

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Other capital expenditure .

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Assets sold .

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Increase (decrease) in unpaid construction cost .

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Other receivables, change .

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Investment activities Financing activities Cash dividends .

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New loans .

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Currency swaps .

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Amortization of long-term debt .

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Short-term loans, change .

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Financing activities (Decrease) increase in cash .

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Effect of exch.

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on cash and cash equivalents .

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Cash and cash equivalents at the beginning of the year .

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Cash and cash equivalents at end of year .

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Financing and investment activities not affecting cash flow: Assets available for sale .

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Finance lease agreements .

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2008 455,977 112,499 ) 343,478 17,049 115,800 ) 60,377 ) 184,350 189,457 ) 12,084 ) 55,134 ) 11,334 ) 15,220 ) 8,119 70,646 ) 345,756 ) 29,041 ) 374,797 ) 7,831 ) 449,882 54,425 288,535 ) 39,355 ) 168,586 21,861 ) 32,724 ) 179,578 124,993 12,560 ) 12,560 ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( 2007 348,319 89,600 ) 258,719 5,906 65,340 ) 60,762 ) 138,522 514,731 ) 81,060 ) 24,447 ) 12,528 ) 22,543 ) 8,288 81,210 565,812 ) 33,286 532,526 ) 8,065 ) 517,257 25,200 27,456 ) 0 506,937 112,933 8,319 ) 74,963 179,578 0 0 Amounts in USD thousands.
27 Notes to the Financial Statements 1.

Landsvirkjun .

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2.

Basis of preparation .

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3.

Basis of consolidation .

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4.

Associated companies .

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5.

Operating revenues .

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6.

Interest income and expenses .

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7.

Net income (exp.)

on fin.

assets/liabilities .

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8.

Foreign currency transactions .

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9.

Impairment .

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10.

Income tax .

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11.

Intangible assets .

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12.

Fixed assets .

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13.

Financial instruments .

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14.

Fair value measurement .

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15.

Fixed assets .

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16.

Inventories .

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17.

Cash and cash equivalents .

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18.

Equity .

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19.

Employees’ benefits .

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20.

Obligations .

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21.

Segment reporting .

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22.

Reporting standards .

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23.

Management evaluation .

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24.

Statement of segments .

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25.

Other income .

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26.


Total number of employees .

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27.

Total salaries .

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28.

Other operating expenses .

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29.

Financial income and (expenses) .

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 Income tax .

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31.

Property, plant and equipment .

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32.

Intangible assets .

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33.

Depreciation .

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34.

Derivative financial instruments .

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35.

Shares in associated companies .

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36.

Shares in other companies .

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37.

Subsidiaries .

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38.

Deferred tax asset .

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39.

Inventories .

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40.

Accounts receivable and other receivables .

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41.

Cash and cash equivalents .

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42.

Equity .


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43.

Revaluation account .

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44.

Long-term liabilities .

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45.

Current maturities of long-term debt .

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46.

Pension fund obligation .

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47.

Obligation due to demolition .

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48.

Accounts payable and other payables .

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49.

Related parties .

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50.

Risk management .

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51.

Aluminium price risk .

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52.

Foreign exchange risk .

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53.

Interest rate risk .

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54.

Liquidity risk .

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55.

Counterparty risk .

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56.

Other issues .

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57.

Subsequent events .

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40 40 41 42 42 43 43 43 44 44 44 44 44 44 45 45 45 46 46 46 47 47 48 49 50 51 51 51 28 Amounts in USD thousands.

Notes Reporting entity 1.

Landsvirkjun Landsvirkjun is a partnership having its place of business in Iceland and its headquarters at Háaleitisbraut 68, Reykjavik.

Landsvirkjun operates on the basis of the Act on Landsvirkjun no.

42/1983.

The financial statements include the Company’s consolidated financial statements and its subsidiaries.
The Company’s main objective is to engage in operations in the energy sector.

2.

Basis of preparation Significant accounting policies used in the preparation of these financial statements are identified below.

a.

Statement of compliance The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU.

The Company’s Board of Directors approved the presentation of the Financial Statements on 20 March 2009. b.
Basis of measurement The financial statements have been prepared on the historical cost basis except for the following assets and liabilities, which have been mea- sured at fair value: derivative financial instruments, long-term receivables, transmission, telecommunications system, trading financial assets and liabilities and shares in other companies.

Fixed operating assets of the subsidiaries, Landsnet hf.

and Fjarski ehf., were revalued during the year.


Fixed assets and asset groups available for sale are recognised at book value or net fair value depending which is lower.

c. Presentation and functional currency The financial statements are presented in USD, which is the parent’s functional currency as of 1 January 2008.

Comparative figures for the year 2007 have been translated on the end rate of the USD against the ISK at year end 2007.
All financial information presented in USD has been rounded to the nearest thousand, unless otherwise stated.

d. Use of estimates and judgements The preparation of financial statements in conformity with the IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.

Actual results may differ from these estimates.


Estimates and underlying assumptions are reviewed on an ongoing basis.

Revisions to accounting estimates are recognised and the effect of the changes are entered in the periods when the changes are made and in subsequent periods if the change also affects those periods.
Information on management’s estimates and decisions made in relation to the application of accounting methods that significantly affect the financial statements are presented in the following notes: - note 31 property, plant and equipment - note 32 intangible assets - note 34 derivative financial instruments - note 46 accrued pension liabilities Amounts in USD thousands.
29 Significant accounting policies Accounting policies set out below have been consistently applied to all periods presented in these financial statements, and to all companies within the group.

3.

Basis of consolidation a) Subsidiaries Subsidiaries are entities controlled by the Company.

Control exists when the Company has the power to govern the financial and operat- ing policies of an entity so as to obtain benefits from its activities.
In assessing control, potential voting rights that currently are exercisable are taken into account.

The consolidated financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Financial statements of subsidiaries have been taken into account.
When the Company’s share of losses exceeds its interest in a subsidiary, the carrying amount of that interest is reduced to nil and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the subsidiary.

In case of a profit on the operation of a subsidiary in a subsequent period, a share in their profit is not recognised until a share in a loss has been fully set off.
b) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Company’s interest in the investee.
Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

c) Subsidiaries with other functional currency Assets and liabilities of a subsidiary with other functional currency than the parent company are translated to USD at the exchange rate ruling at the accounting date.

Income and expenses of that operation are translated to USD at the average exchange rate of the period.
The exchange rate difference arising from the translation is entered as a specific item under equity.

Amounts in the statement of cash flows are translated to USD at the average exchange rate of the period.

The exchange rate difference arising from the translation to USD is entered as a specific item in the statement of cash flows.

4.

Associated companies Associated companies are those companies in which the Company has significant influence, but not control, over the financial and operating policies.
Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity, including any other possible voting power.

The financial statements include the Group’s share in the income and expenses of associated companies according to the method of association, from the date that significant influence commences until the date that significant influence ceases.
When the Group’s share of losses exceeds the book value of an associated company the book value is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the associated company.

If in subsequent periods there is a profit on the operation of associated companies, the share in the profit is not recognised until previous share in losses has been balanced.

5.
5.

Operating revenues Revenues from sales and transmission of electricity consists of sales supplied to power intensive industries and public utilities based on delivery during the period.

Other service income is also recognised when earned or upon delivery.

6.

Interest income and expenses Interest income and expenses are recognised in the income statement as they accrue using the effective interest method.
Interest income and expenses include bank rates, premium, realized interest rate swaps and other difference arising on initial book value of financial instruments and amounts on the date of maturity using the effective interest method.
30 Effective interest is the imputed rate of interest used in determining the current value of estimated cash flow over the estimated useful life of a financial instrument or a shorter period if applicable, so that it equals the book value of the financial asset or liability in the balance sheet.

When calculating effective interest rate the Company estimates cash flow taking into account all contractual aspects of the financial instrument.

Amounts in USD thousands.

7.


Net income (expenses) on financial assets and liabilities Net income (expenses) on financial assets and liabilities include profit and loss on current assets and liabilities and all redeemed and unredeemed fair value changes, dividends and changes in foreign exchange difference.

Dividend income is recognised in the income statement when distribu- tion of dividends has been approved.

8.
8.

Foreign currency transactions Transactions in foreign currencies are recognised at the exchange rate ruling at the dates of the transactions.

Monetary assets and liabilities denominated in foreign currencies are recognised at the exchange rate ruling at the end of the period.

The foreign currency gain or loss thereon is recognised in the income statement.
Non-monetary assets and liabilities measured at cost value in a foreign currency are translated to USD at the exchange rate ruling at the date of the transactions.

Tangible assets and liabilities recognised in foreign currencies at fair value are translated to USD at the exchange rate ruling at the date of determination of fair value.

9.

Impairment i) Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired.
A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate.
An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value.

Impairment loss on financial assets is recognised in the income statement.

Accumulated loss on available-for-sale financial assets, previ- ously recognised among equity, is recognised in the income statement when the impairment loss has been incurred.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised.
For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in the income statement.

For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity.
ii) Non-financial assets The carrying amounts of the Company’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each report- ing date to determine whether there is any indication of impairment.

If any such indication exists, then the asset’s recoverable amount is estimated.

Impairment tests are carried out at least once a year on intangible assets with undetermined useful life.
Impairment loss is recognised when the book value of the asset or its cash generating unit exceeds its recoverable amount.

A cash generating unit is the smallest distinguishable asset group that generates cash, which is mostly independent from other units or unit groups.

Impairment loss is expensed in the income statement and later proportionally as reduction in the book value of other assets pertaining to the unit.
The recoverable amount of non-financial assets or its cash generating unit is the greater of its fair value less cost to sell or its value in use.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
An impairment loss in respect of non-financial assets is reversed if there has been a change in the estimates used to determine the recover- able amount.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

10.

Income tax Income tax on the results for the year consists of current tax and deferred tax.
Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date.

31 Amounts in USD thousands.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against the asset.
A deferred tax asset is recognised in the financial statements.

Its calculation is based on the difference in balance sheet items, according to the tax return, on the one hand, and the consolidated financial statements on the other.
The difference thus arising is due to the fact that the tax assess- ment is based on other premises than the Group’s financial statements and is in main respect a temporary difference as expenses are entered in the financial statements in an another period than in the tax return.

11.

Intangible assets Intangible assets are recognised at cost value, less impairment loss and depreciation.

Expenditure for general research cost is expensed in the period it incurs.
Development cost for future power projects is capitalised among fixed assets.

The development cost is only capitalised if there is probability of future economic benefit and the Company intends and is able to con- clude, use or sell it.

The cost is not depreciated at this stage but account is taken for possible impairment loss if a project plan changes.

Water and geothermal rights are capitalised in the balance sheet at cost value as intangible assets with unlimited useful life.
Other intangible assets are stated at cost less accumulated depreciation and impairment loss.

Subsequent cost is only capitalised if it increases the estimated future economic benefit of the asset it relates to.

All other cost is expensed in the income statement when incurred.

Amortization is calculated on a straight line basis, based on the estimated useful lives of intangible assets from the date that they become ready for use.

Estimated amortization and useful life is specified as follows: Software .
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25% 4 years 12.

Fixed assets Property, plant and equipment Fixed assets are initially measured at cost.
The Group’s transmission and telecommunication systems are recognised at a revalued cost in the balance sheet, which is their fair value, less depreciation from the date of revaluation.

The revaluation of those assets will be carried out on a regular basis.

All value increase due to the revalu- ation is recognised in the revaluation account among equity after income tax effect.

Depreciation of the revalued cost is recognised in the income statement.
Upon sale or disposal of an asset, the part of the revaluation account pertaining to the asset is transferred to retained earnings.

Other operating assets are capitalised at cost, less accumulated depreciation and impairment.

Initial value of fixed assets includes the estimated cost of demolition following their use.

Estimated demoliton cost of power lines has been measured at discounted value based on the useful life and an obligation in relation thereto has been recognised among long-term liabilities.
An increase in the obligation due to the reversal of disccounting is expensed in the income statement in addition to depreciation of demolition cost.

Cost value consists of all cost incurred due to the acquisition of the asset.

Cost value of fixed assets constructed in own account is the aggregate cost of construction, such as cost of material and salaries in addition to all other cost the Company incurs in making the asset operative.
If single items of fixed assets have different estimated useful lives they are divided in accordance with their different useful lives.

Profit or loss on the sale of an operating asset is the difference between the sales value and the book value of the asset and is recognised in the income statement.

Renewal cost of parts of fixed assets is capitalised if it is considered likely that the cost involves future economic benefit for the Company and furthermore, if the cost is measureable.
Operating cost of fixed assets is recognised in the income statement.

32 Amounts in USD thousands.

Interest expense on loans used to finance the cost value of projects is capitalised at the time of construction.

Interest is not calculated on develop- ment cost.

After the assets have been taken into use, interest expense is recognised in the income statement.

Depreciation Depreciation is calculated as a fixed annual percentage based on the estimated useful lives of the operating assets.
Depreciation method, estimated useful life and scrap value are reassessed at each accounting date.

Depreciation ratios and useful life are specified as follows: Power stations: .

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Powerhouses and other structures .

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Machinery .

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Thermal stations .

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Substations .

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Power lines .

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Depreciation 1.67% 2.5-6.67% 1.67-3.33% 1.67-6.67% 2.5%-5% 2.00% 2.00% 10-25% 10-20% 5.00% 7.00% 6.00% 14-15% Useful life 60 years 15-40 years 30-60 years 15-60 years 20-40 years 50 years 50 years 4-10 years 5-10 years 20 years 15 years 17 years 7 years 13.
Financial instruments i) Non-derivative financial instruments Non-derivative financial instruments consist of investments in shares and bonds, accounts receivables, other receivables, cash and cash equivalents, borrowings, accounts payable and other short-term liabilities.

Non-derivative financial instruments are recognised at fair value at initial recognition.
In case of financial instruments, not measured at fair value through the income statement, all direct transaction cost is entered as increase in fair value at their initial recognition, with the excep- tions described below.

Following an initial recognition non-derivative financial instruments are recognised as follows.

Financial instruments are entered in the consolidated financial statements when the Company becomes a part of contractual provisions of the relevant financial instrument.
Financial assets are derecognized if the Company’s contractual right to cash flows due to the asset expires or the Company transfers the assets to another party without holding back control or almost all the risk and reward involved in the ownership.

Conventional purchase and sale of financial assets are recognised at the transaction date, i.e.

the date the Company enters into obligation to purchase or sell the asset.
Financial obligations are derecognized from the consolidated financial statements if the obligations of the Company defined in an agreement are paid, expire, are disallowed or invalidated.

Cash and cash equivalents consist of cash, short-term market securities and demand deposits.

Note no.

6 includes information on accounting methods used for financial income and expenses.
Financial assets and liabilities at fair value through income statement A financial instrument is recognised at fair value and fair value changes through the income statement in case of current financial assets or if it is, at initial registration, determined as a financial instrument at fair value through the income statement.
A financial instrument is denomi- nated at fair value through the income statement if the Company manages such investments and decisions of purchase and sale are based on their fair value.

Financial assets and liabilities at fair value through the income statement are recognised at fair value in the balance sheet and fair value changes are recognised in the income statement.

Direct transaction cost is entered in the income statement as it incurs.

Amounts in USD thousands.


33 Other financial instruments Other non-derivative financial instruments are recognised at amortised cost value using the effective interest method, less impairment loss, if any.

Off-setting of financial assets and liabilities Financial assets and liabilities are set off and the net amount is recognised in the balance sheet when the legal right exists on off-setting and the Company intends to account for financial assets and liabilities by off-setting.
ii) Derivative financial instruments The Company enters into derivative financial instruments to hedge its foreign currency, interest rate and aluminum price risk exposures.
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related and another instrument with the same provisions as the embedded derivative would be defined as derivative and the hybrid contract is not stated at fair value in the income statement.

Derivative financial instruments are recognised initially at fair value.
Attributable transaction costs are recognised in the income statement when incurred.

Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

Economic hedges Hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currencies.
Changes in the fair value of such derivatives are recognised in the income statement as part of net income (expenses) on financial assets and liabilities.

Separable embedded derivatives Fair value changes of embedded derivatives separable from the host contract are recognised when the fair value change takes place, see notes on risk management.

14.
14.

Fair value measurement Some of the Company’s accounting standards and notes require that fair value be measured, both for financial assets and liabilities and other assets and liabilities.

Fair value has been determined due to assessments and/or notes according to the following methods.

Where applicable, further information is made available on methods used to find the fair value of assets and liabilities in the note relevant to the asset or the liability in question.
The fair value of financial assets and liabilities listed in an active market is the same as their listed value.

Evaluation methods are applied to all other financial instruments in calculating their fair value.

A financial asset or liability is considered to be listed on an active market if the official price can be obtained from a stock exchange or another independent party and the price reflects real and regular market transactions between unrelated parties.
Evaluation methods can involve the use of recent transaction prices between unrelated parties.

The methods take note of the value of other finan- cial instruments similar to the instrument in question, and methods are used to determine the discounted cash flow or other evaluation methods that can be applied in order to measure in a reliable way the real market value.
When applying evaluation methods, all factors that market parties would use in price assessment are used and the methods are in accordance with generally accepted methods for rating financing instruments.

The Company verifies its evaluation methods on an ongoing basis and tests them by using prices obtained from transactions in an active market with the same instrument, without adjustments or changes, or based on information from an active market.
The most reliable verification of the initial fair value of derivative financial instruments is the purchase value, unless the fair value of the instrument can be verified by comparison with other recent listed market transactions with the same instrument, or based on an evaluation method where variables are exclusively based on market data.

When such market data can be obtained, the Company recognises profit and loss at the initial recognition date of the instruments.

15.
15.

Fixed assets Fair value of revalued property, plant and equipment has been determined on the basis of the discounted cash flow of the asset in question.

34 Amounts in USD thousands.

16.

Inventories Inventories are stated at the lower of the cost value or the net sales value.

Cost value of inventories is based on the “First In First Out” method and includes cost incurred upon the purchase of the inventories and in bringing them to the sales location and in a saleable state.

17.
17.

Cash and cash equivalents Cash and cash equivalents consist of cash, short-term market securities and demand deposits.

18.

Equity The Group’s equity is divided into owners’ contribution, revaluation account, translation difference, other equity and minority interest.

The parent company’s contributed capital amounts to USD 586.5 million (ISK 36,364 million).

19.
19.

Employees’ benefits i) Defined contribution plan Cost due to contribution to defined benefit plans is expensed in the income statement when incurred.

ii) Defined benefit plan The Company’s obligation due to defined benefit plans is calculated by estimating the future value of defined pension benefits accrued by current and former employees in current or previous periods.

The benefits are discounted in order to determine their present value.
An actuary has calculated the obligation on the basis of a method, which is based on accrued benefits.

Changes in the obligation are recognised in the income statement when incurred.

20.

Obligations Obligations are recognised when the Company has entered into obligations due to past events, it is likely that they will be settled and they can be reliably measured.
The obligation can be assessed on the basis of estimated cash flows, discounted on the basis of interests reflecting market interests and the risk inherent with the obligation.

21.
21.

Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing related products or services (operating segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments.

The Group’s main segment is based on operating segments.
Geographical segments are not disclosed as almost the entire operation of the group is carried out in Iceland.

Inter-segment pricing is determined on an arm’s length basis.

Segment operating return, assets and liabilities consist of items that can be directly linked to each segment, in addition to the items that can be reasonably divided into segments.
Items not classified with single segments are mainly investments and related income, borrowings and related cost, collective assets and related cost, in addition to deferred income tax.

22.

Reporting standards The following new standards, amendments to standards and interpretations are not yet effective and do thus not affect the preparation of these financial statements.

New standards and interpretations that have not been implemented by the Group.
IFRS 8 Operating Segments introduces the “management approach” to segment reporting.

IFRS 8, which becomes mandatory for the Group’s 2009 consolidated financial statements, will require a change in the presentation and disclosure of segment information based on the internal reports regularly reviewed by the Company’s Chief Operating Decision Maker in order to assess each segment’s performance and to allocate resources to them.
The standard is not expected to have effect on the Company’s financial statements.

Amounts in USD thousands.

35 Revised IAS 1 Presentation of Financial Statements (2007) introduces the term “total comprehensive income”, which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners.
Total comprehensive income may be presented in either a single statement of comprehensive income, or in an income statement and a separate statement of comprehensive income.

Revised IAS 1, will become mandatory for the Company’s 2009 consolidated financial statements.
Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.

The revised IAS 23 will become mandatory for the Company’s 2009 consolidated financial statements and is not expected to have effect on the Company’s financial standing.
Revised IFRS 3 Business Combinations (2008) incorporates the following changes that are likely to be relevant to the Company’s operations: - The definition of a business has been broadened, which is likely to result in more acquisitions being treated as business combinations.

- Contingent consideration will be measured at fair value, with subsequent changes therein recognised in profit or loss.
- - Any pre-existing interest in the acquiree will be measured at fair value with the gain or loss recognised in profit or loss.

- Any non-controlling (minority) interest will be measured at either fair value, or at its proportionate interest in the identifiable assets and Transaction costs, other than share and debt issue costs, will be expensed as incurred.

liabilities of the acquiree, on a transaction-by-transaction basis.
Revised IFRS 3, will become mandatory for the Company’s 2010 consolidated financial statements, if endorsed by the EU.

Amended IAS 27 Consolidated and Separate Financial Statements (2008) requires accounting for changes in ownership interests by the Company in a subsidiary, while maintaining control, to be recognised as an equity transaction.
When the Company loses control of a subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognised in profit or loss.

The amendments to IAS 27, which become mandatory for the Company’s 2010 consolidated financial statements if endorsed by the EU, are not expected to have a significant impact on the consolidated financial statements.
Amendment to IFRS 2 Share-based Payment – Vesting Conditions and Cancellations (2008) clarifies the definition of vesting conditions, intro- duces the concept on non-vesting conditions, requires non-vesting conditions to be reflected in grant-date fair value and provides the accounting treatment for non-vesting conditions and cancellations.

If the amendments to IFRS 2 will become mandatory for the Company’s 2009 consolidated financial statements, it will be with retrospective application.
The effect of the introduction of the standard on the Company’s financial statements has not yet been estimated.
Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation requires puttable instruments, and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, to be classified as equity if certain conditions are met.
If the amendments will become mandatory for the Company’s 2009 consolidated financial statements with retrospective application required, they are not expected to have any impact on the consolidated financial statements.

Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items clarifies the application of existing prin- ciples that determine whether specific risks or portions of cash flows are eligible for designation in a hedging relationship.
The amendments will become mandatory for the Company’s 2010 consolidated financial statements if endorsed by the EU, with retrospective application required.

The amendments are not expected to have any impact on the consolidated financial statements.

IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty pro- grammes under which the customer can redeem credits for awards such as free or discounted goods or services.
IFRIC 13, which becomes man- datory for the Company’s 2009 consolidated financial statements, is not expected to have any impact on the consolidated financial statements.

IFRIC 15 Agreements for the Construction of Real Estate applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors.
IFRIC 15, which becomes mandatory for the Company’s 2009 consolidated financial statements if endorsed by the EU, is not expected to have any impact on the consolidated financial statements.

IFRIC 17 Distributions of Non-cash Assets to Owners provides guidance on when and how a liability for certain distributions of non-cash assets to owners acting in their capacity as owners is recognised and measured, and how to account for settlement of that liability.
IFRIC 17, which becomes mandatory for the Company’s 2010 consolidated financial statements if endorsed by the EU, is not expected to have any impact on the consoli- dated financial statements.

36 Amounts in USD thousands.

One interpretation, IFRIC 12 Service Concession Arrangements, is effective for the year 2008 but it has not been applied in preparing these cons- olidated financial statements because it has not yet been endorsed by the EU.

23.
23.

Management’s evaluation and assumption in relation to the application of accounting methods The Group’s management makes judgements, estimates and assumptions that may affect items in the Group’s balance sheet for the next period.

The management evaluates on an ongoing basis its judgements and estimates based on previous experience and other relevant factors, such as estimated future events when decisions on judgements and estimates are made.
Fair value of derivative agreements The fair value of derivative agreements not listed in effective markets is determined by using evaluation methods, which are reviewed on an ongoing basis by independent parties.

All evaluation models used must be approved and tested in order to ensure that the results reflect the documents used.

Segment reporting 24.

Statement of segments Segment information is presented by sectors.
The primary segment statement is presented according to the nature of the operation and is based on the Group’s organisation and internal disclosure.

Inter-segment pricing is determined on an arm’s length basis.

Segment operating income includes the segments pertaining directly to specific segments and the items that can be logically divided between the segments.

Assets and liabilities of the Group are in the same manner divided between segments based on the beforementioned premises.
Operating segments Year 2008 Electricity production Electricity transmission Adjustments Total Income from third party .

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Income within the Group .

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Segment income .

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Segment operating expenses .

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EBITDA .


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Depreciation and amortization .

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Segment earnings, EBIT .

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398,544 25,821 424,365 154,076 ) 270,289 83,280 ) 187,009 ( ( ( ( Segment assets .

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Shares in associated companies .

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Total assets .

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4,522,542 12,942 4,535,484 Segment liabilities .

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Total liabilities .

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3,150,038 3,150,038 53,483 69,745 123,228 42,002 ) 81,226 22,563 ) 58,663 571,818 400 572,218 512,032 512,032 Investments .

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Depreciation of operating assets .

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Depreciation of intangible assets .

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Impairment loss on intangible assets .

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313,942 78,795 ) 377 ) 4,108 ) ( ( ( 30,129 22,116 ) 447 ) ( ( ( ( 95,566 ) 95,566 ) 95,566 311 311 452,027 0 452,027 100,512 ) 351,515 105,532 ) 245,983 ( ( ( 488,482 ) ( 488,482 ) 4,605,878 13,342 4,619,220 ( ( ( 419,642 ) 419,642 ) 3,242,428 3,242,428 1,530 ) 311 342,541 100,600 ) 824 ) 4,108 ) ( ( ( Amounts in USD thousands.
37 Year 2007 Electricity production Electricity transmission Adjustments Total Income from third party .

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Income within the Group .

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Segment income .

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Segment operating expenses .

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EBITDA .

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Depreciation and amortization .

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Segment earnings, EBIT .

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304,624 29,434 334,058 127,215 ) 206,844 62,625 ) 144,219 ( ( ( ( Segment assets .

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Shares in associated companies .

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Total assets .

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5,071,626 6,258 5,077,884 Segment liabilities .

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Total liabilities .

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3,435,449 3,435,449 64,199 48,111 112,310 56,130 ) 56,180 19,461 ) 36,719 794,516 661 795,177 714,742 714,742 Investments .

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Depreciation of operating assets .

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Depreciation of intangible assets.

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Impairment loss on intangible assets .

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469,475 50,963 ) 435 ) 11,226 ) ( ( ( 107,747 19,155 ) 290 ) 16 ) ( ( ( ( ( ( ( ( ( ( 77,545 ) 77,545 ) 77,545 126 126 368,824 0 368,824 105,800 ) 263,025 81,960 ) 181,064 ( ( 730,758 ) 730,758 ) 5,135,385 6,918 5,142,303 608,032 ) 608,032 ) 3,542,158 3,542,158 15,651 ) 126 561,571 69,992 ) 726 ) 11,242 ) ( ( ( Other income 25.
Other income is specified as follows: Service sale, rent and other income .

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Sales profit on operating assets.

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2008 10,315 76 10,391 2007 6,743 34 6,777 Salaries and salary related expenses 26.
Total number of employees is specified as follows: Average number of employees during the year calculated to full-time equivalents .

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Full-time equivalent units at year-end .

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352 317 347 301 27.

Total salaries of employees are specified as follows: Salaries .

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Pension premium payments .

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Defined pension benefit payments .

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Increase in pension obligation .

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Other salary related expenses .

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Salaries of the Board of Directors, Managing Director, Deputy and Executive Directors are specified as follows: Salaries of the Board of Directors of the parent company .

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Salaries of Boards of Directors of three subsidiaries .

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Salaries and benefits of the Managing Director of the parent company .

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Salaries of the Deputy Managing Director and Directors of the parent company .

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Salaries and benefits of the Managing Director and Directors of subsidiaries .

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38 32,775 3,736 1,662 3,876 2,623 44,672 115 131 244 950 1,070 40,565 4,699 1,850 2,985 3,746 53,845 153 94 326 1,367 892 Amounts in USD thousands.

Salaries are divided as follows in the income statement: Energy production costs .

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Transmission costs .

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Cost of general research .

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Other operating expenses .

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Other operating expenses 28.

Other operating expenses are specified as follows: Corporate office .

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Finance .

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Human resources .

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Information technology .

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Engineering and construction .

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Pension .

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Other shared costs .

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Other costs - relating to subsidiaries .

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Assets available for sale, impairment .

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Depreciation .

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Auditors’ fees are specified as follows: Auditing of financial statements .

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Reviewing of interim financial statements .

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Other services .

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 Financial income and (expenses) 29.

Financial income and (expenses) are specified as follows: Interest income .

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15,390 6,279 Interest expenses .

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Guarantee-fee paid to owners .

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Capitalised interest costs .

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Total interest expenses .

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Exchange rate difference .

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Fair value changes of derivatives .

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Expensed aluminium hedges .

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Fair value changes of shares .

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Sales profit on shares in an associated company .

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Net income (expenses) on financial assets and liabilities .

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Effects through associated companies .

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Financial income and (expenses) ( ( ( ( ( ( ( ( ( ( 178,060 ) 6,970 ) 7,288 177,742 ) 128,612 ) 310,883 ) 54,759 ) 13 ) 156 494,111 ) 4,100 ) 660,563 ) ( ( ( ( ( ( 154,872 ) 6,759 ) 69,434 92,197 ) 224,064 362,172 59,447 ) 920 ) 5,757 531,625 69 ) 445,638 The borrowing costs on new long-term debt used for financing construction expenditure was 3.75%.
The interest cost capitalized, including the guarantee fee, was 4% on funds invested in assets under construction.

Amounts in USD thousands.

39 Income Tax 30.

In May 2008, the Icelandic Parliament, Althingi, approved a decrease in the income tax rate from 26% to 23.5% with partnership companies and 18% to 15% with limited liability companies as of 1 January 2008 and the change will become effective in the tax assessment of the year 2009.
Due to this, the deferred tax asset has decreased by USD 10.3 million compared to 31 December 2007.

The decrease is recognised in the group’s income statement.

Income tax recognised in the income statement is specified as follows: Change in income tax asset .

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Current tax .

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Liability due to revaluation recognised in equity .

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Foreign exchange difference .

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Reversal of a subsidiary’s current tax related to prior year.

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Recognised as income (expense) in the income statement.

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Change in income tax asset is specified as follows: Change in temporary difference .

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Decrease in tax ratio .

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Carry forward loss utilised .

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Foreign exchange difference .

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Change in deferred tax asset .

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Effective tax rate: (Loss) profit for the year .

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Income tax for the year .

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(Loss) profit before income tax .

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Income tax acc.


to the parent company’s curr.

tax rate .

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Effect of different tax rates within the Group .

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Decrease due to change in tax rate .

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Non-deductible cost .

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Other items .

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Effective income tax .

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2008 344,532 ) 70,048 ) 414,580 ) 97,426 ) 14,435 10,345 3,074 476 ) 70,048 ) ( ( ( ( ( ( 23.5% -3.5% -2.5% -0.7% 0.1% 16.9% ( ( ( 2008 26,612 361 ) 30,751 12,941 105 70,048 14,483 10,345 ) 35,415 12,941 ) 26,612 26.0% 0.1% 0.2% 0.4% 26.7% Non-current assets 31.
Property, plant and equipment, their initial value and depreciation is specified as follows: Total value at 1.1.2007 .

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Additions during the year .

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Transferred from assets in construction Sold and disposed of .

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Total value at 31.12.2007 .

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Effect of foreign exchange rate changes Additions during the year .

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Revaluation of fixed assets.

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Transferred from assets in construction Sold and disposed of .

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Total value at 31.12.2008. .

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Power stations 2,697,778 7,509 1,708,553 0 4,413,840 143,159 0 264,421 0 4,821,420 Transmission 474,287 49,253 163,184 0 686,724 406,714 ) 10,484 229,394 0 0 519,888 ( Communicat, equipment 11,856 878 0 0 12,734 6,546 ) 1,210 2,715 0 0 10,112 ( ( ( ( Other assets 70,698 8,015 147 ) 1,509 ) 77,057 19,411 ) 5,771 0 0 607 ) 62,810 ( ( ( ( ( ( ( 2007 167,193 ) 251 ) 0 0 0 167,444 ) 140,252 ) 0 26,942 ) 0 167,193 ) 2007 459,258 167,444 626,702 162,943 774 0 1,145 2,582 167,444 Total 3,254,619 65,654 1,871,590 ( 1,509 ) 5,190,355 432,671 ) ( 160,624 232,109 264,421 ( 607 ) 5,414,230 40 Amounts in USD thousands.
Power stations Transmission equipment Other assets Total Communicat.

Depreciation and impairment loss Total value at 1.1.2007 .

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Depreciation of the year .

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Sold and disposed of .

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Total value at 31.12.2007 .

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Depreciation of the year .

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Revaluation of depreciation .

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Effect of foreign exchange rate changes Sold and disposed of .

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Total value at 31.12.2008. .

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1,428,413 48,677 0 1,477,090 77,697 0 0 0 1,554,787 Non-current assets are specified as follows: Book value 1.1.2007 .

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31.12.2007 and 1.1.2008 .

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31.12.2008 .

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1,269,365 2,936,750 3,266,633 17,258 17,217 0 34,474 19,422 18,995 27,806 ) 0 45,086 ( 457,030 652,250 474,802 ( 4,746 834 0 5,579 700 0 2,923 ) 0 3,357 7,110 7,154 6,755 19,590 3,251 1,291 ) 21,550 2,780 0 1,935 ) 524 ) 21,871 ( ( ( 1,470,006 69,978 ( 1,291 ) 1,538,693 100,600 18,995 32,664 ) ( ( 524 ) 1,625,100 51,108 55,507 40,939 1,784,613 3,651,660 3,789,129 Official assessment of fixed assets and insurance value The official assessment of the Company’s real estates amounted to USD 275 million at year end 2008.
Insurance value of the Company’s assets amounts to USD 3,822 million.

32.

Intangible assets are specified as follows: Capitalised Water and development geothermal cost rights Software Total Cost value Total value at 1.1.2007 .

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Additions during the year .

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Total value at 31.12.2007 .

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Effect of foreign exchange rate changes .

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Additions during the year .

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Total value at 31.12.2008 .

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Depreciation and impairment loss Total value at 1.1.2007 .

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Depreciation and impairment loss during the year .

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Total value at 31.12.2007 .

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Depreciation and impairment loss during the year .

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Effect of foreign exchange rate changes .

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Total value at 31.12.2008 .

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Book value 1.1.2007. .

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31.12.2007 and 1.1.2008. .

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31.12.2008 .

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( ( 65,347 28,413 93,760 6,599 ) 55,134 142,295 32,268 11,247 43,515 4,108 10 ) 47,613 33,079 50,245 94,682 14,207 26,361 40,568 0 0 40,568 0 0 0 0 0 0 14,207 40,568 40,568 ( ( 3,516 2,175 5,691 1,650 ) 1,685 5,726 1,654 735 2,389 824 315 ) 2,898 1,862 3,302 2,828 ( ( 83,070 56,949 140,019 8,249 ) 56,819 188,589 33,922 11,982 45,904 4,932 325 ) 50,511 49,148 94,113 138,077 Amounts in USD thousands.

41 33.
41 33.

The Group’s depreciation and impairment is divided as follows: 2008 2007 Power stations .

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Transmission .

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Telecommunication equipment .

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Other assets .

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Depreciation of assets in operation .


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Impairment loss on development cost .

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Amortization of software .

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The Group’s depreciation is divided as follows by sector: Energy production costs .

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Transmission costs .

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Cost of general research .

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Other operating expenses .

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34.

Derivative financial instruments in the balance sheet are specified as follows: Assets: Embedded derivatives in electricity sales agreements .

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Aluminium hedges .

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Currency swaps .

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Interest rate swaps .

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Other derivatives .

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Derivative financial instruments are divided as follows: Long-term component of derivative agreements .

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Short-term component of derivative agreements .

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Liabilities: Embedded derivatives in electricity sales agreements .

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Aluminium hedges .

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Currency swaps .

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Interest rate swaps .

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Other derivatives .

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Derivative financial intruments are divided as follows: .

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Long-term component of derivatives .

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Short-term component of derivatives .

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 Amounts in USD thousands.

Shares 35.
Shares 35.

Shares in associated companies recognised according to the equity method within the Group are specified as follows: 2008 Share in Eignarhaldsfélagid Farice ehf.

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Theistareykir ehf.

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Netorka hf.

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Hecla SAS .

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Sipenco Gmbh .

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Isturk .

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HydroKraft Invest hf.

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Theistareykir ehf.

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Netorka hf.

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HydroKraft Invest hf.

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36.

Shares in other companies are specified as follows: Eignarhaldsfélagid Farice ehf, .

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Neydarlínan hf.

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Orkuvördur ehf.

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DMM Lausnir ehf.

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Vistorka hf.

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Other companies (4/5) .

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Total shares in other companies .

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Impairment loss on share asset .

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( ( ( ( ( ( ( ( ( return 1,668 ) 2,074 ) 83 81 38 ) 44 ) 440 ) 4,100 ) Share in return 24 3 ) 90 ) 69 ) Share 9.4% 7.9% 9.0% 17.8% 14.8% Share 29.5% 32.0% 40.8% 30.0% 25.0% 30.0% 50.0% Share 32.0% 40.8% 50.0% 2008 Share Book value 7.9% 9.0% 17.8% 13.2% 414 165 295 292 162 1,328 1,201 ) 127 ( Book value 10,986 1,251 436 209 0 0 460 13,342 Book value 4,663 1,522 733 6,918 Book value 1,997 806 323 576 570 493 4,765 2,452 ) 2,313 ( 2007 2007 Shareholding has been decreased by impairment loss, or by USD 1.2 million, due to an uncertainty on the future standing of individual companies.
Some of the companies are established around high-risk innovative projects.

37.

Landsvirkjun’s subsidiaries are specified as follows: Fjarski ehf.

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Hraunaveita ehf.

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Icelandic Power Insurance Ltd. .

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Landsnet hf.

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Landsvirkjun Power ehf.

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Amounts in USD thousands.

Share 100.0% 100.0% 100.0% 64.7% 100.0% 43 Tax asset 38.

Changes in tax asset during the year is specified as follows: Calculated tax asset at the beginning of the year .

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Calculated income tax .

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Current income tax .

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Liability due to revaluation of fixed assets transferred to equity .

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Exchange rate loss and translation difference due to tax asset .

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Deferred tax asset at year-end .

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The Company’s deferred tax asset is specified as follows: Carry forward taxable loss .
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Non-current assets and intangible assets .

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Derivative financial instruments.

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Other items .

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Exchange rate loss due to tax asset .

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Deferred tax asset at year-end .

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2008 106,797 70,048 258 31,950 ) 11,744 ) 133,409 50,550 140,516 52,423 ) 7,460 12,694 ) 133,409 ( ( ( ( ( ( 2007 273,990 167,444 ) 251 0 0 106,797 34,002 201,792 140,224 ) 11,227 0 106,797 Current assets 39.
Inventories Inventories are specified as follows: Oil .

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Spare-parts and consumables .

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40.


Accounts receivables and other short-term receivables Accounts receivables and other short term receivables are specified as follows: Nominal value of accounts receivables .

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Assets available for sale .

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Other short-term receivables .

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294 3,975 4,269 52,949 8,412 37,013 98,374 561 4,876 5,437 60,433 0 12,903 73,337 At year-end 2008, 70% of accounts receivable were under 30 days old and almost no receivable was older than 60 days.

41.

Cash and cash equivalents Cash and cash equivalents are specified as follows: Bank deposits .

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Market securities .

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113,940 11,053 124,993 91,417 88,160 179,578 Equity 42.

The parent company is a partnership owned by the State and Eignarhlutir ehf.

The State owns a 99.9% share in the Company and Eignarhlutir ehf.
holds 0.1%.

The Company is an independent taxable entity.

43.

The revaluation account consists of revaluation of fixed assets of subsidiaries after income tax effect.

Translation difference is the foreign exchange difference arising due to Landsvirkjun’s subsidiaries with other functional currencies.

44 Amounts in USD thousands.

Liabilities 44.

Long-term debt is specified as follows by currencies: Liabilities in ISK, indexed.

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Liabilities in ISK, unindexed .

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Liabilities in CHF .

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Liabilities in EUR .

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Liabilities in GBP .

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Liabilities in JPY .

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Liabilities in USD .

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Current maturities of long-term debt .

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Total long-term debt .

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Maturity date 2009-2020 2009 2012-2022 2009-2028 2014-2016 2009-2013 2009-2026 2008 Average interests 3.9% 6.8% 2.5% 2.7% 11.4% 1.1% 2.2% 2007 Average interests 3.8% 13.3% 2.5% 4.2% 11.4% 1.6% 4.8% Remaining bal.

333,592 3,902 93,487 1,431,944 13,433 175,483 923,428 2,975,269 ( 186,008 ) 2,789,261 Remaining bal.
563,548 7,613 88,452 1,576,711 18,984 43,871 783,903 3,083,082 ( 347,329 ) 2,735,753 Interest terms on the parent company’s loans are from 1.0-14.5%.

On average, nominal interests for the period were approximately 4.51% but they were approximately 4.69% the previous year.

The city of Reykjavik and the town of Akureyri provide, together with the State, a guarantee of collection for all obligations of Landsvirkjun, entered into within the end of year 2006.
From the beginning of year 2007 the State and Eignarhlutir ehf.

provide such a guarantee for all of Landsvirkjun’s obligations entered into after that date.

45.

According to loan agreements, current maturities of long-term debt are as follows: 2008 .

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2009 .

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2010 .

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2011 .

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2012 .

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2013 .

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Later.

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2008 - 186,008 197,618 285,758 197,725 146,759 1,961,401 2,975,269 2007 347.329 26,565 171,323 228,242 189,790 - 2,119,833 3,083,082 46.
Pension fund obligation The Company’s obligation to refund the indexation charges on retirement payments to current and former employees, which hold pension rights with state and communal pension funds amounted to USD 22.1 million at year end 2008 according to an actuary’s evaluation, which is based on estimated future changes in salaries and prices.

Interest in excess of price increase are assessed at 3.5% and salary increase in excess of price increase is assessed at 1.5% per year on average.
Premises on life expectancy and death rate are in accordance with provisions of Regulation no 391/1998 on obligatory pension benefits and operation of pension funds.

The retirement age is 68 years for current employees and 65 years for non-employees with vested benefits and this is consistent with the relevant pension funds’ regulation.

Change in the pension fund obligation is specified as follows: Balance at 1.1. .

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Expensed during the period.

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Payments during the period .

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Effect of foreign exchange rate differences .

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Balance at 31.12. .

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Pension fund obligation, 5 year statement: Present value of the obligation .

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2008 22,118 2007 38,153 2006 35,168 ( ( 2008 38,153 5,255 1,379 ) 19,911 ) 22,118 2005 31,419 ( 2007 35,168 4,650 1,665 ) 0 38,153 2004 28,664 Amounts in USD thousands.

45 47.

Obligation due to demolition Change in the obligation due to demolition is specified as follows: 2008 2007 Balance at 1.1. .

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Expensed during the period.

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Effect of foreign exchange rate differences .

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Balance at 31.12. .

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7,212 324 3,601 ) 3,936 ( 6,781 431 0 7,212 In accordance with IFRS, the initial value of fixed operating assets shall include estimated cost of their demolition after their use.

Estimated demolition cost of power lines has been assessed and discounted on the basis of useful life.

In return, an obligation has been written up among long-term liabilities.
An increase in the obligation is expensed in the income statement amounting to the discounted value in addition to depreciation of the demolition cost.

48.

Accounts payable and other short-term payables Accounts payable and other short-term payables are specified as follows: 2008 2007 Accounts payable .

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Bill of exchange .

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Accrued interest .

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Other short-term liabilities .

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41,095 0 35,874 18,567 95,537 128,776 55,904 44,597 18,000 247,277 49.

Related parties Definition of related parties Associated companies and key management are among the Company’s related parties.
Transactions with related parties Sale of goods and services Associated companies .

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2008 596 Cost Associated companies .

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41 Interest income Associated companies .


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676 Accounts receivable and other short-term receivables Associated companies .

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21,928 Accounts payable Associated companies .

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9 Loans to related parties are granted on market terms.

2007 984 48 0 339 0 46 Amounts in USD thousands.

Risk management 50.
Risk management 50.

Risk management One of the most important factors in effective risk management is the analysis of risk factors, risk measurement, response in order to limit the risk and monitoring.
The Company’s Board of Directors has approved a risk management policy, which is based on the following factors: - - - - - That risk is defined and its origin is known That generally accepted methods are used in assessing the risk That effective management is applied in accordance with authorisations That effective monitoring on risk factors is ensured That information provided to the risk committee and the Board of Directors is accurate and provided on a regular basis Landsvirkjun’s risk management strategy defines a benchmark in each risk category with respect to hedging limits.
The Company’s Board of Direc- tors receives on an ongoing basis an overview of the Company’s risks and results of risk management.

Decisions and the supervision of how hegding is implemented are entrusted to a risk management committee.

The risk management committee consists of the Managing Director, his deputy and the Financial Director.

The Managing Director is the chairman of the risk management commit- tee.

Daily risk management is in the hands of the Head of Risk Management.
The objectives of risk management are to analyse, manage and monitor Landsvirkjun’s risks in order to stabilise operating results by reducing operating fluctuations due to exchange rate, interest and aliminium price changes.

Financial risk is divided into market risk, liquidity risk and coun- terparty risk.
The Company’s market risk consists mainly in three risk categories: - Risk due to fluctuations in world market price of aluminium - - Interest rate risk due to the Company’s liabilities Exchange rate risk due to liabilities and income in foreign currencies 51.

Aluminium price risk The Company is exposed to substantial risk due to future aluminium price fluctuations.

The Company has thus entered into derivative agreements in order to secure its income base and reduce fluctuations.
Such agreements consist in most cases of fixing aluminium price at a certain level.

The Company therefore loses income if aluminium price increases considerably, but at the same time guarantees better cash flow should the price of aluminium decrease in the markets.

Risk management may hedge up to 100% of aluminium price risk and proportionally less over the next 10 years.

The duration is based on an effective market with aluminium and official price changes with the LME (London Metal Exchange).
At the end of December, fair value of the hedges in question was positive by USD 98 million while the agreements are effective over the next six years.

According to the IFRSs, embedded derivatives are derivative agreements that are a part of other agreements but are not treated as separate deriva- tive agreements when their economic character and inherent risk are not closely linked to the original agreement.
The Company has defined the part of the electric power sales agreements related to aluminium price as embedded derivative.

Therefore, the fair value of the Company’s embedded derivatives in electric power sales agreements changes parallel to changes in the price of aluminium.

Fair value changes of the agreements is recognised in the Company’s income statement.

In evaluating the value of embedded derivatives, generally accepted evaluation methods are used as the market value is not available.
Fair value of the agreements is calculated on the basis of the forward price of aluminium, discounted at zero-coupon in the USA allowing for fluctuations.

Effec- tive market with aluminium extends over the next 10 years and the price of aluminium must therefore be estimated from that time until the end of the underlying energy agreements.

This has been done by extending forward aluminium process with unchanged prices from the last effective price in the process.
Fair value calculations of embedded derivatives have allowed for uncertainty on forward aluminium prices in relation to the long duration of the agreements.

The Company has in previous accounts calculated the fair value of embedded derivatives based on forward price over 7 years as disclosed by the LME.

Forward prices with the same Exchange are now for 10 years, which has been taken into account in the calculations.
In evaluating the value of embedded derivatives forward prices for 10 years are therefore used, instead of 7 years, while unchanged prices are still allowed for from the last known price of the forward process.

Amounts in USD thousands.

47 The Company uses standard methods in the evaluation of the value of embedded derivatives with a longer duration than 10 years and levies a charge on interests for the discounting of payment flow for a longer period than 10 years.
Landsvirkjun has entered into agreements on the purchase of energy for resale to power intensive industries.

Those agreements are related to aluminium price development and do thus have embedded derivatives.

The fair value of the agreements is calculated in the same way and on the basis of the same conditions as the Company’s power sales contracts.

The fair value of embedded derivatives is specified as follows: Fair value of embedded derivatives at the beginning of the year .

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Exchange rate effect .

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Fair value changes during the year .

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Fair value of embedded derivatives at year end .

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Division of embedded derivatives is specified as follows: Long-term components of embedded derivatives .

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Short-term component of embedded derivatives .

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Total embedded derivatives .

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2008 665,158 1,712 497,168 ) 169,702 183,667 13,965 ) 169,702 ( ( 2007 338,323 0 326,835 665,158 587,075 78,083 665,158 Fair value of embedded derivatives, taking into account derivative agreements entered into in order to hedge, amounted to USD 268 million at the end of December (2007: USD 544 million).
The accompanying table shows fair value changes of agreements related to aluminium price and inter- est changes, but effects due to volatility are insubstantial.

Amounts in the table are before taxes.

Interest +100bp 0 -100bp ( ( ( -10% 190,539 ) 193,650 ) 196,806 ) Aluminium price 0% 24,089 0 20,880 ) ( 10% 239,708 194,634 156,022 52.

Foreign exchange risk The year 2008 is the first year that the USD is used as the functional currency in the financial statements of Landvirkjun.
Foreign exchange risk consists therefore from now on in foreign exchange rate changes against the USD and risk management and benchmarks have been adjusted to this change.

There can be considerable fluctuations in the Company’s loan portfolio against the USD over the accounting period, as about 30% of the loan portfolio is unhedged against the currency.

The risk from changes in the loan portfolio is limited compared to risk benchmarks determined by the Board at each time.
For that purpose, the Company uses foreign exchange swaps and options.

The Company also ensures the fixed rate of cash flows against the functional currency for up to three years with forward agreements and options.

The Group’s foreign exchange risk is specified as follows in nominal value (USD thousand): 2008 Accounts receivables and short-term receivables .

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Cash .

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Derivatives .

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Bonds .

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Accounts payable and other short-term payables .

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Risk in balance sheet .

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2007 Accounts receivables and short-term receivables .

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Derivatives .

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Bonds .

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Accounts payable and other short-term payables .

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Risk in balance sheet .

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EUR 30,717 4,912 1,010,550 ( 1,431,944 ) ( 30,802 ) 416,567 ) ( 297 51,786 1,034,500 ( 1,576,705 ) 68,840 ) ( 558,962 ) ( ISK 20,023 36,544 107,190 337,494 ) 45,269 ) 219,006 ) ( ( ( 44,670 57,043 ( 1,131,226 ) 571,155 ) ( ( 153,836 ) ( 1,754,504 ) JPY 0 3 22,931 ) 175,483 ) 2,859 ) 201,270 ) 0 344 8,935 43,877 ) 465 ) 35,063 ) ( ( ( ( ( ( ( Other currencies 2,295 409 3,864 ) 106,920 ) 3,993 ) 112,073 ) 2,603 2,705 0 107,435 ) 2,550 ) 104,677 ) ( ( ( ( ( ( ( 48 Amounts in USD thousands.
Exchange rate of the main currencies against the USD, (usd/currency) for the years 2008 and 2007 is specified as follows: EUR .

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GBP .

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CHF .

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JPY .

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NOK .

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ISK .

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The rates are based on the mid rate of the Central Bank of Iceland.
Average rate 2008 0.69 0.55 1.09 102.03 5.71 88.07 2007 0.73 0.50 1.20 117.68 5.85 64.02 Rate at year end 2008 0.71 0.69 1.06 90.22 6.99 120.87 2007 0.68 0.50 1.12 112.08 5.42 62.00 Sensitivity analysis An increase in the USD by 10% against the following currencies at December 31, would have increased the Group’s profit by the following amounts after taxes.

The analysis assumes that all other variables, especially interest rates, remain unchanged.

The analysis was made in the same way for the year 2007.
EUR .

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JPY .

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ISK .

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Profit 2008 95,600 18,000 23,168 2007 133,839 49,065 15,323 A decrease in the USD by 10% against the beforementioned currencies would have the same effect in the opposite direction, provided that all other variables remain unchanged.
The proportion of Landsvirkjun’s income in USD has increased in the past years with new electricity sales agreements with power intensive industries related to aluminium price.

The proportion was around 70% in the year 2008, which is a considerable increase from the years 2006 and 2007 when the proportional rate was around 50%.

It is estimated that the share of income in USD will remain high, or around 60-70%, but the share changes in accordance with changes in the price of aluminium.
The fair value of currency swaps was negative by USD 52 million at the end of December 2008.

The underlying principal amount is USD 520 mil- lion.

The fair value of forwards currency agreements was negative by USD 500 thousand, the underlying principal amount being USD 4 million.

The fair value of forwards currency agreements was negative by USD 45 million with the underlying principal amount being approx.

USD 631 million.

53.


Interest rate risk Landsvirkjun faces interest rate risk as the Company has interest bearing assets and liabilities.

Interest bearing financial liabilities are much higher than interest bearing financial assets.

In the case of fixed interest rate of financial liabilities the market risk consists in that interest rate decreases in the future and the Company therefore carries a higher financing cost than otherwise.
In the case of financial instruments with variable interest rate the risk consists in interest increase.

At year end 2008, the proportion of loans with variable interest rate was approx.

80% compared to 76% at year end 2007.

A change in interest rate by 1% would have led to a change in interest expenses by USD 26 million in the year 2008 and by USD 22 million in the year 2007.

The Company’s financial instruments with fixed interest rate are not sensitive to interest rate changes.
At year-end 2008, the estimated market value of the Company’s long-term liabilities was approximately USD 149 million lower than their book value.

The fair value of interest rate swaps, not denominated in a hedging purpose as fair value hedges, is recognised in the income statement.

Lands- virkjun has entered into agreements on interest rate swaps, which aim at reducing the Company’s interest expenses and risk exposure.
At the end of December 2008, the fair value of interest rate swaps was negative by USD 11 million.

The underlying amount is approx.

USD 189 million.

An increase in interest rate by 1% would have led to positive fair value changes in the agreements by USD 5.6 million.

A decrease in interest rate by 1% would have led to negative fair value changes in the agreements by USD 7.5 million.

Amounts in USD thousands.

49 54.


Liquidity risk Liquidity risk consists of the risk of losses should the Company not be able to keep its obligations at maturity date.

In order to react to such risk, the Company’s liquidity balance is monitored by analysing the flow of revenues and expenses and the maturity dates of financial assets and liabilities.

Effective control on liquidity ensures sufficient access to cash flow at each time.
In order to ensure access to cash and maintain flexible financing possibilities Landsvirkjun has used varying loan types.

In the past years, financing has mostly taken place through a framework agreement with EMTN (Euro Medium Term Note).

The total amount that the Company can borrow through the EMTN agreement is USD 2.5 billion.

Landsvirkjun aims at having unreserved access to liquid assets corresponding to the average of the Company’s net liquidity need for six months.
Falling under liquid assets are cash, short-term securities and open loan access with financial companies.

At year-end 2008, this amount was USD 125 million but Landsvirkjun also has access to a Revolving Credit Facility of USD 350 million, or a total of USD 475 million.

Taken into account cash flow from operation over the next two years, the Company believes that it has guaranteed sufficient liquidity until the end of year 2010.
The Company’s risk related to refinancing of the Company is reduced with even spread of amortization and interests in long-term outstanding loans.

Contractual payments due to financial instruments, including interest, are specified as follows: 2008 Non-derivative financial instruments Long-term loans .

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Contractual Within More than Book value cash flow one year 1–2 years 2–5 years 5 years ( 2,975,269 ) 98,374 ( 95,537 ) ( 2,972,432 ) ( 3,766,341 ) 98,374 ( 95,537 ) ( 3,763,504 ) ( 267,387 ) 98,374 ( 95,537 ) ( 264,550 ) ( 275,446 ) ( 831,726 ) (2,391,782) ( 275,446 ) ( 831,726 ) ( 2,391,782 ) Derivative financial instruments Currency swaps .

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Embedded deriv.

in electricity sales agreem.

( ( ( 97,105 ) 10,754 ) 432 ) 98,032 169,702 159,443 ( ( ( 64,537 ) 12,598 ) 447 ) 125,638 438,670 486,726 2007 Non-derivative financial instruments .

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( 3,083,082 ) 73,337 ( 247,277 ) ( 3,257,022 ) ( 4,458,464 ) 73,337 ( 247,277 ) ( 4,632,404 ) Derivative financial instruments Currency swaps .

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Embedded deriv.

in electricity sales agreem.
( ( 80,515 16,498 ) 12,855 121,457 ) 665,158 620,573 ( ( 103,313 22,129 ) 12,903 140,774 ) 936,903 890,216 ( ( ( ( ( ( ( ( ( ( ( 1,049 1,309 ) 447 ) 18,669 14,061 ) 3,901 10,635 ) 1,246 ) ( ( 67,596 ) 3,738 ) ( 12,645 6,305 ) 23,712 2,233 ) 9,598 60,478 75,642 64,786 22,779 379,321 408,440 452,252 ) 73,337 247,277 ) 626,192 ) ( 154,889 ) ( 950,247 ) ( 2,901,076 ) ( 154,889 ) ( 950,247 ) ( 2,901,076 ) ( ( 21,742 823 ) 12,903 64,516 ) 87,403 56,710 ( ( 3,740 1,306 ) 42,790 ) 95,919 55,563 14,682 4,774 ) 32,871 ) 316,113 293,150 ( ( 63,149 15,226 ) 597 ) 437,468 484,794 50 Amounts in USD thousands.
55.

Counterparty risk Counterparty risk is the risk that a counterparty to an agreement does not comply with provisions of the agreement.

Landsvirkjun’s counterparty risk arises first and foremost due to the Company’s energy contracts and derivatives entered into for hedging purposes, but such contracts are only entered into with financial companies.

Though the amounts involved are considerably high, the risk is limited by the Company �s requirements for counterparty quality.
Landsvirkjun has set a benchmark for derivatives which involves that no derivative agreements are made with financial companies that have a lower rating than A- from Standard and Poor’s or a comparable rating from other recognised credit rating agencies.

If credit rating is not available, a special insurance agreement is made between parties limiting Landsvirkjun’s risk.
Before power sales contracts are made, the financial standing of the relevant companies and their parent companies are thoroughly reviewed, if applicable.

The Company’s counterparty risk is specified as follows at year end: Derivative financial instruments.

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2008 305,011 246 98,374 124,993 528,624 2007 787,007 494 73,337 179,578 1,040,416 The fair value and book value of financial assets and liabilities in the balance sheet is specified as follows: Shares in other companies .

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2008 2007 Book value 127 159,443 98,374 124,993 ( 2,975,269 ) 95,537 ) ( Fair value 127 159,443 98,374 124,993 ( 2,826,473 ) 95,537 ) ( Book value 2,313 620,574 73,337 179,578 ( 3,083,082 ) 247,277 ) ( Fair value 2,313 620,574 73,337 179,578 ( 3,048,572 ) 247,277 ) ( Other issues 56.

On 22 August 2007, a special evaluation committee issued a ruling on a settlement amount for water rights in connection with Kárahnjúkar power project and its distribution between owners.
The total amount amounted to approx.

USD 13.2 million.

Most owners of water rights in the Jökuld- alur valley and three in Fljótsdalur valley announced that they would not accept the ruling of the committee and filed a case in court on 22 February 2008.

Forty cases were confirmed in the District Court of East Iceland on January 15, 2008.

The parties involved own one third of the water rights.
Settlement payments for land rights related to Hálslón in the land of Brú in Jökuldalur has been put on hold subsequent to the ruling of the Comm- ittee for the Interior, which deemed the land as public land.

Landowners will challenge that ruling in courts of law.

In the year 2007, the Company entered into two ISK/USD currency swaps with domestic financial institutions.
Due to the weakening of the ISK against the USD in the year 2008, unrealised foreign exchange loss arose, which has been recognised as negative fair value in the amount of USD 45 million in the Group’s financial statements.

It is considered likely that those agreements must be terminated before maturity in year 2012 at the request of the financial institutions in question and the Company does not accept the aforementioned evaluation under such conditions.
The Company has capitalised water rights to the total amount of USD 40.6 million, whereof water rights related to Kárahnjúkar weigh the most.

With law no.

58/2008 on the change of law on natural resources and the energy sector, which enters into effect on 1 July 2009, restrictions are set for the State, municipalities and companies owned by them on the endorsement of ownership of water rights for waters containing harnessable power in excess of 10 MW.
However the State and municipalities are allowed to give to companies owned by them the right of use of the resources for up to 65 years at a time.

Upon the adoption of this law, the Prime Minister shall nominate a comittee to discuss the arrangement of leasing of water and geothermal energy rights owned by the State.

The comittee shall in its work discuss on lease amount, lease term, renewal of lease agreements and other issues related to parties’ rights and obligations.
The comittee shall submit proposals before 1 June 2009.

57.

Subsequent events Nothing has come forth after the balance sheet date which would require adjustments or changes to the financial statements for the year 2008.

Amounts in USD thousands.

51 52 Amounts in USD thousands.

The photographs in this report are by Thorvaldur Örn Kristmundsson.

Cover Page.

1 Hnausaver, central highlands Hekluhraun lava field, south Iceland Page.

4–5 Eystri Rangá river, south Iceland Page.


19 Hveravellir, central highlands Page.

20–21 Grænavatn lake, central highlands Page.

52–53 Thjórsá river, south Iceland Pipar DESIGN PRINTING Svansprent SUPERVISION Thorsteinn Hilmarsson Hanna Marinósdóttir ISO 27001 Landsvirkjun Háaleitisbraut 68 103 Reykjavík Iceland Tel: + (354) 515 9000 Fax: + (354) 515 9007 landsvirkjun@lv.is www.landsvirkjun.com L a n d s v i r k j u n ’ s A n n u a l R e p o r t 2 0 0 8 Annual Report 2008