Financial Statements 2016

Transcription

1 Financial Statements 2016 Landsnet hf. Gylfaflöt Reykjavík Reg. no

2 Contents Endorsement and Signatures by the Board of Directors and the CEO... Independent Auditor's Report... Income Statement... Statement of Comprehensive Income... Balance Sheet... Statement of Changes in Equity... Statement of Cash Flows... Notes to the Financial Statements... Appendix 1: Corporate Governance Statement... Appendix 2: Non-financial information Financial Statements of Landsnet hf

3 Endorsement by the Board of Directors and the CEO Landsnet hf. was established in 2004 and the role of Landsnet is to administer the transmission of electricity and system operation in accordance with the provisions of Chapter III of the Electricity Act No. 65/2003. Results of the year 2016 According to the income statement, loss of the year amounted to 13 million USD and total loss amounted to 13 million USD. According to the balance sheet, the Company's equity at year end amounted to 308 million USD, including share capital in the amount of 46 million USD. Average number of employees was 123. Share capital at year end 2016 is divided between four shareholders as at the beginning of the year: Landsvirkjun... Rarik ohf.... Orkuveita Reykjavíkur... Orkubú Vestfjarða ohf.... Share 64.73% 22.51% 6.78% 5.98% The Board of Directors of the Company is composed of two women and one man plus two Alternate Directors, one of each sex. The Board thus meets the requirement of Article 63 of the Public Limited Companies Act that both genders must be represented on a board of directors composed of three members. The Board of Directors proposes that no dividends be paid to shareholders in 2017 for the operating year 2016, in which context the Board makes reference to the annual financial statements regarding changes in equity. As of the beginning of the year 2016 the Financial Statements are prepared in US dollars (USD), which is the Company s new functional currency. Comparison amounts have been translated into USD using the exchange rate published by the Central Bank of Iceland. In December 2016, Landsnet issued unsecured, USD-denominated bonds. At the same time, it made a payment on an Icelandic, inflation-indexed start-up loan from the parent company, the remaining balance of which was converted into USD. The funding and currency conversion are part of an effort to change the composition of loans, convert the loan portfolio into Landsnet s functional currency and reduce currency risk. The December bond issue is divided into two phases, with half paid in December 2016 and the remainder in March Approximately 80% of Landsnet s longterm debt was consequently denominated in USD at year-end, having previously been 90% denominated in ISK. These changes to the loan portfolio serve to reduce future currency risk substantially as regards impact on operating results and the balance sheet. Corporate governance The Board of Directors of Landsnet hf. emphasizes maintaining good management practices. The Board of Directors has laid down comprehensive guidelines wherein the competence of the Board is defined and its scope of work vis-à vis the CEO. These rules include i.e. rules regarding order at meetings, comprehensive rules on the competence of Directors to participate in the discussion and decision of issues presented to the Board, rules on secrecy, rules on information disclosure by the CEO to the Board and other issues. The Corporate Governance Statement, which is appendix 1 in the Financial Statements, provides further information. Non-financial information In June 2016, Iceland s parliament, the Althingi, passed amendments to the Annual Accounts Act No. 3/2006, which amendments took effect as of January These amendments include increased requirements for information disclosure in the Report of the Board of Directors, futher details on which are provided in Annex 2 to the Company s annual Financial Statements. Statement of the Board of Directors and the CEO According to the best of the Board of Director's and the CEO's knowledge, the financial statements are in accordance with the International Financial Reporting Standards as adopted by the EU and it is the Board's and CEO's opinion that the annual financial statements give a true and fair view of the financial performance of the Company for the financial year 2016, its assets, liabilities and financial position as at 31 December 2016 and its cash flows for the financial year Further, in our opinion the financial statements and the endorsement by the Board of Directors and the CEO give a fair view of the development and performance of the Company's operations and its position and describes the principal risks and uncertainties faced by the Company. Financial Statements of Landsnet hf

4 Endorsement by the Board of Directors and the CEO, continued The Board of Directors and the CEO have today discussed the annual financial statements of Landsnet hf. for the year 2016 and confirmed them by means of their signatures. Reykjavik, 9 February 2017 The Board of Directors: Sigrún Björk Jakobsdóttir Svana Helen Björnsdóttir Ómar Benediktsson CEO: Guðmundur Ingi Ásmundsson Financial Statements of Landsnet hf

5 Independent Auditor's Report To the Shareholder of Landsnet hf. Opinion We have audited the financial statements of Landsnet hf. for the year ended December 31, 2016 which comprise the statement of comprehensive income, the statement of financial position, the statement of changes in equity, the statement of cash flows for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements give a true and fair view of the financial position of Landsnet hf. as at December 31, 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and additional requirements in the Icelandic Financial Statement Act. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of Landsnet hf. in accordance with International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and the Icelandic Institute of State Authorized Public Accountants, Code of Ethics (FLE Code) and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matters Valuation of transmission lines and substations Transmission lines and substrations are the companies most valuable assets and its valuation is based on management estimations, therefore we consider it to be a key audit matter. Transmission lines and substrations are recognised according to the revaluation method. At the year-end its carrying amount was USD 643 million or 83% of total assets. Revaluation is performed on a regular basis, when management assesses that its fair value has changed significantly. Operating value was measured using a cash flow analysis. The assets were revaluated at year-end 2015 and it is management estimation that there is no basis for revaluation at year-end As to the valuation of the assets, we refer to fixed assets in operation note 14 and accounting policies notes 35c and 35h. How the matter was addressed in our audit Our audit was focused on management estimations of operating value of transmission lines and substations at the year-end We examined the valuation methodology and its consistency with prior year. We also examined management assumption for the valuation. This included.: Reviewing the operating plan which is the basis for the valuation. Reviewing the assumptions for the weighted average cost of catital (WACC) used. We assessed if the valuation s calculations were in accordance with IFRSs and assessed that the discloures were appropriate. We have also examined management judgement related to depreciation methods in accordance with IFRS. Financial Statements of Landsnet hf

6 Independent Auditor's Report, continued Interest-bearing loans and borrowings Due to its significance in the company s financial statements and related to changes during the year, we consider interest-bearing loans and borrowings to be a key audit matter. Interest-bearing loans and borrowings carrying amount at the year-end 2016 was USD 383 million. At the end of the financial year new loan agreements were made with third party and changes were made to loan agreements with the parent company. The basis for accounting for interest-bearing loans and borrowings are presented in notes 24 and 35b in the financial statements. Our audit procedures included.: Recalculation of interest-bearing loans and borrowings at year-end according to loan agreements. Third-party confirmation of year-end balance. Assessment of covenants, accrued interests and maturities. Evaluation of management accounting treatment of parent company loans in accordance with IFRSs. Assessment of interest-bearing loans and borrowings disclosures in accordance with IFRSs. Other information Management is responsible for the other information. The other information comprises the report of board of directors, non-financial reporting and corporate governance statement which is an appendix in the Financial Statement. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, except the confirmation regarding report of the board of directors as stated below. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. In accordance with Paragraph 2 article 104 of the Icelandic Financial Statement Act no. 3/2006, we confirm to the best of our knowledge that the accompanying report of the board of directors includes all information required by the Icelandic Financial Statement Act that is not disclosed elsewhere in the financial statements. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and additional requirements in the Icelandic Financial Statement Act, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing Landsnet hf. s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Landsnet hf. s financial reporting process. Auditor s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Financial Statements of Landsnet hf

7 Independent Auditor's Report, continued Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Landsnet hf.'s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Reykjavik, 9 February Deloitte ehf. Páll Grétar Steingrímsson State Authorized Public Accountant Rúnar Dór Daníelsson State Authorized Public Accountant Financial Statements of Landsnet hf

8 Income Statement for the year 2016 Operating revenue Transmission... Other income... Notes ,6 128, , , , ,735 Operating expenses Energy procurement costs... Transmission costs... System operation... Other operating expenses ,565 16, ,121 34, ,873 7, ,467 7,662 80,026 65,920 Operating profit... Financial income... Financial expenses... Net financial expenses... Share in net earnings of associated company... (Loss) profit before income tax... Income tax... (Loss) profit... (Loss) earnings per share: Basic and diluted (loss) earnings per each 1 share... 49,717 56,815 1,205 2,987 ( 67,383) ( 21,965) 12 ( 66,178) ( 18,978) ( 16,256) 37,987 13,25 3,289 ( 7,575) ( 12,967) 30, ( 0.28) 0.68 Notes no. 1 to 35 are an integral part of these financial statements. Financial Statements of Landsnet hf Amounts are in USD thousand

9 Statement of Comprehensive Income for the year 2016 Notes (Loss) profit... ( 12,967) 30,412 Items under total (loss) profit recognised among equity: Revaluation of transmission system... Current tax on revaluation of transmission system... Total items under total profit recognised among equity... Total (loss) profit of the year ,737 0 ( 36,147) 0 144,590 ( 12,967) 175,002 Notes no. 1 to 35 are an integral part of these financial statements. Financial Statements of Landsnet hf Amounts are in USD thousand

10 Balance Sheet as at 31 December 2016 Assets Notes Fixed assets in operation , ,931 Projects under construction ,615 23,310 Intangible assets ,003 13,034 Investments in subsidiary and associates ,667 5,614 Long-term note... 1, Fixed assets 735, ,797 Inventories ,646 4,323 Receivable from parent company ,457 4,743 Trade and other receivables ,085 7,794 Marketable securities ,663 Cash and cash equivalents ,253 62,290 Current assets 35,441 84,813 Total assets 770, ,610 Equity Share capital... 45,549 45,549 Statutory reserve... 4,703 4,703 Restricted equity Revaluation account , ,989 Foreign currency translation Retained earnings... 46,585 52,515 Equity , ,756 Liabilities Long term liabilities from parent company , ,311 Other interest bearing long-term liabilities ,464 71,091 Deferred income tax liability ,019 56,600 Deferred income ,862 2,936 Provision due to site restoration ,023 6,997 Long-term liabilities and obligations 425, ,935 Loans from parent company ,768 Current maturities ,454 7,222 Income tax payable ,292 7,895 Trade and other payables ,829 10,034 Short-term liabilities 36,644 34,919 Total liabilities 462, ,854 Total equity and liabilities 770, ,610 Notes no. 1 to 35 are an integral part of these financial statements. Financial Statements of Landsnet hf Amounts are in USD thousand

11 Statement of Changes in Equity for the year 2016 Year 2015: Foreign Share Statutory Restricted currency Revaluation Retained capital reserve equity translation account earnings Total Equity at 1 January ,549 1, ,647 20, ,754 Profit... 30,412 30,412 Revaluation of transmission , ,737 Income tax effects of revaluation of transmission... ( 36,147) ( 36,147) Total comprehensive income ,590 30, ,002 Transfer to statutory reserve... 2,946 ( 2,946) 0 Depreciation on revaluation recognised under accumulated deficit... ( 4,248) 4,248 0 Equity at 31 December ,549 4, ,989 52, ,756 Year 2016: Equity at 1 January ,549 4, ,989 52, ,756 Foreign currency translation Total comprehensive loss... ( 12,967) ( 12,967) Dividends paid to shareholders... ( 3,227) ( 3,227) Share Transfer in to net statutory earnings reserve... of associated company ( 205) 0 Depreciation on revaluation recognised under accumulated deficit... ( 10,469) 10,469 0 Equity at 31 December ,549 4, ,520 46, ,411 Notes no. 1 to 35 are an integral part of these financial statements. Financial Statements of Landsnet hf Amounts are in USD thousand

12 Statement of Cash Flows for the year 2016 Notes Cash flow from operating activities Operating profit... 49,717 56,815 Adjustments for: Profit from sales of fixed assets... 7 ( 1) ( 9) Depreciation and amortisation ,450 22,165 Working capital from operation before financial items and taxes 79,166 78,971 Operating assets, (increase) decrease... ( 644) 1,436 Operating liabilities, decrease... ( 229) ( 610) Net Cash from operating activities before financial items and taxes 78,293 79,797 Interest income received... 1,204 1,471 Interest expenses paid and foreign exchange difference... ( 18,403) ( 15,274) Taxes paid... ( 8,698) ( 4,458) Net cash from operating activities 52,396 61,536 Cash flow from investing activities Investment in transmission infrastructures... ( 45,208) ( 29,517) Other investments... ( 3,035) ( 3,527) Proceeds from sale of property, plant and equipment Long-term note, change ( 759) Marketable securities, change... 6,153 ( 1,955) Net cash to investment activities ( 42,007) ( 35,732) Cash flow from financing activities Payment of loans from parent company... ( 143,916) ( 51,794) New long-term liabilities... 98,767 0 Payments of long-term liabilities... ( 7,432) ( 7,409) Dividends paid to shareholders... ( 3,227) 0 Net cash to financing activities ( 55,808) ( 59,203) Net decrease in cash and cash equivalents... ( 45,419) ( 33,399) Effect of exchange rate changes on cash and cash equivalents... Foreign currency translation... Cash and cash equivalents at 1 January... Cash and cash equivalents at 31 December... Investment and financing activities without cash flow effect: Currency-converted, USD-denominated loan from parent company... Currency-conversion of ISK-denominated loan from parent company... 1,382 ( 716) 0 ( 7) 62,290 96, ,253 62, , ,582 ( 207,582) ( 207,582) Notes no. 1 to 35 are an integral part of these financial statements. Financial Statements of Landsnet hf Amounts are in USD thousand

13 Notes to the Financial Statements 1. Reporting entity Landsnet hf. is domiciled at Gylfaflöt 9 in Reykjavik, Iceland. The Company is a subsidiary of Landsvirkjun, and the financial statement of Landsnet hf. is included in the consolidated financial statements of Landsvirkjun. Landsnet was established in 2004 on the basis of the Electricity Act passed by the Icelandic parliament, the Althingi, in the spring of The role of Landsnet is to administer the transmission of electricity and system operation in accordance with the provisions of Chapter III of the Electricity Act No. 65/2003, which stipulates that the Company must not engage in any activities other than necessary to perform its duties under the Act. 2. Basis of preparation The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU. The financial statements were approved by the Board of Directors on 9 February Details of the Company's accounting policies are included in note Functional and presentational currency The financial statements are presented in USD, which is the Company's functional currency from the beginning of the year Amounts are presented in USD thousand unless otherwise stated. The financial statements have been prepared on the historical cost basis, except for the Company's transmission system is recognised at a revalued amount. Comparative amounts have been translated into USD using the exchange rate published by the Central Bank of Iceland. Amounts in the income statement are translated using the average mid-rate for the period, balance sheet amounts are translated using the mid-rate on the balance sheet date and cash flow amounts are translated either using the average mid-rate for the period or on the date when the transaction took place, as applicable. 4. Use of estimates and judgements The preparation of the financial statements in conformity with IFRS standards 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 in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the following notes: - Note 14 and 35c - Fixed assets in operation - Note 15 and 35d - Intangible assets - Note 27 and 35j - Estimation of provision due to site restoration - Note 25 and 35n - Income tax Determination of fair values A number of the Company's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Landsnet revaluates part of fixed assets to fair value, as stated in note 14, just as they do with marketable securities. Other assets and liabilities are not recognised at fair value. Trade and other receivables The fair value of trade and other receivables is measured at the estimated discounted cash flow, based on market interests on the reporting date. Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Financial Statements of Landsnet hf Amounts are in USD thousand

14 5. Revenue See accounting policies in note 35k Transmission revenue consist of: Energy transmission... Transmission losses and ancillary services... Service income... Input fees... Transmission revenue total , ,641 21,067 17, , ,876 Landsnet s largest customers are also shareholders in the company. Further information on revenues from shareholders is provided in Note 32 on related parties. 6. Energy transmission Energy transmission consist of: Energy transmission to power-intensive consumers... Energy transmission to distribution system operators... Energy transmission total... 70,840 73,454 35,403 30, , , Other income Other income consist of: Income from work sold... Rental income... Income from guarantees of origin and certification... Sales profit from fixed assets... Other income... Other income total , Energy procurement costs Energy procurement costs consist of: Electricity purchases due to transmission losses... Purchase of ancillary services... Energy procurement costs total... 14,184 10,774 6,381 5,671 20,565 16, Fee to auditors Fee to auditors consist of: Deloitte ehf.... KPMG ehf.... Fee to auditors total... Audit of Audit of Financial Other Financial Other Statement service Statement service Other services in 2016 consists of costs relating to a review of interim financial statements and purchased services regarding the introduction of the Company s changed functional currency. Financial Statements of Landsnet hf Amounts are in USD thousand

15 10. Personnel expenses See accounting policies in note 35c and 35i Salaries and other personnel expenses consist of: Salaries... Defined contribution plan payments... Defined benefit plan payments... Other payroll expenses... Capitalised salaries... Personnell expenses total... 12,316 10,330 1,567 1, , ( 1,430) ( 1,057) 13,588 11,490 Personnel expenses are specified as follows: Transmission costs... System operation... Other operating expenses... Average number of employees... Full-time equivalent units at year-end... 5,601 5,067 3,574 3,198 4,413 3,225 13,588 11, Remuneration of the Board of Directors, CEO and Executive Directors were as follows: Thousand ISK Remuneration of the Board of Directors... Remuneration and benefits of the CEO... Remuneration of Excecutive Directors Depreciation and amortisation See accounting policies in notes 35c and 35d Depreciation and amortisation are specified as follows: Thousand USD ,831 7, ,731 18, ,963 62, Five director positions were filled in 2016 compared with 3.33 in Salaries are determined by the National Remuneration Board and are increased accordingly. An additional and outstanding sum of 17 thousand USD (2.2 million) was paid to the CEO for the year 2015 and the comparative figure was adjusted accordingly. Depreciation of fixed assets in operation, see Note Amortisation and impairment losses, see Note Depreciation and amortisation recognised in the income statement... 28,862 21, ,009 29,450 22,165 Depreciation and amortisation are allocated as follows to operating items: Transmission costs... System operation... Other operating expenses... Depreciation and amortisation recognised in the income statement... 28,341 20, ,450 22, Financial income and expenses See accounting policies in note 35m Financial income and expenses are specified as follows: Interest income... Net gain in fair value of marketable securities... Exchange rate difference... Total financial income , ,477 1,205 2,987 Financial Statements of Landsnet hf Amounts are in USD thousand

16 12. Financial income and expenses, contd.: Interest expenses... Indexation... Exchange rate difference... Change in present value of the provision due to site restoration... Capitalised interest expense... Total financial expenses... Net financial expenses... ( 17,408) ( 15,351) ( 7,412) ( 7,309) ( 45,219) 0 ( 26) ( 659) 2,682 1,354 ( 67,383) ( 21,965) ( 66,178) ( 18,978) Net financial expenses due to the construction of a transmission infrastructure and capitalised development cost amounting to 2.7 million USD (2015: 1.4 million USD) is capitalised and has been reported as a reduction in financial expenses. Capitalised financial expenses were 6.5% of capital tied in transmission structures under construction during the year (2015: 5.7%). This is the Company's average finance cost. 13. Income tax See accounting policies in note 35n Income tax recognised in the income statement is specified as follows: Deferred income tax for the year... Foreign currency translation... Income tax payable... Income tax recognised in the income statement... 7, ( 4,292) ( 7,895) 3,289 ( 7,575) 13. Income tax, contd.: Income tax recognised in equity: Income tax liability due to revaluation of fixed assets ,147 Change in deferred income tax liability is specified as follows: Change in temporary differences... Income tax liability due to revaluation of fixed assets... Change in deferred tax assets... 7, ( 36,147) 7,581 ( 35,960) Reconciliation of effective tax rate (Loss) profit before income tax... Income tax according to the current tax rate... Effects of associates... Other... Effective tax rate ( 16,256) 37, % 3, % ( 7,597) 0.3% 41 ( 0.1%) % ( 3) ( 0.0%) ( 8) 20.3% 3, % ( 7,575) Financial Statements of Landsnet hf Amounts are in USD thousand

17 14. Fixed assets in operation: See accounting policies in note 35c Fixed assets in operation: Cost Balance at Revaluation... Additions... Transfer... Transferred from projects under construction... Sold and disposed of... Foreign currency translation... Balance Revaluation at Additions... Transferred from projects under construction... Sold... Balance at Depreciation Balance at Revaluation... Depreciation... Sold and disposed of... Foreign currency translation... Balance at Depreciation... Sold... Balance Carrying amount Carrying amount without revaluation Transmission Substations lines Other Total 234, ,125 32, , , , ,660 3,518 2, ,868 ( 1,047) 1, ,918 6, , ( 115) ( 115) ( 4,796) ( 8,066) ( 673) ( 13,535) 347, , , ,2390 2,327 2, ,362 9,072 12, , ( 72) ( 72) 358, ,663 33, ,207 51, ,226 9, ,331 27,458 37, ,923 7,132 12,533 1,491 21, ( 98) ( 98) ( 940) ( 1,883) ( 181) ( 3,004) 84, ,341 11, ,308 12,373 15,327 1,162 28, ( 47) ( 47) 97, ,668 12, , , ,899 23, , , ,576 21, , , ,995 21, , , ,735 23, , , ,539 21, , , ,031 21, ,933 Basis of revaluation of fixed assets in operation in 2015 In accordance with the International Accounting Standard, the Company s lines and substations are recognised according to the revaluation method. These assets were revalued at year-end The revaluation was based on two methods. First, it was based on the estimated reconstruction cost of the transmission system, which was calculated by independent experts at the beginning of the year and projected to year-end Second, the operating value was measured using a cash flow analysis. The valuation period was , with the future operating value calculated thereafter. The year s revaluation was based on the operating value on the assumption that investment would equal the depreciation of the current asset base. The discounting of future cash flows was based on the weighted average cost of capital (WACC) determined for the Company with respect to powerintensive consumers and distribution system operators. In the assessment of the Company's management, a revaluation of fixed assets in operation in 2016 is not necessary. The revaluation has been categorised as level 3 fair value. Financial Statements of Landsnet hf Amounts are in USD thousand

18 14. Fixed assets in operation, contd.: Rateable value and insurance value The rateable value of the Company's real property amounts to upwards of 30.9 million (2015: 24.0 million). Assessed value for the same property's fire insurance amounts to 50.7 million (2015: 44.3 million) and book value amounts to 45 million (2015: 29.6 million). The insurance value of the Company's assets amounts to million (2015: million), excluding transmission lines and cables, which are insured by an emergency insurance fund. The Company's emergency insurance amounts to million (2015: million). Projects under construction: Balance at Additions... Transferred to fixed assets in operation... Transferred from intangible assets... Foreign currency translation... Balance at ,310 6,377 46,782 24,640 ( 21,678) ( 8,498) 3, ,615 23, Intangible assets: Capitalised See accounting policies in note 35d and 35h development cost Software Total Cost Balance at ,079 4,016 18,095 Additions... 2, ,228 Transferred to projects under construction... ( 631) 0 ( 631) Foreign currency translation... ( 255) ( 75) ( 330) Balance at ,951 4,411 20,362 Additions... 1, ,758 Transferred to projects under construction... ( 3,201) 0 ( 3,201) Balance at ,025 4,894 18,919 Amortisation and impairment losses Balance at Amortisation and impairment losses... Foreign currency translation... Balance at Amortisation and impairment losses... Balance at Intangible assets, contd.: Carrying amount ,997 2,438 6, ,009 ( 70) ( 46) ( 116) 4,699 2,629 7, ,968 2,948 7,916 10,082 1,578 11,660 11,252 1,782 13,034 9,057 1,946 11,003 Development costs are reviewed each year by the management of Landsnet hf. and are examined for any indications of impairment. If the management believes that impairment has occurred, that development cost is expensed as impairment. Financial Statements of Landsnet hf Amounts are in USD thousand

19 16. Investment in subsidiary See accounting policies in note 35e The breakdown of investment in subsidiary is as follows: Share Carrying Share Carrying amount amount Landsnet ehf % % 4 The Company's share in Landsnet ehf. is stated at cost as the firm has not conducted any operations from its establishment. 17. Investment in associates See accounting policies in note 35f The breakdown of investment in associates is as follows: Share in Share in Carrying Carrying net earnings net earnings amount amount Orkufjarskipti hf. 50% ,662 5, Inventories See accounting policies in note 35g Inventories are spare parts and material inventories. No write-down due to the Company's inventories is recognised in the financial statements for the year 2016 nor for the year Trade and other receivables See accounting policies in note 35b Trade and other receivables: Trade receivables... Other receivables... Trade and other receivables total... 6,832 6,600 1,253 1,194 8,085 7, Marketable securities See accounting policies in note 35b Marketable securities held by the Company are listed on a stock exchange. They are liquid but cannot be classed as cash because their maturity is more than three months. The measurements of marketable securities are categorised as Level 1 fair value. 21. Cash and cash equivalents See accounting policies in note 35b Cash and cash equivalents: Bank deposits in USD... Bank deposits in other currency... Cash and cash equivalents total Equity See accounting policies in note 35b Share capital 10,731 33,558 7,522 28,732 18,253 62,290 The Company's total share capital according to its Articles of Association was ISK 5,903 million at year-end. The Company holds no treasury shares. Each share of ISK in the Company carries one vote. All share capital has been paid. Revaluation account The Company's revaluation account consists of the revaluation increase of the Company's fixed assets after income tax effects. Depreciation of the revalued price is entered in the income statement and transferred from the revaluation account to retained earnings (unadjusted loss). Financial Statements of Landsnet hf Amounts are in USD thousand

20 22. Equity, contd.: Statutory reserve Under the Public Limited Companies Act, 25% of the nominal value of the Company s share capital must be held in a statutory reserve, which is not permitted to be used to pay dividends to shareholders. 10% of each year s profit must be deposited in the reserve until it amounts to 10% of the nominal value of the share capital, when the percentage deposited becomes 5%. Foreign currency translation Foreign currency translation is the foreign exchange difference arising due to subsidiary and associated company with other functional currencies. Restricted equity Under the Annual Accounts Act, the Company must transfer its share in the profit or loss of associates exceeding received dividends, or dividend payouts that have been decided, into a restricted reserve account among equity. Dividends The Company paid dividends in 2016 for the financial year 2015 ISK 400 million, but not in the year 2015 for the financial year (Loss) earnings per share See accounting policies in note 35o Basic and diluted (loss) earnings per share: (Loss) profit to shareholders... ( 12,967) 30,412 Weighted average number of ordinary shares at 31 December... Basic and diluted (loss) earnings per share... 45,549 45,549 ( 0.28) Interest-bearing loans and borrowings See accounting policies in note 35b This Note provides information on the contractual terms of the Company's interest-bearing loans and borrowings, which are measured at amortised cost. Long-term liabilities Indexed bond loan from parent company in ISK, fixed interest... Loan agreement from parent company in USD, fixed interest... Unlisted bond loan in USD, fixed interest... Loan agreement in CHF, LIBOR + margin... Listed indexed bond loan in NASDAQ OMX in ISK, fixed interest... Current maturities on long-term liabilities... Interest-bearing long-term liabilities total , , , ,661 38,364 45,302 39, , ,624 ( 16,454) ( 7,222) 366, ,402 Short-term liabilities Short-term loans from parent company specifies as follows: Accrued interest of long-term liabilities with parent company... Short-term loans from parent company total , ,768 The issuance of unlisted bonds on the United States Private Placement market in the amount of USD 200 million was finalised at the end of the year. Half of this amount was issued and finalised in December, with the other half to be completed in March The average interest rate of the issue is a fixed rate of 4.56%. Concurrently, Landsnet paid USD 95 million on an indexed loan from the parent company, with the remaing balance converted to USD and maturing in As at year-end 2016, the Company meets all current requirements of loan agreements regarding financial strength. Financial Statements of Landsnet hf Amounts are in USD thousand

21 24. Loans and borrowings, contd.: Terms of interest-bearing loans and borrowings Debts in foreign currencies: Debt in USD... Debt in CHF... Debt in ISK, indexed... Total interest-bearing loans and borrowings... Maturities by year of interest-bearing loans and borrowings: Final Weighted Carrying Weighted Carrying maturity avg. rate amount avg. rate amount % 306, % 31, % 38, % 45, % 338, , ,624 Year 2017/ ,454 7,222 Year 2018/ ,559 7,292 Year 2019/ ,675 7,366 Year 2020/ ,461 7,445 Year 2021/ , ,837 Later ,533 41, , , Deferred tax liability See accounting policies in note 35n The breakdown of deferred tax liability is as follows: Deferred tax liability at 1 January... Calculated income tax for the year... Deferred tax liability due to revaluation of fixed assets... Income tax payable... Foreign currency translation... Deferred tax liability at 31 December... 56,600 21,078 ( 3,289) 7, ,147 ( 4,292) ( 7,895) 0 ( 305) 49,019 56,600 The breakdown of deferred tax liability was as follows at year-end: Fixed assets in operation... Intangible assets... Other assets... Provision due to site restoration... Other obligations... Unrealized exchange rate difference... Deferred tax liability at 31 December... 55,188 56,223 1,366 1, ( 1,405) ( 1,399) ( 616) ( 635) ( 5,928) ,019 56, Deferred income Deferred income is recognised mostly with regard to connection charges paid by electricity buyers to the Company during the year. At year-end, deferred income amounted to 3.1 million USD (2015: 3.1 million USD). The part of deferred income that will be recognised in the income statement next year is recognised in current liabilities. Connection charges recognised in profit or loss for 2016 amounted to 0.1 million USD (2015: 0.1 million USD). Financial Statements of Landsnet hf Amounts are in USD thousand

22 27. Provision due to site restoration See accounting policies in note 35j Change in the provision due to site restoration is specified as follows: Balance at Present value for the year reversed... Increase in provision... Foreign currency translation... Balance at ,997 6, ( 122) 7,023 6,997 The initial value of property, plant and equipment includes the estimated cost of the demolition thereof after use. The estimated demolition cost of lines has been valuated and discounted based on life-cycle criteria. The discounted value is recognised as a provision under long-term liabilities. In the income statement, the change in the discounting provision, which is based on a 5.7% interest rate (2015: 6.4%), is reported under financial expenses, in addition to depreciation under operating expenses. 28. Pension fund obligation See accounting policies in note 35i The Pension Fund for State Employees calculates at the end of each year the benefit plan obligation accrued for the year. Actuary assessment is based on the accrued obligation for the year being discounted at year-end on the basis of the annual interest rate generally used to assess pension fund obligations. The present annual rate is 3.5%. A total of 37 thousand USD is expensed in relation thereto for 2016 (2015: 8 thousand USD), but the accrued benefit plan obligation is paid in full each year. 29. Trade and other payables See accounting policies in note 35b Trade and other payables are specified as follows: Trade payables... Other payables... Trade and other payables total... 11,868 6,876 3,961 3,158 15,829 10, Financial instruments Overview The Company has exposure to the following risks from its use of financial instruments: Credit risk Liquidity risk Market risk This Note presents information about the Company's exposure to each of the above risks, the Company's objectives, policies and processes for measuring and managing risk and its management of capital. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Board of Directors seeks consultation regarding financial risk both from its employees and external consultants and discusses it regularly at Board meetings. The Company's objective is to discover and analyse the risks it faces, set a benchmark for risk exposure and control it. The Company's risk management policy is regularily reviewed to analyse market changes and changes within the Company. The year saw a systematic initiative to reduce market risk through the refinancing and currency conversion of a start-up loan from the parent company, which was previously inflation-indexed and ISK-denominated. In December 2016, the Company raised funds by issuing a fixed-interest bond in the amount of USD 200 million, half of which was issued and finalised in December 2016, with the other half to be completed in March Financial Statements of Landsnet hf Amounts are in USD thousand

23 30. Financial instruments, contd.: At the end of September 2016, an agreement was concluded with the parent company on a payment on the startup loan, followed by an agreement at the end of December to convert the remaining balance of the loan to USD. Landsnet has thus achieved its objective to have a large proportion of its funding in its functional currency, thereby minimising future market risk in the form of operational and balance sheet currency risk. At year-end, the Company s loan portfolio had become 79.9% USD-denominated (2015: 0%) and 11.8% ISK-denominated (2015: 89.8%), Through this refinancing and debt restructuring, the Company has also moved nearer to its objective of a normally spread maturity profile of its long-term debt. Credit risk Credit risk is the risk of financial loss of the Company owing to the failure of a customer or counterparty to a financial instrument to meet its contractual obligations. The Company's credit risk is mainly due to trade receivables and is dependant on the financial condition and operations of each customer and also cash and cash equivalent. Trade and other receivables The Company s main customers are electricity generating companies, distribution system operators and powerintensive consumers. The Company's largest customers are also shareholders in the Company. Approximately 85% (2015: 86%) of the Company's transmission income derives from the Company's shareholders. Highest possible loss due to credit risk The Company's highest possible loss due to financial assets is their book value, which was as follows at yearend: Long-term note... Receivables from parent company... Trade and other receivables... Market securities... Cash and cash equivalents... Highest possible loss due to credit risk total , ,457 4,743 8,026 7, ,663 18,253 62,290 31,801 81,397 Impairment losses No impairment loss has been recognised in relation to accounts receivable at year-end; nor has loss on receivables been expensed during the year, which is based on the management's experience. The Company's collection issues are reviewed on a regular basis. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial commitments as they fall due. Landsnet s aim is to manage its cash position so as to ensure that it has sufficient cash at all times to meet its commitments and thereby minimise liquidity risk. During the year, the Company obtained a credit line facility from Landsbankinn hf. in the amount of USD 50 million. This facility is as yet undrawn. The strong cash flow from operations, new funding, a well spread maturity profile and the access to a credit line have already secured the Company s liquidity to the year Financial Statements of Landsnet hf Amounts are in USD thousand