Orkuveita Reykjavíkur - Major shareholder announcements

Orkuveita Reykjavíkur and owners approve an action plan tackling the company‘s financial situation

Orkuveita Reykjavíkur‘s (OR) Board of Directors and the municipalities that own
the company - The City of Reykjavík, Akranes Town and Borgarbyggð Municipality
- have approved an extensive action plan to secure a more solid foundation for
the company‘s operation and activities for the period ending at year end 2016
under the difficult conditions currently in the credit markets. New investments
in utility systems will be postponed, operational cost will be further reduced,
assets will be sold, and the tariffs for sewage and hot water will be raised.
Furthermore OR will immediately obtain subordinated loans from it owners and
thus prevent the depletion of funds that the company would otherwise be headed
towards before mid-year 2011. The accumulated effect of the action plan over
the period of 2011-2016 amounts to approximately 50 billion ISK. 


                          No access to foreign funding

The Board and Management of OR announced a variety of measures in August 2010
to improve the operations of the company. These measures led to redundancies of
employees, increase in tariffs, economization of operations and sales of assets
not required for core operations. 



At that time it was known that these measures would not result in full force
until late 2011 and that OR would also need the facilities of the international
capital market. Plans for foreign financing will not be materialized now and
the company cannot ensure its funding on its own premises. 



The Board and Management of OR presented this situation to its owners, the
three municipalities, in early 2011 and requested their cooperation for
financing. The action plan is the result of that cooperation and aims to ensure
the company‘s operation on a permanent basis and that OR can meet its
obligations with minimal impact on services to its customers. 


                       Measures in five principal aspects

OR‘s owners have committed to financing the company until the end of 2016
without the involvement of credit institutions. Such is the municipalities'
reaction to the situation that has presented itself by the company not
obtaining the required lending facilities. The owners' joint conclusion is to
remove all doubt that OR can fulfill the company's obligations as a public
utility. 



However, additional measures are called for to permanently ensure OR‘s
operations. Actions in that regard were proposed in August 2010, as mentioned
above, but now they have been elaborated further. 



1. Postponement of investment projects 2011-2016

Investment in utility systems for approximately ISK 15 billion will be
postponed, including sewerage in Akranes, Borgarbyggð and Reykjavik. Other
investment will be cut by ISK 1.3 billion during this period. 

2. Reduction of operating expenses 2011-2016

Operating cost will be reduced by ISK 5 billion, both wage costs and other
costs of operation. Vacancies will not be filled and the number of employees is
expected to decrease by about 90 by the end of year 2016. It is not expected to
resort to mass layoffs as took place in October 2010. 

3. Increase of tariffs

The tariffs for use of sewerage will be increased by 45% and the tariff for hot
water use by 8% on May 1st, 2011. OR‘s revenues are expected to increase by ISK
6.1 billion until the end of 2016 due to higher charges for use of the sewerage
systems and by ISK 1.9 billion during the same period due to increased tariffs
for the hot water usage. 

  -- The expenditure of a family in an apartment of a common size will increase
     by around ISK 1,500 per month, of which about ISK 1,000 are due to increase
     in sewage charges and ISK 500 because of increased tariffs for hot water.
  -- The reason for increases in tariffs are that the operating result of these
     services is unacceptable, and major investments in the sewerage and
     district heating systems have been undertaken in recent years.

4. Sale of assets

OR will sell assets that are not part of the company‘s core operations for ISK
10 billion over the period 2011-2016. A few properties have already been sold
this year for prices in line with expectations. 

5. Subordinated loans from owners

OR will receive subordinated loans from its owners, in total of ISK 12 billion,
divided among them in accordance with their respective ownership*. A loan of
ISK 8 billion will be granted in April 2011 and ISK 4 billion in 2013. The loan
period is 15 years without repayment the first 5 years and rates will be
subject to the best terms of the Municipality Credit Iceland Plc. and. 

  -- OR‘s own credit lines, ISK 8 billion, will only be used to cover market
     risk and other risks in operations during the plan period. This is
     particularly in case the liquidity requirements increase due to adverse
     changes in the exchange rates, aluminum prices, interest rates or
     inflation.

These measures combined are intended to bridge OR‘s ISK 50 billion outstanding
capital needs until the end of year 2016. OR‘s Board of Directors discussed the
company‘s financial needs during this period in October 2010 and approved on
October 25th 2010 a budget that included the need for financing during
2011-2016 for ISK 42 billion. That budget has now been revised and the
financial needs amount to ISK 50 billion mainly due to unfavorable development
of exchange rates and interest rates from the time of the original budget. The
revised budget is attached. 


         Mr. Bjarni Bjarnason, CEO. Tel. +354 516 7707.

Attachments:

OR consolidated budget 2011 and five year plan 2012-2016.pdf