Hitaveita Suðurnesja - Financial Statement Release

Annual Results 2009

Profit for the year amounts to ISK 6798 million and equity ratio increases
significantly 

Reykjanesbaer, Iceland, February 6, 2010 - The annual financial statements for
the first operating year of HS Orka hf. in its present form were approved at
the Board of Directors' meeting today February 6, 2010. 

The Company's profit for the year amounted to ISK 6,798 million [USD 53
million] compared to a loss of ISK 11,682 million for the year 2008. After
taking into account income and expenses recognized under equity, comprehensive
income for the year amounted to ISK 8,155 million [USD 64 million] compared to
a loss of ISK 4,744 million for the year 2008. An increase in comprehensive
income is mainly due to decrease in foreign exchange loss and fair value
changes of embedded derivatives. Equity ratio was 33.5%, whereas it was 16.3%
at the beginning of the year. 

According to the statement of comprehensive income, HS Orka hf.'s operating
revenue in the year amounted to ISK 6,226 million compared to ISK 5,425 million
for the year 2008. The increase in revenue is mainly due to service fees for
services provided to HS Veitur hf., but the companies have entered into a
service agreement thereon. Other revenues amounted to ISK 784 million and are
due to sale of land and geothermal rights.
“Despite a difficult year for the Icelandic economy, HS Orka has been able to
produce a very positive outcome for this year in terms of profit and an
increase in the equity ratio from 16.3% to 35.5%.” says Julius Jonsson, CEO of
HS Orka, adding that “The main reasons for the improved results are the
increase in the aluminum price and a more stable Icelandic Krona, and it's
important that this development continue”.
Production cost and cost of sales amounted to ISK 4,419 million compared to ISK
3,066 million for the year 2008. The increase in production cost and cost of
sales is due to increased cost of production, sale and distribution of
electricity, in addition to cost of services provided to HS Veitur hf. Other
operating expenses amounted to ISK 499 million compared to ISK 377 million for
the year 2008. Increase in other operating expenses is mainly due to impairment
of development cost in the amount of ISK 142 million. Aluminum prices increased
significantly since the beginning of the year. Therefore, the future value of
aluminum plant agreements (fair value changes of embedded derivatives) has
increased by in excess of ISK 7.069 million. 

Net finance income amounted to ISK 5,476 million in the year compared to net
finance loss in the amount of ISK 15,516 million in 2008. The weakening of the
Icelandic krona against foreign currencies lead to a ISK 1,245 million foreign
exchange loss whereas in the previous year foreign exchange loss amounted to
ISK 10,408 million. Interest expenses increased from 2008 from ISK 632 million
to ISK 764 million. No finance expenses were capitalized during the year
compared to ISK 34 million in 2008. Increase in fair value of the Company's
embedded derivatives amounted to ISK 7,069 million in the period compared to a
decrease of ISK 2,687 million in 2008.
According to the balance sheet as at 31 December 2009, HS Orka hf.'s assets
amounted to ISK 42,069 million. Assets increased by ISK 5,590 million from the
beginning of the year. Increase in assets is mainly due to fair value changes
in derivatives and revaluation on operating assets. 

HS Orka hf.'s liabilities amounted to ISK 27,981 million according to the
balance sheet, whereof short term liabilities amounted to ISK 5,392 million.
Liabilities have decreased by ISK 2,564 million from the beginning of the year.
Thereof, decrease in long term liabilities amounts to ISK 613 million. Short
term liabilities decreased by ISK 1,951 million, which is mainly explained by
the payment of short term liabilities due to cost of projects. 

During the year the management has been in a process of negotiations with its
banks since the weakening of Icelandic krona in year 2008 which led to an
increase of the Company's loans resulting in a breach of covenants. Subsequent
to year-end, the banks revised the covenants equity ratio and operating ratio,
increased interest and changed repayment schedules. The current ratio at year
end was low but will be increased by a sale of bonds classified as non-current
and there is also very unlikely that the currency and interest rate swap
liability classified as current liability will be paid in full in year 2010. 

During the year the management has been in a process of negotiations with its
banks since the weakening of Icelandic krona in year 2008 which led to an
increase of the Company's loans resulting in a breach of covenants. Subsequent
to year-end, the banks revised the covenants equity ratio and operating ratio,
increased interest and changed repayment schedules. The current ratio at year
end was low but will be increased by a sale of bonds classified as non-current
and there is also very unlikely that the currency and interest rate swap
liability classified as current liability will be paid in full in year 2010.
Operating outlook for HS Orka hf. is good despite uncertain economic outlook.
The management of the Company believes that there is an increasing demand for
electricity in Iceland in coming years and the plan is to increase the
Company's capacity in that respect. As access to new funding sources is
limited, there is uncertainty about the timing of increase of Company's
capacity in the future but preparations are ongoing. Researches will be carried
out on further power plant options and various licenses are being obtained in
relation thereto. The largest single projects are research drilling and other
preparation for new power plants, in addition to increased down pumping and
construction of supply systems.
Following are the main figures in the annual financial statements in ISK
thousand. 
: See attachment.

Attachments:

hs orka hf _financial report 2009.pdf

press release.pdf