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Announcement:

Moody's: Improving macroeconomic conditions offset tightening monetary policy for Icelandic utilities

21 Jan 2016

London, 21 January 2016 -- Iceland's utilities will see a net positive impact from improving domestic macroeconomic conditions, despite tightening monetary policy, according to Moody's Investors Service. The rating agency expects revenue growth in the next 12-18 months to be driven by increasing domestic demand and also higher inflation-linked regulated tariffs as the inflation rate picks up. Upward pressure on the Icelandic krona will reduce companies' foreign debt burden, whilst rising domestic interest rates will have only a small impact on the costs of servicing debt as most is foreign currency denominated.

"We expect that positive macroeconomic developments will underpin the financial position of Iceland's two main utilities, although Orkuveita Reykjavikur will benefit more than Landsvirkjun, due to its predominantly domestic oriented regulated activities", says Erica Gauto Flesch, an Analyst at Moody's.

Moody's report, entitled "Icelandic Utilities: Improving prospects due to positive macroeconomic conditions" is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

Moody's expects that Orkuveita Reykjavikur (OR) will benefit from the improving trend in economic growth and domestic demand for utility services. According to Moody's forecasts, demand for electricity and hot water will rise by around 3% p.a. and 1.5% p.a. respectively until 2018. Whilst the increase in domestic demand for electricity will have a positive impact on Landsvirkjun's financial position, power sales to local utilities only represent a small proportion of its overall revenues and therefore it will benefit proportionally less than OR.

Upward pressure on the Icelandic krona also helps OR to reduce the burden of foreign currency denominated liabilities. Since the beginning of 2015, the Icelandic krona has strengthened by around 7% in trade-weighted terms. This will have a positive impact on OR's debt burden given the mismatch between foreign currency income and its debt servicing obligations. On the other hand, Landsvirkjun will only see a modest impact on its financial profile as it has limited exposure to the Icelandic krona.

Moody's notes rising domestic interest rates but expects that they will have only a limited impact on the cost of servicing debt. Since the majority of both utility companies' debt is denominated in foreign currency, the effects of a tighter monetary policy, and corresponding increases in the local interest rate, will have only a marginal impact on their financial profiles.

However, higher inflation will have a positive impact on the tariffs of regulated utility services. Inflation is expected to increase further and remain in the range of 3%-4%, until 2018. Around 65% of OR's revenue is derived from monopoly or quasi-monopoly regulated activities, with tariffs that increase broadly in line with inflation. Moody's expects that Landsvirkjun will benefit from a rise in the inflation rate albeit to a lesser extent than OR, since a modest proportion of Landsvirkjun's revenues are linked to Icelandic inflation.

Subscribers can access the report at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1012253

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Erica Gauto Flesch
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Improving macroeconomic conditions offset tightening monetary policy for Icelandic utilities
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