Annual Report 2001

The photo above depicts the exhibition “Visions in wood” held by the National Museum of Iceland at Landsvirkjun's Ljósifoss hydro station, south Iceland (photo: Sigfús Már Pétursson).

The pictures in this annual report are of artefacts preserved in the National Museum (photographer: Ívar Brynjólfsson). Landsvirkjun wishes to thank the National Museum and its staff for assistance with the selection of the photos and subtitles.

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Design: Nonni og Manni�

Printing: Grafík�

Supervision: Thorsteinn Hilmarsson�

Cover: On the cover there is a photo of a door from Valthjófs-

stadur, East Iceland, from about 1200. The door was a church

door at Valthjófsstadur until 1859. It is thought to have been

higher originally, with a third circular motif.

Sword with silver enamel from 10th century. Found at Hafurbjarnarstadir, southwest Iceland.

Operating revenues 2001 – 13,009 m.

General Market�ISK 6,788 million

Power-intensive industry�ISK 6,169 million

Other revenues�ISK 52 million

Operating expenses 2001 – ISK 14.848 m.

Depreciation�ISK 5,391 million

Operating costs�ISK 4,290 million

Interest�ISK 5,167 million

Breakdown of sales to power-intensive industries (GWh)

ISAL�55.4%

Nordic Aluminum�23.0%

Icelandic Alloys�20.2%

Fertilizer Plant�1.4%

Cash generation and net result

2001 prices

Highlights of the annual accounts (ISK)� �� 2001 ��� 2000 �

Net loss�� 1,839 million��� 1,366 million� �

Cash generated by operating activities� � 5,542 million��� 3,751 million�

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Liabilities �� 94.4 billion��� 77.1 billion�

Owners' equity� � 37.7 billion��� 34.5 billion�

Equity ratio �� 28.5% ��� 30.9%�

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Electricity production, purchases and sales� �� 2001��� 2000�

Total production �� 6,838 GWh��� 6,579 GWh�

Electricity purchases �� 661 GWh��� 655 GWh�

Sales to general market �� 2,242 GWh��� 2,272 GWh�

Sales to power-intensive industries� 4,956 GWh��� 4,683 GWh�

Sales increase �� 3.5%��� 7.4%�

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Electricity prices to the general market 2001�� Change from 2000�

� Avarage price� Nominal price� In real terms�

Primary electricity� 3.43 ISK/kWh� 4.1%� -1.6%�

Secondary electricity� 0.58 ISK/kWh� 10.5%� 4.4%�

Average price� 3.03 ISK/kWh� 4.2%� -1.5%�

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Landsvirkjun's mission is to provide its customers with the best energy solutions to create the basis for a modern quality of life. �Landsvirkjun's owners are the Icelandic State (50%), City of Reykjavík (45%) and Town of Akureyri (5%).

Landsvirkjun's credit rating on international markets�� Moody's � Standard & Poor's�

Short term � P1 � A1+�

Long term � Aa3 � A+

Bronze clasp with dragon motif.�

From 10th century

On February 9, Landsvirkjun signed an agreement with Alstom of France for the purchase and installation of state-of-the-art software for control and monitoring of electricity systems. The new energy management system will enter service in autumn 2002.

On March 2, Landsvirkjun signed an agreement to act as main sponsor of the National Museum of Iceland for the fol-lowing three years.

On May 25, the President of Iceland, Ólafur Ragnar Gríms-son, laid the cornerstone for the Vatnsfell Hydro Station (90 MW). The first of the two turbines at Vatnsfell went on stream on November 9. The second turbine entered opera-tion in December.

In June, Landsvirkjun submitted an environmental impact assessment (EIA) for the 690 MW Kárahnjúkar Hydro Project to the State Planning Agency. This is the most exten-sive EIA ever conducted in Iceland. On August 1, the State Planning Agency announced its opposition to the project on the grounds that it would entail considerable environmental impacts. Landsvirkjun then lodged an appeal against the Agency’s ruling with the Minister for the Environment. The Minister for the Environment ruled in Landsvirkjun’s favour on December 20, overturning the Planning Agency’s ruling and approving the Kárahnjúkar Project with 20 conditions.

The company raised its wholesale tariff to local utilities by 4.9% as of July 1. The reason for the increase was the company’s higher operating costs, particularly as a result of unfavourable exchange rate developments in the preceding period, which caused a steep increase in financial expenses.

Landsvirkjun published a proposal on July 10 for an environ-mental impact assessment for the Nordlingaalda Diversion. The aim behind this project is to contribute to economical utilization of hydropower in the River Thjórsá and River Tungnaá basin, and to ensure sufficient supply of electricity to meet demand, for uses including aluminium production in southwest Iceland.

Preparatory work began for the 110 MW Búdarháls Hydro Project on the River Tungnaá late in the summer, involving construction of a bridge and roads as well as excavation for the foundations of the powerhouse. This was done in order to enable construction to begin next spring if contracts for power-intensive industries in southeast Iceland need to be fulfilled.

In September, the parties to the Noral declaration, who plan to construct an aluminium smelter and related electricity production facilities in East Iceland, agreed that their final decision as to whether to go ahead with the project should be postponed from February 1, 2002 to September 1, 2002. The postponement was decided because more time was needed to work on environmental aspects of the hydropower project and on funding of the smelter.

Number og Employees 2001�A total of 286 man-years were worked by full-time employees of Landsvirkjun, an increase of 10 from the previous year. Temporary employees worked 86 man-years in all, the same as the previous year.

O v e r v i e w ��

Managing Director • Fridrik Sophusson

Deputy Managing Director • Jóhann Már Maríusson

Executive management:

Finance and Marketing • Örn Marinósson

Transmission • Thórdur Gudmundsson

Energy • Bjarni Bjarnason

Human Resources • Sigthrúdur Gudmundsdóttir

Information • Bergur Jónsson

Engineering and Construction • Agnar Olsen

A new Board of Directors was appointed at Lands-virkjun’s annual general meeting in April 2001, for aone-year term until April 5, 2002.

Appointed by the Minister for Industry and CommerceMr. Jóhannes Geir Sigurgeirsson, ChairmanMr. Árni Grétar Finnsson, Deputy ChairmanMs. Edda Rós Karlsdóttir

Appointed by the City Council of ReykjavíkMr. Helgi HjörvarMr. Pétur JónssonMr. Vilhjálmur Th. Vilhjálmsson

Appointed by the Town Council of AkureyriMr. Kristján Thór Júlíusson

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M a n a g e m e n t

B o a r d o f D i r e c t o r s

One of two chairs owned by the matronThórunn Jónsdóttir at Grund, north Iceland.

16th century.

Solid position despite operating lossLandsvirkjun sustained a substantial loss on its opera-tions for the second year in a row. The reasons were infact all discussed by us in the last annual report, sincethe reasons for the previous year’s loss apply even moreto the operating result now. Amounting to ISK 1,839million, the loss is mainly the result of the company’sheavy indebtedness in foreign currencies. Comparedwith the previous year, the loss has increased by almostISK 500 million. Developments in the exchange rate ofthe króna have caused depreciation and net financialcosts to rise, while Landsvirkjun’s income, largelydenominated in Icelandic krónur, has not growncorrespondingly. The main explanation for higher ope-rating costs is an increase in depreciation of almost ISK900 million.

A more stable criterion than profit for measuring thecompany’s performance and position is cash generatedby operating activities. In these terms, 2001 was one ofthe best years in the company’s history, with cashgenerated from operating activities of ISK 5,542million, an increase of ISK 1.6 billion. Every year, thecompany has generated substantial amounts whichconfirm its capability of meeting its liabilities and hand-ling the development of the power system that it hasundertaken. Furthermore, substantially higher incomeis assured from 2005 onwards by current long-termcontracts with power-intensive industrial manu-facturers, when contractual rises will take place in thepower price to two of Landsvirkjun’s largest customers.Bearing this in mind, there is every reason to considerthat Landsvirkjun has a bright future and is wellequipped for tackling large-scale projects.

Kárahnjúkar hydro projectThe Reydarál group’s plans for the construction of analuminium smelter in Reydarfjördur and developmentof the Kárahnjúkar hydro project aroused much debateand excitement during the year. For its part, Lands-

virkjun emphasized giving systematic publicity to theseplans on the Internet and at numerous meetings andpresentations in many parts of Iceland. Landsvirkjuncompleted its environmental research and submitted anenvironmental impact assessment report to the StatePlanning Agency in April. The Agency declared theproject unacceptable because of its considerableenvironmental impact. It also criticized the report byLandsvirkjun and its consultants, alleging that infor-mation was lacking on important points. Landsvirkjun’sappeal against the Agency’s ruling to the Minister forthe Environment was not dealt with until the end of theyear, when the appeal was broadly accepted and theproject was authorized with twenty conditions. Afterreassessing the project on the basis of these conditions,Landsvirkjun has concluded that even though they addmore than ISK 2 billion to the investment cost, theprofitability of the project is still highly satisfactory.

Current estimated cost of procuring power for a fullyoperational 390,000 t.p.y. aluminium smelter in eastIceland is ISK 118 billion. This includes both phases ofthe Kárahnjúkar project, expansion of Krafla geother-mal plant, a geothermal power station at Bjarnarflagalong with necessary substations and transmission lines.The real rate of return on these investments is estimatedat 6.3% and real return on equity more than 14%.

The aim is to be able to reach a decision on constructionwork to begin for the hydro project and aluminiumsmelter on September 1, 2002.

Looking aheadAnother strong feature of the year’s activities wasconcerted action to prepare power projects, so that asmany choices as possible are available as opportunitiesfor power sales arise. This has become important, sincethe rapid development over the past sex years entailsthat fully designed and authorized power projects are nolonger at hand. Landsvirkjun makes every effort to

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R e p o r t b y t h e C h a i r m a n a n d M a n a g i n g D i r e c t o r

present hydropower projects and seek permits for themwell in advance, in order to facilitate informed anddemocratic decision-making about whether to authorizethem. Such preparatory work is certainly necessary,because both Nordurál and ISAL have expressed aninterest in expanding their smelters considerably in theyears to come.

Deregulation of the power sectorChanges to electricity legislation are in the offing. It isvital to know from the very start what rules shall governcompetition in the power market. An important point isthat whatever changes are made should not impairLandsvirkjun’s credit rating, since this would lead topoorer credit terms and thus reduce the company’sability to attract foreign power-intensive industrialinvestors to Iceland. It should also be borne in mind thatthe cost of existing loans could also be increased inphases by a lower credit rating, which in turn couldaffect power prices in the ordinary market in Iceland.

Community responsibilityRecently, Landsvirkjun has been purposefully involvingitself in various projects concerning the community atlarge, as part of a new company policy which affects itsworking methods in most areas. The underlying notionis that no man is an island and no company can work inisolation either. Landsvirkjun not only produces elec-tricity and builds power stations. All companies are partof the community and interact widely with theirenvironment. This entails both rights and duties. Forthis reason, Landsvirkjun needs to bear in mind the

context in which its activities are conducted and ensurea responsible attitude towards the environment in ac-cordance with its mission and position at any time.

An assessment of Landsvirkjun’s activities has foundthat the essence of its community responsibility is linkedto the fact that the company is a pioneer in developingthe highlands and has opened them up to tourism andtravellers by improving access. Company activities arespread all over Iceland and serve as an importantelement in many smaller communities, forming theirbackbone to some extent. The heated debate abouthydropower projects, power-intensive industries andenvironmental issues recently has underlined theimportance of allowing people to find out aboutLandsvirkjun’s plans and activities for themselves. Thecompany has therefore made a point of opening accessto its stations and their activities, along with infor-mation and presentations about energy issues and theenvironmental questions that are related to them.

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Chairman Managing Director

Bronze boss from a scabbardfound at Lundur, north Iceland

L a n d s v i r k j u n ’ s P o w e r S y s t e m 2 0 0 1 Hydropower stationGeothermal power stationSwitchyardPower-intensive industry220 kV transmission line132 kV transmission line66 kV transmission line

Mjólká�

Geiradalur

Glerárskógar

Hrútatunga

Blanda 150 MW

LaxárvatnVarmahlí›�

Rangárvellir

Laxá 28 MW

Krafla 60 MW

Bjarnarflag 3MW

Hryggstekkur

Teigarhorn

Hólar

Prestbakki

Búrfell 270 MW

Sog 90 MW

Brennimelur

KorpaGeitháls

Hamranes

Vatnshamrar

Sigalda 150 MWHrauneyjafoss 210 MW

Sultartangi 120 MW

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TransmissionProduction and installation of Landsvirkjun’s newenergy management system is proceeding according toplan. The project was assigned to Alstom of France.Two Landsvirkjun employees will spend 12 months inParis participating in the installation of the system inco-operation with the manufacturer. The new energymanagement system replaces an earlier one which isnow 12 years old and would not have met the require-ments of the new deregulated environment.

In recent years, ABB of Sweden has been engaged in thedevelopment of equipment for dampening powersystems oscillations. As a cooperative experiment, thisequipment has been installed in two Landsvirkjunpower stations.

Collaboration was established with BKK (Bergens-halvøens Kommunale Kraftselskap) of Norway ondisturbance analysis and design of a framework plan forpower system protection of Landsvirkjun’s network.

O p e r a t i o n s

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Greater importance was attached to the introductionand development of condition monitoring and assess-ment of equipment in substations on which virtually allmaintenance work is presently based. Time-based main-tenance has subsequently been given less emphasis. Theproject is run in collaboration with Doble of the USA,which provides important databases, training andtesting equipment, making condition monitoring easierthan before.

A report was published on the future development ofLandsvirkjun’s transmission network serving plannedpower-intensive industries in the southwest. The mainfinding of the report was that a 400 kV transmissionnetwork will need to begin operation in southwestIceland in 2007 if the planned expansions at theNordurál and ISAL aluminium smelters are realized.

Benchmarking was conducted in 2001 based onoperations in 2000. Landsvirkjun is participating in theinternational ITOMS benchmarking project with 24companies from 14 countries. Landsvirkjun’s perform-ance improved and productivity increased substantiallycompared to the results two years ago. Landsvirkjun wasone of the performers, together with two other compa-nies in the comparative group, having the lowest costlevel and one of the highest service levels. (See chart.)

There were 152 major disturbances registered in thepower system in 2001 compared with 136 in 2000.Despite this increase, system outage time dropped fromthe previous year and measured 26.8 minutes for allareas except the West Fjords. If the West Fjords area isincluded, system outage time totalled 34.7 minutes.

Power production Power production went smoothly during the year. TheCompany had set a target of 99% average availability ofturbines for the winter period, and this was achieved.The same target has been set for 2002. Organizedmaintenance work is conducted during the summerwhen there is a lower load on the power system, andavailability of turbines for the year as a whole measured93%, the same as the previous year. Vatnsfell HydroStation went on stream at the end of the year, andLandsvirkjun now operates 10 hydropower stations andtwo geothermal power stations, as well as two backupfossil-fuel stations.

Extensive upgrading and refurbishment has beenundertaken at Landsvirkjun’s power stations inoperation in recent years, headed by the installedcapacity expansion at Búrfell, installation of a secondturbine at Krafla and renewal of electrical and controlequipment at the River Sog power stations. Theseprojects were largely completed in 2001. Less up-grading will take place in 2002, which will create scopefor attending to other pressing tasks in operations.

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ITOMS Benchmarking

Carved cupboard with door on hingesfrom Skagafjördur, North Iceland.

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EnvironmentDuring the year, Landsvirkjun began to keep “greenaccounts” for its electricity transmission and at theBlanda Hydro Station, as the first step towards intro-ducing such control throughout the company as awhole. Green accounts present statistics about rawmaterial use and the quantity of contaminants releasedby operations.

In order to establish how environmentally friendlyhydropower can be, a simple life-cycle analysis wasmade for Blanda Station. This involved examining theimpact on the environment from the time the projectwas constructed and the impact of the production itself,right up to the point where the electricity is delivered tothe transmission network. Initial findings from theanalysis show that Icelandic hydropower has everychance of consolidating itself even more firmly as anenvironment-friendly energy resource.

Development of the company’s environmental manage-ment system continued. In particular, various environ-mental aspects of operations were addressed. A newpurchasing policy was also approved, laying downclearer requirements towards suppliers. Provisionsinclude the following: “In purchasing, quality andenvironmental considerations shall be taken intoaccount as much as those of cost. If goods are com-parable in other respects, the type must be selectedwhich causes least harm to the environment.”

Power Production, Purchases and SalesLandsvirkjun’s production amounted to 6,838 GWh in2001, a record figure and an increase of 3.9% from theprevious year. Iceland’s total electricity production was8,028 GWh, which means that Landsvirkjun’s share wasjust under 85.3%, virtually unchanged between years.Landsvirkjun’s hydro production was 6,327 GWh (justover 96% of the national total) and its geothermalstations produced 511 GWh (35.2%). Furthermore,

Landsvirkjun purchased a total of 661 GWh fromReykjavík Energy and Sudurnes Regional Heating Co.for resale to power-intensive industries.

Sales amounted to 7,198 GWh, up 3.5% from the yearbefore. Losses and own use were 309 GWh, or 4.1% ofown production and purchases. Sales of primaryelectricity in the general market decreased by 1.4%,while total general market sales including secondaryelectricity were down by 1.3%. Sales to power-intensiveindustries grew by 5.8%, mainly accounted for by theexpansion of production capacity at the Nordurálaluminium smelter from 60,000 to 90,000 tonnes p.a.from the middle of the year. Total sales by Landsvirkjunincreased by 3.5% from the year before.

Landsvirkjun’s Power Stations

Hydropower stations 1107 MWBúrfell 270 MWHrauneyjafoss 210 MWBlanda 150 MWSigalda 150 MWSultartangi 120 MWVatnsfell 90MWÍrafoss 48 MWLaxá 28 MWSteingrímsstöd 26 MWLjósifoss 15 MW

Geothermal stations 63 MWKrafla 60 MWBjarnarflag 3 MW

Fossil fuel stations 42 MWStraumsvík 35 MWAkureyri 7 MW

Total installed capacity 1212 MW

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MarketingHydrological conditions were good for Landsvirkjunthroughout the year, and the closing months wereexceptionally favourable. This was fortunate, given theslight delay that occurred before Vatnsfell Stationbecame operational. Landsvirkjun allowed its customersto benefit from good hydrological conditions bysupplying them with excess power free of charge, whilealso lowering the power rate in order to reducedependence on fuel generators to produce electricityduring peak hours. This resulted as intended in someincrease in energy sales.

Landsvirkjun’s wholesale tariff to local utilities wasraised by 4.9% on July 1, 2001. After allowance forinflation, this represents in fact a reduction in real termsbetween 2000 and 2001, in accordance with a policy laiddown by Landsvirkjun’s owners in 1997.

Talks with the Reydarál Group on power sales fromKárahnjúkar were largely completed during the year.An agreement on electricity sales has been reached andit is aimed to sign contracts before September 2002.

This would be the largest power sales agreement inLandsvirkjun’s history. Talks began on stepping upsales to Nordurál, and ISAL decided to submit theproposed expansion of its Straumsvík smelter forenvironmental impact assessment. A positive outcomefrom one or more of these projects will secure Lands-virkjun’s future and contribute to the ongoing evolutionof Iceland’s electricity industry.

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Landsvirkjun’s energy sales and losses 1966-2001

Mitten from Arnheidarstadir, East Iceland. 10th century.

Environmental impact assessmentLandsvirkjun emphasized extensive environmentalresearch during the year and conducted environmentalimpact assessments (EIA) for a number of projects inorder to be able to respond to growing demand forelectricity, not least from foreign investors in power-intensive industrial manufacturing in the next few years.

Environmental research for the Kárahnjúkar HydroProject (690 MW), which was launched in spring 2000,continued during the year. This is the largest and mostencompassing research project of its kind everconducted in Iceland. An EIA report was submitted tothe State Planning Agency in April. On August 1, theState Planning Agency ruled that the project, asdescribed in the EIA, should be rejected due to con-siderable environmental impact. Landsvirkjun appealedagainst the ruling to the Minister for the Environmentin August, and on December 20, the Minister ruled thatthe project should be approved with 20 conditions. Themost important ones involved disallowing a number ofdiversions, and transferring the overflow at Hálslónreservoir from a side dam to the 190 m high main damat Kárahnjúkar.

An EIA report was completed for a 40 MW expansionto Krafla geothermal power station. In December, theState Planning Agency ruled that the project should beapproved.

Environmental research for Bjarnarflag geothermalstation (40 MW) continued. Work began on an EIAplan proposal, for which all necessary research is alreadycompleted. The EIA process is expected to be con-cluded in 2002.

Work also continued on the EIA for the NordlingaaldaDiversion on the River Thjórsá. Research on the impactbegan in 1996, although extensive envionmental re-search has been going on in the area for decades. An

EIA plan proposal was sent to the State PlanningAgency in September, which approved it in Octoberwith several comments. The EIA process is expected tobe completed in 2002.

Proposals for an EIA plan for the Lower Thjórsáhydropower stations at Urridafoss and Núpur (110-130MW each) were submitted to the State PlanningAgency in August and approved in September. Theassessment process for these projects is expected to becompleted in 2002.

Kárahnjúkar projectEarly in 2000 preparations began in earnest for theKárahnjúkar project (690 MW). Diverse technical prep-arations and research continued in 2001. An extensivereview of project design was completed in June and anew project design report was published.

After tenders were invited internationally, an agreementwas made with Kárahnjúkar Engineering Joint Venture(VST, Electrowatt, AV, Harza, Rafteikning) forpreparation of tender documents for Phase 1 of theKárahnjúkar project. Document preparation began inJuly, and in August the Company advertised forcontractors to take part in prequalification for con-struction of the headrace tunnel and the Kárahnjúkardam. A number of international consortiums applied totake part in these tenders, which will be the largest inLandsvirkjun’s history. Work on the tender documentshas made good progress and at the end of the year, theproject design was being modified in line with theMinister for the Environment’s ruling on environ-mental impact. The aim is to begin preparatory con-struction work in spring 2002, and work on the projectitself later in the year.

Project design was completed for Fljótsdalur Lines 3and 4, between the substation in Fljótsdalur and theproposed smelter in Reydarfjördur. The transmission

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R e s e a r c h a n d d e v e l p m e n t

lines will be 51 km long, built with standard guyed steelframe towers rated for 420 kV voltage, with an initialoperating voltage of 220 kV.

Nordlingaalda diversionA wide range of technical studies were made to identifythe most suitable arrangement for diverting the RiverThjórsá from Nordlingaalda and into Lake Thórisvatn.The river will be diverted through a tunnel with apumping station either inside the tunnel or at itswestern end. The surface elevation for the Nordlinga-alda reservoir has also been finalized, the maximumelevation is now 575 m a.s.l. Project design for thediversion will be completed in the first half of 2002.Drilling and other site research was also undertaken inorder to be able to invite tenders in spring 2002.

Lower ThjórsáGeological research and project design were undertakenfor the Urridafoss and Núpur hydro projects (110-130MW each). Project design for both is expected to becompleted by mid year 2002.

Transmission systemPreparation for Sultartangi Line 3, between substationsSandfell and Brennimelur, took place during the year.The line will be 120 km long and built with standardguyed steel towers for a rated voltage of 420 kV.

Prepatation took place for the Krafla Line 3 betweensubstations Krafla and Fljótsdalur. Measuring 120 kmlong, the line is expected to be built with standard guyedsteel towers for a rated voltage of 245 kV.

Vatnsfell StationConstruction of the Vatnsfell hydro station (90 MW)commenced in summer 1999 and has been in progressnon-stop ever since. Most of the site construction workwas finished during the year. Installation of machineryand electrical equipment began late in 2000 and activity

peaked around the middle of 2001. The first turbine wasscheduled to enter operation in mid-October, but thiscould not be managed until a month later. Then anaccident during testing of the turbine caused firedamage to the generator. Repairs will finish by March2002. The second turbine went on stream just beforeChristmas, only a couple of days late. The station wasinaugurated on November 9.

Búdarháls StationPreparations for the Búdarháls hydro project (110 MW)continued during the year. After international tender-ing, engineering consultants Mott MacDonald, Acresand Línuhönnun were commissioned to draw up tenderdocuments for the project. Tender design begantowards the end of summer and progressed according toplan until the end of the year.

Preparatory work for construction of Búdarháls hydroproject began in autumn 2001. This involved bridgingthe River Tungnaá, roadbuilding, a part of the exca-vations for the powerhouse, intake, surge basin andexcavations for the headrace canal. The contractorArnarfell was commissioned for the project followingtenders. By the end of the year, the headrace canalexcavations were largely completed, steel girders hadbeen manufactured in Poland and delivered to Iceland,and most of the bridge foundations had been concreted.Completion of the preparatory work is scheduled forJuly 2002.

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Copper pendant from the west Fjords area.Used as a talisman.

There was a net loss of ISK 1,839 million onLandsvirkjun’s operations in 2001. This is the secondyear in a row with a negative result, after four consecu-tive years of profits. The downturn in performance ismainly due to the depreciation of the króna, since mostof the company’s liabilities are denominated in foreigncurrency. Return on equity in 2001 was negative by4.9%.

Income statementOperating revenues increased by 14.2% from theprevious year, by ISK 1,618 million. This increase isalmost entirely due to sales to power-intensiveindustries, revenues from which are denominated inforeign currencies and linked to world market prices foraluminium.

Operating expenses rose by ISK 1,344 million from theyear before. The largest increase in any expense item isin depreciation, up by ISK 872 million. Rise in generalexpenses is also a factor along with increased purchasesof power resold to power-intensive industries. The higherdepreciation figure is largely due to price indexationadjustments to the value of property, plant andequipment.

EBITDA amounted to ISK 8,719 million, an increase ofISK 1,146 million from the year before. Landsvirkjun’sprofit before net financial costs amounted to ISK 3,328million, an increase of 9% between the years.

Despite depreciation in the exchange rate of the krónaand rising long-term liabilities, interest expensesshowed little change between the years. This is mainlydue to lower nominal interest rates, which averaged5.3% in 2001 compared with 6.3% the year before,which is the result of effective risk management andfalling interest rates in international markets. The slideof the króna meant that this was only reflected in thecompany’s performance figures to a small extent.Measured in terms of Landsvirkjun’s own index, the realannual interest rate was 6.3%. By comparison, the realannual interest rate was 6.6% in 2000 and 4.9% onaverage over the period 1987 to 2001.

Balance sheet and cash flowsLandsvirkjun’s total assets grew by ISK 20.5 billion inthe course of the year and the book value of equity byISK 3.2 billion, while liabilities increased by ISK 17.3

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Composition of revenues

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2001 prices

Prices at year end 2001

Three-blade broach from the 10th century.

billion. The rise in asset value in excess of investment isexplained by indexation adjustments. The revaluationfactor on which the company’s accounting is based wentup by 15.6% in 2001. Total assets at the end of the yearamounted to ISK 132.1 billion. Liabilities amounted toISK 94.4 billion and equity ISK 37.7 billion. The equityratio at the end of 2001 was 28.5%, compared with30.9% at the end of 2000.

Although price and exchange rate developments have amajor impact on Landsvirkjun’s operating performance,they have relatively little effect on cash flows. Cashgenerated by operating activities amounted to ISK5,542 million, which is ISK 1,792 million higher thanthe 2000 figure.

Investments during the year totalled ISK 8,377 million,largely on account of the Vatnsfell Station and powerdevelopment research. Net borrowing was ISK 3,826million.

Risk managementLandsvirkjun applies active risk management to hedgeagainst foreign exchange and interest rate risks. Riskmanagement was further enhanced during the year andnow also extends to aluminium price risk and linkage ofrevenues to foreign currencies, along with both foreignand domestic currency exposures.

The exchange rate of the króna was very volatile duringthe year, which is a new reality that Landsvirkjun, justlike other Icelandic companies, must learn to address.Landsvirkjun was an active player in the foreignexchange markets in Iceland in two different ways. Thecompany took some positions in ISK when it seemedobvious that the exchange rate had slid too fast, and alsomade forward contracts for part of its USD revenues.This enabled it to secure a very attractive exchange ratefor part of the USD revenues for up to 18 months.

In 2001, Landsvirkjun also began using financial instru-ments to hedge against part of the risk entailed bylinking the power rate to aluminium prices. The com-pany used derivatives for this purpose with good resultsand is likely to step up this activity even further in thefuture.

FundingIn recent years, Landsvirkjun has been aiming toincrease the weighting of the Icelandic króna in thecomposition of its total liabilities. However, conditionswere rather unfavourable in the domestic bond marketand it was not possible to launch bond issues there withacceptable interest terms.

Landsvirkjun’s funding activities internationally wentvery smoothly, however, and the company made sevenissues to the value EUR 100 million and USD 100million, which was used both for investment purposesand to amortize earlier, less favourable loans. All theissues were made under Landsvirkjun’s USD 1 billionEMTN programme.

11

Copper ring from the early middle ages.

The company showed a net loss from its operations in 2001 as in the

previous year, after a four-year period of profit. The net loss amounted

to ISK 1,839 million compared with ISK 1,366 million in 2000. The

increase from the previous year can for the most part be explained by

the devaluation of the Icelandic króna during the year. Net real

interest costs were 6.3% in 2001. Operating revenues in 2001

increased by ISK 1,618 million from 2000, operating expenses

increased by ISK 1,344 million and net financial costs increased by

ISK 746 million. Cash generated by operating activities was ISK

5,542 million in 2001 compared to ISK 3,751 in 2000.

Investments amounted to ISK 8,377 million compared to ISK 6,412

million in 2000. New long-term borrowings exceeded repayments of

long-term debts by ISK 3,826 million in 2001 compared with ISK

2,688 million in the previous year.

Landsvirkjun is a partnership, jointly owned by the State Treasury,

with a 50% interest, the City of Reykjavík, which holds 45.525%, and

the Town of Akureyri which owns a 5.475% interest. The company

is an independent legal entity having independent finances and

accounting.

The Board of Directors will at the annual meeting propose a dividend

payment to the owners for 2001 in conformity with the provisions of

the Act on Landsvirkjun and the Partnership Agreement between the

owners. According to that regulation the dividend payment will

amount to ISK 321 million should the Board's proposal be approved.

The Board of Directors and the Managing Director hereby confirm

the 2001 Financial Statements by means of their signatures.

To the Board of Directors of Landsvirkjun.

We have audited the accompanying balance sheet of Landsvirkjun as

of December 31, 2001, and the related statement of income and

statement of cash flows for the year then ended. These financial

statements are the responsibility of the company’s management. Our

responsibility is to express an opinion on these financial statements

based on our audit.

We conducted our audit in accordance with generally accepted

auditing standards. Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates

made by management, as well as evaluating the overall financial

statements’ presentation. We believe that our audit provides a

reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of

the financial position of Landsvirkjun as of December 31, 2001, and

the results of its operation and its cash flows for the year then ended,

in accordance with the law and generally accepted accounting

principles in Iceland.

12

DIRECTORS’ REPORT

F i n a n c i a l s t a t e m e n t s 2 0 0 1

Reykjavík, March 1, 2002

Board og Directors: Jóhannes Geir SigurgeirssonÁrni Grétar Finnsson Edda Rós Karlsdóttir

Helgi Hjörvar Kristján Thór JúlíussonPétur Jónsson Vilhjálmur Th. Vilhjálmsson

Managing Director: Fridrik Sophusson

AUDITOR’S REPORT

Reykjavík, March 1, 2002

Jón Eiríksson

Ólafur Nilsson

KPMG Endurskoðun hf.

Note 2001 2000OPERATING REVENUESPower sales – Local utilities . . . . . . . . . . . . . . . . . . . . . . 6,788,499,978 6,605,734,265 Power sales – Power-intensive industries . . . . . . . . . . . 6,169,217,478 4,743,725,974

12,957,717,456 11,349,460,239 Sale of steam from geothermal wells . . . . . . . . . . . . . . . 22,485,700 23,383,300 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,037,246 18,407,962 Total operating revenues 13,009,240,402 11,391,251,501

OPERATING EXPENSES 1Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,232,887,794 1,840,721,045 Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 647,646,808 595,084,396 Engineering and construction . . . . . . . . . . . . . . . . . . . . 2 ( 64,950,861 ) 199,699,176 Cost of general research . . . . . . . . . . . . . . . . . . . . . . . . 2 254,182,449 211,746,845 General administrative expenses . . . . . . . . . . . . . . . . . . 13 1,219,871,579 970,611,548 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,5 5,391,232,139 4,519,006,186 Total operating expenses 9,680,869,908 8,336,869,196

Operating profit 3,328,370,494 3,054,382,305

FINANCIAL COSTS 3Interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 313,344,602 ) ( 236,167,044 )Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,358,272,508 4,270,254,420 Exchange-rate losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 12,575,773,771 6,894,603,122 Gain on net monetary position . . . . . . . . . . . . . . . . . . . 1 ( 11,453,659,000 ) ( 6,508,118,000 )

5,167,042,677 4,420,572,498

(NET LOSS) ( 1,838,672,183 ) ( 1,366,190,193 )

13

I n c o m e s t a t e m e n t 2 0 0 1

All amounts are in ISK

ASSETSNote 2001 2000

PROPERTY, PLANT AND EQUIPMENT 1.4In operationPower stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,596,704,991 143,708,245,402 Substations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,714,819,786 16,362,349,105 Power lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,418,174,545 23,634,164,140 Vehicles, equipment and dredger . . . . . . . . . . . . . . . . . 986,879,413 930,370,665 Office building and equipment . . . . . . . . . . . . . . . . . . . 2,464,485,203 1,723,415,245

223,181,063,938 186,358,544,557 Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . 104,781,083,322 86,855,178,008 Total in operation 118,399,980,616 99,503,366,549

Construction and researchDevelopment costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,235,328,830 1,882,013,570 Projects under construction . . . . . . . . . . . . . . . . . . . . . 4,544,708,707 5,216,282,840 Total construction and research 7,780,037,537 7,098,296,410

Shares and long-term notes receivableWholly owned subsidiary . . . . . . . . . . . . . . . . . . . . . . . 6 263,666,914 5,000,000 Shares in other companies . . . . . . . . . . . . . . . . . . . . . . 6 102,182,447 117,347,292 Long-term notes receivable . . . . . . . . . . . . . . . . . . . . . 60,125,016 21,122,391 Total shares and long-term notes receivable 425,974,377 143,469,683

Total property, plant and equipment 126,605,992,530 106,745,132,642

CURRENT ASSETSAccounts receivable – trade . . . . . . . . . . . . . . . . . . . . . . 1,622,303,061 1,687,284,943 Accounts receivable – other . . . . . . . . . . . . . . . . . . . . . 249,725,656 176,883,227 Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . 11,816,391 10,579,744 Inventories (oil) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,792,500 27,861,600 Cash and bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . 3,617,194,788 2,948,711,411 Total current assets 5,534,832,396 4,851,320,925

Total assets 132,140,824,926 111,596,453,567

14

B a l a n c e s h e e t a s a t D e c e m b e r 3 1 , 2 0 0 1

All amounts are in ISK

LIABILITIES AND OWNERS’ EQUITYNote 2001 2000

OWNERS’ EQUITY 7Owners' contribution . . . . . . . . . . . . . . . . . . . . . . . . . . 23,373,032,000 20,707,646,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,322,635,936 13,796,634,625

37,695,667,936 34,504,280,625

OBLIGATIONSAccrued pension obligation . . . . . . . . . . . . . . . . . . . . . . 8 1,510,165,000 1,256,588,000

LONG-TERM LIABILITIESLong-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 87,311,709,732 59,903,274,619

CURRENT LIABILITIESAccounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,532,006,975 1,147,572,324 Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . 1,048,670,314 1,042,364,771 Current maturities of long-term liabilities . . . . . . . . . . 10 3,042,604,969 13,742,373,228 Total current liabilities 5,623,282,258 15,932,310,323

Total liabilities 94,445,156,990 77,092,172,942

Total liabilities and owners’ equity 132,140,824,926 111,596,453,567

15

All amounts are in ISK

Note 2001 2000OPERATING ACTIVITIESCash received from customers . . . . . . . . . . . . . . . . . . . 13,051,560,608 10,997,658,402 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876,182,955 237,347,364 Cash expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,775,127,146 ) ( 3,486,422,946 )Cash payment for interest costs . . . . . . . . . . . . . . . . . . . ( 4,610,124,990 ) ( 3,998,012,217 )

11 5,542,491,427 3,750,570,603

INVESTING ACTIVITIESVatnsfell project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,575,673,944 ) ( 2,512,624,933 )Sultartangi project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 109,385,832 ) ( 868,644,797 )Refurbishment of Búrfell station . . . . . . . . . . . . . . . . . . ( 268,541,842 ) ( 301,766,976 )Refurbishment of Sog stations . . . . . . . . . . . . . . . . . . . . ( 601,558,229 ) ( 444,596,473 )Extension of Krafla station . . . . . . . . . . . . . . . . . . . . . . . ( 254,439,694 ) ( 319,457,533 )Vatnsfell gate structure . . . . . . . . . . . . . . . . . . . . . . . . . ( 294,598,148 ) ( 112,851,278 )Substations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 416,854,355 ) ( 580,933,972 )Power lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 167,467,661 ) ( 88,723,820 )Research and development . . . . . . . . . . . . . . . . . . . . . . . ( 1,695,517,077 ) ( 704,105,281 )Other capital expenditure . . . . . . . . . . . . . . . . . . . . . . . ( 993,282,750 ) ( 478,040,127 )

( 8,377,319,532 ) ( 6,411,745,190 )Decrease in long-term notes receivable . . . . . . . . . . . . . ( 37,956,221 ) 11,623,752

( 8,415,275,753 ) ( 6,400,121,438 )

FINANCING ACTIVITIESNew long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . 19,863,537,172 6,897,041,827 Amortization of long-term liabilities . . . . . . . . . . . . . . . ( 16,037,607,469 ) ( 4,208,556,709 )Cash dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 284,662,000 ) ( 250,309,000 )

3,541,267,703 2,438,176,118

Increase (Decrease) in cash during the period . . . . . . . . 668,483,377 ( 211,374,717 )Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . 2,948,711,411 3,160,086,128 Cash at end of year 3,617,194,788 2,948,711,411

16

S t a t e m e n t o f c a s h f l o w s i n 2 0 0 1

All amounts are in ISK

ACCOUNTING POLICIES1 The financial statements are prepared in conformity with the provisions of the Financial Reporting Act and the related

regulations on the form and content of financial statements. The methods used in preparing the financial statements are inall material respects consistent with those of the previous year. The following is a summary of the accounting policies used in preparing the accounts:• The original cost of property, plant and equipment is revalued to year-end prices. For this purpose the original cost is

divided into two parts. One part, representing local Icelandic cost, is estimated as one-third of the total original cost,while the other part, representing foreign cost, is estimated as two-thirds of the original cost. The local portion isrevalued according to changes in the Icelandic index of construction cost, whereas the foreign portion is revalued onthe basis of changes in the exchange value of the Icelandic króna in relation to the SDR, as adjusted for foreign inflation.The revaluation factor in accordance with this calculation is 15.6% for the current year.

• Depreciation of fixed assets in the income statement is shown at mid-year prices, while accumulated depreciation in thebalance sheet is shown at year-end prices.

• The fixed assets of the company are depreciated on a straight-line basis as follows:Power plants: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Construction expenditure, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.67% 60 yearsMachinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.33% 30 yearsDams and waterways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.67% 60 years

Thermal stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00% 25 yearsSubstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.33% 30 yearsPower lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.78% 36 yearsOffice buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00% 50 yearsEquipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20% 5-8 yearsVehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.00% 5 yearsResearch projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.50% 8 years

• Indexation on local debt and foreign exchange differences are expensed in the income statement. To counterbalancesuch revaluation, a price-level gain on the net monetary liabilities of the company is calculated. The price-level gain iscalculated based on the net liabilities of the company at the beginning of the year, taking into consideration changes inthat position during the year. The result of this calculation is that the net loss reported is stated at mid-year prices.

• Interest is capitalized during construction. Once the respective assets are operational, the interest cost is expensed.• Expenditures for general research are expensed as incurred. Development costs for future power projects are capitalized.

Interest costs on these development costs are, however, not capitalized. These costs will be amortized over a period of8 years, if no firm commitment has been issued to complete the projects. This policy was decided upon with referenceto the risk and uncertainty associated with the future benefits of such costs. Additionally, the viability of one futureproject can change the likelihood of another power project being materialized. Previously, capitalized developmentcosts were either written off when the projects were abandoned or were added to the cost of construction for theprojects that were implemented.

2 Cost of the Engineering and Construction Division is now charged to investments and research, and figures from theprevious year are therefore not fully comparable. These changes result in ISK 230 million lower net loss than if all cost hadbeen charged to the income statement as in previous years.

17

Estimateduseful life

N o t e s t o f i n a n c i a l s t a t e m e n t s

FINANCIAL COSTS3 Interest costs, net, consist of the following (ISK million):

Interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 348 )Tax on interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,407 Guarantee fee paid to owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 Exchange-rate losses on long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,883 Exchange-rate gain on other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 307 )Gain on net monetary position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11,454 )

5,426 Capitalized interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 259 )

5,167 The net real interest cost, to the amount of ISK 5,167 million, is approximately 6.3% on the average outstanding long-termloans for the year 2001, compared to 6.6% for the year 2000. The average for the years 1987-2001 is 4.9%. The net realinterest cost in percentages is computed by comparing total interest cost and exchange-rate differences with the revaluationfactor used by the company, as explained in note 1.

PROPERTY, PLANT AND EQUIPMENT4 Property, plant and equipment in operation consist of the following (ISK million):

Power Power Otherstations Substations lines assets Total

Balance Jan. 1, 2001 . . . . . . . . . . . . . . . . 143,708 16,362 23,634 2,654 186,358 Increase 2001 . . . . . . . . . . . . . . . . . . . . . 6,269 1,219 184 528 8,200 Revaluation 2001 . . . . . . . . . . . . . . . . . . 22,619 2,531 3,686 462 29,298 Retired/sold . . . . . . . . . . . . . . . . . . . . . . ( 0 ) ( 397 ) ( 86 ) ( 192 ) ( 675 )

172,596 19,715 27,418 3,452 223,181 Accumulated depreciation:Jan. 1, 2001 . . . . . . . . . . . . . . . . . . . . . . 65,910 8,372 11,368 1,204 86,854 Depreciation 2001 . . . . . . . . . . . . . . . . . 3,195 606 766 143 4,710 Revaluation 2001 . . . . . . . . . . . . . . . . . . 10,405 1,288 1,799 193 13,685 Retired/sold . . . . . . . . . . . . . . . . . . . . . . 0 ( 275 ) ( 21 ) ( 172 ) ( 468 )

79,510 9,991 13,912 1,368 104,781 Book value at end of year 93,086 9,724 13,506 2,084 118,400

5 Depreciation in 2001 consists of the following (ISK million):Power stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,195 Substations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606 Power lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Depreciation of assets in operation 4,710 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Research projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672

5,391

6 Landsvirkjun established in the year 2000 a wholly owned subsidiary, named Fjarski ehf, which at the beginning of the year2001 took over the Company's telecommunication system, valued at ISK 207 million. In addition, Landsvirkjun paid 38million of share capital to Fjarski ehf during the year. In 2001, the result of Fjarski’s operation was a net loss amounting toISK 6.4 million, which has been charged to Landsvirkjun’s accounts by the equity method. The nominal value of the sharecapital in Fjarski is ISK 250 million.

18

Costs:

During the year, Landsvirkjun also increased its share in VistOrka hf, Enex hf, Netorka hf and Stikla hf and established,along with other parties, a consulting company in France named Hecla SAS. Landsvirkjun has committed to increase itsshare capital in VistOrka hf by ISK 13.2 million during a period of two years. At the end of the year, Stikla merged with acompany named Tetralina-Net and formed a new company named Tetra Ísland. Landsvirkjun has committed to increaseits share capital in Tetra Ísland by ISK 130 million in the year 2002. Landsvirkjun has decided to write its stake in L4Solution Inc down to ISK 4.5 million and also to write down the book value of its holdings by ISK 78.9 million.Landsvirkjun’s holdings consist of the following (ISK million):

Share Nominal value Book value

Tetra Ísland ehf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.4% 38.8 73.3Vindorka hf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4% 11.5 63.0VistOrka hf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3% 2.1 8.0Íslensk orka ehf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.9% 44.7 1.2Enex hf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.7% 7.2 18.6Netorka hf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3% 5.2 9.8L4 Solutions Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.9% USD 0.05 4.5Hecla SAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.0% EUR 0.03 2.7

181.1Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 78.9 )Written down value 102.2

OWNERS’ EQUITY7 The capital account consists of the following (ISK million):

Balance at January 1, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,504 39,893Cash dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 285 ) ( 295 )Revaluation of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,770 - Gain on net monetary position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11,454 ) - Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,839 ) ( 1,902 )

37,696 37,696

Based on the partnership agreement dated 1981, with reference to subsequent amendments to that agreement, the capitalcontributions amounted to ISK 14 billion in terms of year-end prices in 1995. The capital contributions restated to reflectchanges in price levels to the end of 2001 amounted to ISK 18,100 million. The partnership agreement stipulates thatdividends shall be 5.5% of the restated capital contributions and the balance for accrued dividends. Cash payments fordividends are based on certain operating indicators, i.e. profit before depreciation and interest charges on long-term debt.Undistributed accrued dividends amounted to ISK 5,273 million at the end of 2001 and the maximum amount that can bepaid in the year 2002 based on the requirements of the partnership agreement is ISK 321 million. Accordingly, the owners’equity consists of the following balances (ISK million):

Restated capital contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,100 Undistributed accrued dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,273

23,373 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,323

37,696

OBLIGATIONS8 The accrued pension obligation of the company, based on actuarial estimates, amounted to ISK 1,510 million at the end of

2001.

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According to At prices asfinancial statements of year-end

LONG-TERM LIABILITIES9 Long-term liabilities are translated at the rate of exchange prevailing at the end of the year. They are in the following

currencies (million):Indexation

Foreign exhange-rateamount ISK % losses

U.S. dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363.4 37,593 41.6% 6,643 Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254.9 23,346 25.9% 3,089 Icelandic króna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7,357 8.1% 644 Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,974.2 7,859 8.7% 369 German marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130.8 6,123 6.8% 836 Pounds sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.6 5,331 5.9% 830 Swiss francs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.6 1,025 1.1% 165 Norwegian kroner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149.5 1,720 1.9% 307

90,354 100.0% 12,883 Current maturities of long-term liabilities . . . . . . . . . . . 3,043

87,311

The nominal interest rates on outstanding debt are from 0% to 14.5%. The average nominal interest charges were 5.3% for2001 as compared with 6.3% for 2000.The owners of Landsvirkjun provide a guarantee of collection on the long-term liabilities of the company.

10 The following is a maturity schedule as per loan agreements for long-term debt over the next five years (ISK million):2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,043 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,989 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,054 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,903 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,028 Later . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,337

This payment schedule will change through refinancing measures in accordance with the company’s policy of retirementof long-term debt.

STATEMENT OF CASH FLOWS11 Cash flow from operating activites is a good indicator of the company’s ability to repay its liabilities. The statement of cash

flows is particularly useful when comparative figures for several years are presented. For this purpose, the following tableshows the cash flows from operating activities for the last four years (ISK million):

2001 2000 1999 1998Net operating profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . ( 1,839 ) ( 1,366 ) 1,924 283 Reconciling adjustments:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.487 4,562 3,812 3,519 Exchange rate adjustments’ net . . . . . . . . . . . . . . . . . 1,413 521 ( 1,798 ) ( 398 )

Working capital provided by operations 5,061 3,717 3,938 3,404 Changes in components of working capital

Decrease (increase) in current assets . . . . . . . . . . . . . 37 ( 390 ) 330 ( 374 )Increase (decrease) in current liabilities . . . . . . . . . . . 444 424 ( 365 ) 340

Cash provided by operation 5,542 3,751 3,903 3,370 Cash provided by operation as a percentage of total liabilities 6.1% 5.0% 6.0% 5.6%

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OTHER ITEMS 12 The company paid ISK 2,233 million in salaries to employees, which consist of the following

Energy 717Transmission 379Engineering and construction 186Corporate office 80Finance, information and human resources 243Marketing agency 26 1,631Related expenses 251Pension payments 351 2,233

Remuneration to the board of directors and executive management amounted to ISK 80 million. The company had 281 permanent and 86 temporary employees in 2001.

13 General administrative expenses consist of the following:Corporate office 235Finance 210Human resources 125Information 112Pension payments 351Provision for shares 96Marketing unit 40Common costs 51 1,220

14 A dispute between the company and the owners of the water rights of the Blanda river was settled by arbitration in 1992. The amount awarded to the landowners was ISK 92 million. Additionally, the company had to pay all legal fees in connection with the arbitration. In accordance with the decision of the arbitration tribunal, payment of ISK 51 million was to be deferred until such time that a dispute regarding the ownership of the moorland around Blanda river had been resolved. As the Supreme Court of Iceland awarded the Government the right for this claim in a ruling last March, the estimated value of the water rights has been charged to the accounts.

15 Landsvirkjun has made derivatives to hedge risk in connection with sales to power-intensive industries in the year 2002. As those contracts are classified as hedging they are not recorded at market value in the accounts. At year end, the market value of the contracts was ISK 98 million. The contracts are:

Currency Receivables Obligations

Forward contracts ISK 3,384.5Forward contracts USD 31.0 Derivatives (aluminium) USD 15.5 14.5

Landsvirkjun is main sponsor for the National Museum of Iceland

Landsvirkjun • Háaleitisbraut 68 • 103 ReykjavíkTel: (354) 515 9000 • Fax: (354) 515 9007

E-mail: landsvirkjun@lv.is • Website: www.landsvirkjun.com