Reykjavík Grapevine - 15.07.2011, Page 25

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The Reykjavík Grapevine
Issue 10 — 2011
This is such an unbelievable story. There are too many unbelievable stories going around these days.
Wish our overlords would stick to doing semi-believable stuff.
media both to make it known that when
he was Chairman—between 2008 and
2010—the company had always been
able to secure loans, and to accuse the
new Board of fumbling a loan that was
essentially a sure grab.
“In January 2010 the CFO of Reyk-
javík and the CFO of Reykjavík Energy
met with the Nordic Investment Bank
(NIB). They [NIB] expressed great de-
sire to lend Reykjavík Energy 12–14 bil-
lion,” he wrote. “…In June 2010 when I
left as Chairman, there were no doubts
that NIB would loan the company the
previously mentioned amount given
that the company met stipulations [to
raise prices].”
He concluded his letter with the
implicating questions: “What changed
after June 2010? Could it be that com-
ments made by the directors and owner
about the financial state of Reykjavík
Energy have negatively inf luenced its
ability to get financing?”
Sigur!ur Jóhannesson, a Senior Re-
searcher at the University of Iceland In-
stitute of Economic Studies, put it this
way on a University of Iceland radio
show: “I probably wouldn’t say that my
company were bankrupt if I was trying
to get loans, but I think that investors
must look first and foremost at things
like cash f low and annual financial
statements. One can also read reports
by rating agencies, and there is very lit-
tle there mentioned about Jón Gnarr.”
If anybody knows best what the
banks were thinking in 2010, however,
it is probably Anna Skúladóttir who
was Reykjavík Energy’s CFO from May
2006 until 2011. As Gu!laugur Sver-
risson wrote, Anna met NIB in January
2010 and she confirms in conversation
that “the bank expressed interest,” but
told me that it was by no means a done
deal. “In 2010, foreign loans weren’t
just closed to Reykjavík Energy. Iceland
as a whole was still on ice.”
Ultimately, the far bigger questions
remain: What happened to Reykjavík
Energy before Jón Gnarr and the Best
Party enter the story in June 2010?
And, could it be that something hap-
pened before 2010, which would ex-
plain the company’s financial state?

WHEN MONEY GREW ON TREES
Reykjavík Energy was founded through
the merger of the institutions Reykja-
vík Electricity (Rafmagnsveita Reykja-
víkur) and Reykjavík District Heating
(Hitaveita Reykjavíkur) in 1999, and
Reykjavík Water Works (Vatnsveita
Reykjavíkur) in 2000. The company
thus began on solid ground, with a long
history of well-managed services to
captive subscribers, respectively dating
back to 1921, 1930 and 1909.
Historian (and active Left Green
member) Stefán Pálsson, who worked
as a curator of the Reykjavík Energy
Museum for ten years before he was
let go in the mass layoff last October,
explained that the institutions were so
lucrative that they had to find ways of
spending money so that they wouldn’t
show too much profit.
“They would, for example, hire hun-
dreds of school children every summer
to plant trees, make roads, and work on
environmental projects,” Stefán said.
“They would rationalise that we are
harnessing geothermal energy from
this area so we owe it to society to plant
loads and loads of trees. And we give
school children jobs, which makes their
parents happy, which is good for soci-
ety, and things like that.”
In fact, the institutions that pre-
ceded Reykjavík Energy were so lucra-
tive that politicians could milk them
to fund pet projects and other vanities.
For instance, it was under Daví! Odds-
son’s legacy as Mayor of Reykjavík that
District Heating financed the construc-
tion of The Pearl, a well-known monu-
ment in Reykjavík, which opened to the
public in 1991. “It was never supposed
to turn a profit,” Stefán said. “The big
tanks carry hot water, but then there is
the building on top, the restaurant, and
the sightseeing deck. And actually it
was supposed to be even more extrava-
gant with palm trees and tropical birds
and plants.”
Nonetheless, the institutions were
loaded with money and owed very little
when these endeavours were carried
out. It was not until after the institu-
tions were turned into a private part-
nership company (sf.) in 2001 that the
debt begins to amass.
A SLEEPING GIANT STIRS
If there is one person who has been
most closely associated with Reykjavík
Energy over the years, it is Progressive
Party politician Alfre! "orsteinsson.
Alfre!’s involvement began in 1994
when he was appointed Chairman of a
municipal body charged with oversee-
ing the three institutions. It was under
his leadership that the institutions were
merged into Reykjavík Energy in 1999,
and from then until 2006 he served as
Chairman of the Board of the new com-
pany.
Alfre!, along with Gu!mundur
"óroddsson, the former head of Water
Works who was hired as CEO, were
keen on stressing that Reykjavík Energy
was now a company, Stefán explained.
“We the staff were told that we were not
to refer to it as an institution.”
This shift in mentality was also mir-
rored by a shift in the legal framework
governing the company. A specific law,
no. 2001/139, which was passed in
2001, gave Reykjavík Energy the right
to take small loans and make payments
for the purposes of running the com-
pany without the consent of its owners
(the municipalities, Reykjavík, Akranes
and Borgarbygg!). It also gave the com-
pany the right to operate subsidiaries
and to invest in other companies. In
essence, it enabled Reykjavík Energy to
be run like a private company, while re-
taining a political management.
“The idea was that this new com-
pany was a sleeping giant that had been
ineffective in the past. It had almost
endless credit because it owed next to
nothing, and around early 2000 that
was not really something to brag about
in Icelandic society; it was seen as an
unused opportunity. You had this po-
tential of taking loans to grow,” Stefán
told me.
“The same argument was made to
regular people who had paid off their
mortgage; they were told that this made
no sense, that it was downright silly. So
people refinanced their homes, took a
new loan to be paid over twenty years
time instead of five, and this freed cash
to play in the stock market, or to buy a
summer house or a new jeep. I would
say that Reykjavik Energy's troubles
stem from a large-scale version of the
same thing.”
In the case of Reykjavík Energy,
unleashing the power of capital meant
buying tens of small district heating
companies in the south and west of
Iceland, expanding their service from
five to over twenty municipalities. “You
got the impression that somewhere in
Reykjavík Energy there was someone
with a map, putting down f lags, you
know with a Napoleonic dream of tak-
ing over,” Stefán jokingly remarked.
Additionally, Reykjavík Energy be-
gan investing in other companies, and
by 2003, it had shares in over twenty
companies, including Feyging ehf, a
f lax seed operation of which it was the
largest shareholder. That project was
abandoned in 2007 with a loss of 340
million ISK. An attempt to farm tiger
prawns was also declared a failure in
2007, after seven years of work and 114
million ISK down the drain.
Alfre!, the former Chairman of the
Board, is adamant that the investments
were not too many or made too quickly.
“When I left in 2006,” he told me, “the
company’s debt was less than 70 billion
ISK. The state of the company was very
strong. The loans taken were all long
term, to be paid off in 20–30 years.” In
any case, that debt is still nearly seven
times the debt that Reykjavík Energy
inherited through the merger of the in-
stitutions in 1999.
BIG INDUSTRY FULL STEAM
AHEAD
That being said, the bulk of Reykjavík
Energy’s debt can be attributed to the
construction of the Hellishei!i plant,
which former Reykjavík Energy CFO
Anna Skúladóttir said is “the largest
investment in the company’s history.”
The decision to build the plant, she
said, was made in the beginning of the
21st century when it became evident
that the Reykjavík area would need
more hot water as the Nesjavellir plant
was expected to become fully utilised.
At the same time, the decision was
made to harness 300 megawatts of elec-
tricity to be sold to heavy industry, as it
was considered more efficient to build
and run a plant that produces both hot
water and electricity.
In 2006, the company reached an
agreement to sell electricity to alumini-
um smelting company Century Alumi-
num Nor!urál, but when the crash hit
in 2008, Reykjavík Energy had yet to
secure financing for phase five of the
plant build-up, including the 90 MW
that were supposed to go to Nor!urál in
2010.
By that time, however, it had already
purchased five turbines at about 5 bil-
lion ISK a pop. “Turbines must be or-
dered at least three years in advance,”
Anna explained. “It’s like ordering an
airplane.”
Two of the five will come online this
year, but an agreement was reached to
postpone delivery of three of the tur-
bines until a decision has been made
to continue further plant production.
Of the three outstanding turbines,
Reykjavík Energy didn’t have a definite
energy source lined up for the third
one. What’s more, there were originally
seven, not five, turbines ordered, but
Independence Party politician Kjartan
Magnússon said he was able to back
out of two of them when he took over as
Chairman of the Board in 2008.
When Moody’s reviewed the com-
pany for a possible downgrade in July
2008, it noted: “The company's finan-
cial profile has continued to weaken
during the course of the year, mainly
due to the company's exposure to un-
hedged foreign currency debt, the
company's primary source of funding.
Conversely, 80% of its revenues today
are in Icelandic krona derived from
its operations as Reykjavik's primary
multi-utility.”
Despite the risks involved, however,
it has essentially been government poli-
cy to attract heavy industry to the coun-
try. In the span of a decade, Iceland’s
aluminium production went from 4%
of the country’s GDP in 2000 to 14%
in 2010—surpassing the country’s fish
exports and making Iceland the largest
aluminium producer in the world. “The
‘heavy industry agenda’ was a big part
“In many ways, the REI story is a prototype
of the financial crisis. Politicians decided to
allow private individuals into public entities and
let them behave as if they owned what belonged
to the public.”
Continues over
DARTH VADER’S
HEADQUARTERS
Price tag: 4.271,7 BILLION ISK
As the company struggles to stay
af loat, its headquarters, which were
built in 2002 under the chairman-
ship of Alfre! "orsteinsson, stand
as a symbol of what many believe
to have been the excessive and ill-
founded investments of the munici-
pally owned company.
“A service company for the peo-
ple of Reykjavík has no business
building a house like that,” Inde-
pendence Party representative Kjar-
tan Magnússon disapprovingly told
me. “The people of Reykjavík felt it
was part of a power game. When you
come into this house, it’s a sign of
power.”
Similarly, former employee and
historian Stefán Pálsson called it a
monstrosity. “You would expect it to
be Darth Vader’s Headquarters. It is
my advice to politicians connected
with Reykjavík Energy never to al-
low themselves to be interviewed
outside the building.”
On a visit to the infamous
headquarters, Chief Press Officer
Eiríkur Hjálmarsson, a company
veteran since 2006 and the lone
survivor in the PR department after
the October layoffs, showed a pho-
tographer around the building. He
took us to top f loor to see the view
over Mount Hengill, where the com-
pany operates the two power plants
at Nesjavellir and Hellishei!i.
Since our visit, that f loor has
been put on the rental market. The
advertisement is telling: “Fantas-
tic 745m# office space on the sixth
and top f loor in Reykjavík Energy is
available for rent immediately. The
building is fully equipped with the
best of the best and has access to a
big rooftop balcony with a vast un-
hindered view over the city…”
It continues: “In the house is
a staffed reception, World Class
(luxurious fitness centre), with
optional access to lecture rooms, a
library, computer room, and more
[…]Special housing for those with
demands. Blue prints and more in-
formation can be solicited from our
sales men, trod.is.”
The ad doesn’t mention it, but
the building also houses impres-
sive art, including a 35 metre tall
granite fountain by artist Svava
Björnsdóttir, which travels through
all five f loors of the building, and
a Foucault Pendulum, which takes
26 hours to knock down all the pins
before they pop up again.
However, former Chairman
of the Board Alfre! "orsteinsson
doesn’t think it’s overly extravagant.
“The main fault of the house is that
it is considered beautiful and chic,”
he said. “If it had been built as a one
or two story house nobody would
have said anything. Should we have
built an ugly house?” Furthermore,
he said the top-class kitchen, which
has been heavily criticised is “not
unlike other kitchens in Reykjavík.”