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Unaudited results of Latvenergo Group for 2017

28.02.2018.

Overall, 2017 has been one of the most successful years in the Group’s operation in the last years. Decisions adopted by the Group and also the overall development of the energy industry were the main contributors to that. In 2017, Latvenergo Group has been the most valuable power utility in the Baltics with the asset value exceeding 4 billion euros as at the end of 2017. The Group revenue has not changed considerably in comparison to the preceding year and amounts to 925.6 million euros. The Group EBITDA[1] equals 541.7 million euros, which is 38% higher than the last year.

The following major factors describe 2017 as particularly favourable for the Group’s operations:

  • the electricity output has increased considerably reaching 5,734 GWh, which is one of the historically largest output levels. Along with the successful electricity generation, during the year Latvia achieved positive electricity trade balance exporting a part of the generated electricity;
  • the Group successfully commenced natural gas trade in Latvia and Lithuania.

Last year, electricity prices in the Baltic countries continued approximation and approaching the level of the Nordic countries. In 2017, there was an increase in electricity spot prices in the Nordic countries and Estonia, while, in Latvia and Lithuania they decreased by 4%. This was mainly due to the operation of NordBalt interconnection reducing the price difference between the Baltic countries and the Nordic countries.

In 2017, electricity output of the power plants of Latvenergo Group was one of the historically largest output levels – it was 5,734 GWh, which is 22% more than in 2016. Electricity generation at the Daugava HPPs has increased by 74% in 2017 and amounts to 4,270 GWh (2,449 GWh in 2016). Higher water inflow in the Daugava River was the major reason behind the increase in electricity generation by the Daugava HPPs; therefore, electricity output in 2017 was the largest since 1998 and the third largest since the beginning of monitoring in 1966. Considering the high electricity generation by the Daugava HPPs, electricity generation at the Riga CHPPs in 2017 was 36% lower than the year before and amounted to 1,411 GWh.

The thermal energy output in 2017 has decreased by 2% compared to the last year and amounted to 2,612 GWh due to comparatively warmer weather during the heating season and entry of new thermal energy producers on the market.

In April 2017, the natural gas market was opened in Latvia; and Latvenergo Group started natural gas trade to corporate customers in Latvia and Estonia.The amount of natural gas trading transactions by Latvenergo equals 36% of the gas consumption in Latvia in 2017, including the gas being purchased in the free market and sold to customers in Latvia and Estonia.

Latvenergo Group was among the biggest electricity traders in the Baltics. The electricity market share of Latvenergo Group was around 27% of the total electricity retail market in the Baltics in 2017. The electricity sales outside Latvia account for 1/3 of the total retail sales of electricity. In total, 6.9 TWh of electricity were sold to retail customers in the Baltics in 2017: in Latvia – 4.6 TWh, in Lithuania – 1.3 TWh and in Estonia – 1 TWh.

The revenue of Latvenergo Group in 2017 remained at the level of 2016 and amounted to 925.6 million euros. The increase in electricity output at the Daugava HPPs contributed to the growth of the Group’s profit, which was also positively affected by the corporate income tax reform in Latvia. Latvenergo Group's EBITDA has increased by 38 % in the reporting year and amounted to 541.7 million euros. In 2017, the Group’s profit was 322.2 million euros consisting of the Group's annual operating result in the amount of 173.1 million euros and a deferred tax reversal in the amount of 149.1 million euros as the result of the tax reform[2]. In compliance with the Law on Mid-term Budget 2018, 2019 and 2020, the forecasted amount of dividend payable to the state budget from the gained profit in the coming years amounts to 94.2 million euros in 2018, 132.9 million euros in 2019 and 127.1 million euros in 2020.

Latvenergo Group is among the biggest taxpayers in Latvia. In 2017, the Group has paid 238 million euros to the state budget, including more than 90 million euros as dividends for the use of the state capital.

In 2017, the total amount of investment of Latvenergo Group increased by 43.1 million euros or 21% compared to the last year and amounted to 243.8 million euros. The increase was due to higher investment in the transmission and generation segments. By continuing the reconstruction of the Daugava HPPs’ hydropower units, 41.8 million euros were invested in this project in the reporting year. To ensure high quality power network service, technical parameters and operational safety, a significant amount is invested in the modernization of the power network. The investment in the network assets accounts for 65% of the total investment.

Latvenergo AS has contributed to the reduction of mandatory procurement public service obligation fee (MP PSO fee). As of 1 January 2018, the fee has been reduced by 1 EUR/MWh and is now 25.79 EUR/MWh compared to the previous value of 26.79 EUR/MWh. This was made possible by the decision of Latvenergo AS to apply for the receipt of a one-off compensation from the Latvian state in October 2017, at the same time opting out of the receipt of 75% of the annual electrical capacity payments for Riga CHPPs. On 21 November 2017, the Cabinet of Ministers of the Republic of Latvia accepted an order which supports the compensation payment in the amount of 454.4 million euros to Latvenergo AS. In order to finance the one-off compensation, the state applies its right as the Shareholder of Latvenergo AS uses its right to carry out a capital release of Latvenergo AS.

On 7 September 2017, Moody’s maintained the credit rating of Latvenergo AS at the Baa2 level with a stable future outlook. In their assessment, Moody’s also took into account the one-off compensation from the state, the planned changes in the support intensity for the Riga CHPPs and the planned Latvenergo AS capital release.

On 14 November 2017, considering the development directions set out in the strategy of Latvenergo Group, the Management Board of Latvenergo AS approved the Strategic Development and Efficiency Program.The strategic development section of the program contains a plan for implementation of major strategic projects. The efficiency section provides for review, centralisation and digitalisation of the Group’s processes with the overarching goal of maintaining the long-term profitability of the Group.  This is the Group’s largest optimization plan in the last decade, and it will allow the Group to increase its value in the long run and to remain competitive in an open market and a changing energy industry.

The audited financial statements of Latvenergo Group for 2017 and the Corporate Governance Report for 2017 will be published on 18 April 2018. The Annual Unaudited Condensed Consolidated Financial Statements of Latvenergo Group for 2017 are available in the section Investors/ Reports

 

[1] EBITDA – earnings before interest, corporate income tax, share of profit or loss of associated companies, depreciation and amortisation and impairment of intangible and fixed assets

[2] The new Corporate Income Tax (CIT) Law was adopted on 28 July 2017 and entered into force as of 1 January 2018, providing for a different application procedure for the CIT compared to the former CIT Law. In accordance with the International Financial Reporting Standards and the Law On Annual Financial Statements and Consolidated Financial Statements, deferred tax liabilities will no longer be recognised. The accrued deferred tax liabilities in amount of 149.1 million euros recognised in previous years (from 1997 to 2017) are reversed and recorded as income in the profit and loss statement for 2017. Reversal of the deferred tax does not affect Latvenergo Group’s cash flow and does not increase financial resources.

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