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Repurchase of capacity payment commitments will allow reducing OIK [Mandatory Procurement Component]


On November 21, the Cabinet of Ministers adopted the ordinance drafted by the Ministry of Economy providing for the capital release of Latvenergo AS in the amount of 454.4 million EUR for the purpose of repurchase of the electricity OIK commitments.

As it has been reported earlier, Latvenergo AS has applied for a one-off compensation from the state, at the same time opting-out of the receipt of 75 per cent of the annual electrical capacity payments for cogeneration power plants Riga TEC-1 and Riga TEC-2. As a result, the long-term commitments of the state will decrease by EUR 262 million. In the report, the one-off compensation to Latvenergo AS is estimated at EUR 454 million. The compensation will be financed by applying the rights of the state as the Shareholder to carry out a capital release of Latvenergo AS.

Along with implementation of the developed solution of reduction of OIK, a trend of the commencement of a decrease of the OIK in the further periods has been pointed out. In the aggregate, the OIK decreases from 2.7 EUR cents/ kWh in 2017 to 2.5 EUR cents/ kWh in 2020, which will also allow reducing the targeted state subsidies for the OIK from approximately 89 million EUR in 2018 to approximately 18 million EUR in 2019 and in 2020. An increase of the OIK to 4.0 EUR cents/ kWh for consumers was reviewed as an alternative scenario.

In recent years, financial results of Latvenergo Group have improved substantially, as of 30 June 2017 the Group’s assets exceeded EUR 3.8 billion and equity – EUR 2.4 billion. According to the researches carried out by independent international third parties, the capital structure ratios of Latvenergo Group are better than those of many industry benchmark companies: net debt to equity was 23% and net debt to EBITDA was 1.5 as of 30 June 2017.

The impact from the aforementioned measures on the financial stability of Latvenergo Group has also been evaluated by the credit rating agency Moody’s, that has published an Issuer comment, but has not revised the credit rating of Latvenergo AS or its future outlook. n accordance with Moody’s comment, Latvenergo will be able to maintain adequate financial flexibility and key financial metrics in line with guidance for the current rating Baa2 with stable future outlook.

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