Eesti Energia. Swedbank Credit Research Q Credit Analyst Marek Randma Tel:

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1 Published on at 13:05 Eesti Energia Swedbank Credit Research Q Credit Analyst Marek Randma Tel:

2 Q2 results Eesti Energia Corporate ratings Recommendations Electricity Moody s Baa3/Stable CDS No instruments Bloomberg equity: Z ET S&P BBB/Neg EUR bonds Overweight Bloomberg Debt: ESTONE Fitch - Date of data Key financials Comments Re sults analysis 2Q17 2Q16 % 1H17 1H16 % 2017E 2016 % Sa le s % % % Opex na na na EBITDA % % % Depreciation and amortization na na na EBIT % % % Net interests -6-3 na na na Other financials % % % Pre -ta x profits % % % Taxes na na na Extraordinary items 0 0 na 0 0 na 0 0 na Ne t income % % % Net debt % % EBITDA margin 46% 31% 14.9 % 38.3 % 33.2 % 5.1 % 36% 54% % FFO/ IBD 31% 22% 9.4 % 26% 7% 19.4 % IBD/ EBITDA NIBD/ EBITDA EBITDA/ Interests Revenues increased mostly due to 43% increase in electricity production and ramp-up of its new Enefit 280 shale oil production unit Higher volumes contributed to revenue growth and lower costs per unit, improving margins. Excluding the Q one-off EUR 12.6m gain from retroactive reduction in pollution taxes and environmental fees, EBITDA increase would have been 52%. Income taxes increased due to the declaration of EUR 47m in dividends in Q2 Source: Swedbank Research, Eesti Energia

3 Q2 results Segment breakdown Se gme nt bre akdown 2Q17 2Q16 % 1H17 1H16 % 2017E 2016 % Sa le s % % % Electricity % % % Distribution % % % Liquid fuels % % % Other % % % EBITDA % % % Electricity % % % Distribution % % % Liquid fuels 7-3 na 12-3 na % Other % % % EBITDA ma rgin 36.0 % 36.7 % -0.7 % 38.3 % 33.2 % 5.1 % 36.0 % 44.1 % -8.2 % Electricity 28% 23% 4.7 % 33% 26% 6.3 % 30% 34% -3.8 % Distribution 52% 53% -1.1 % 45% 45% 0.4 % 43% 45% -1.4 % Liquid fuels 27% -23% 50.7 % 29% -12% 40.7 % 30% 12% 17.9 % Other 34% 101% % 53% 46% 6.9 % 50% 121% % Source: Swedbank Research, Eesti Energia Comments Average sold electricity price declined by 10% y/y to EUR 37/MWh, 35% higher sold volumes helped Electricity segment s revenues grow 24% to EUR 82m. Higher volumes contributed to lower costs per unit, improving electricity segment s EBITDA margin to by 5 pps. In liquid fuels segment sold volumes grew by 53% y/y to 104 kt and average sales price by 17% to EUR 235/t. Liquid fuels EBITDA improved by EUR 10m from the segment s worst result since at least

4 Credit summary Near-term outlook Financial summary & key credit metrics Profit & Loss E 2018E 2019E Re ve nue s Operating costs EBIT D A Depreciation Amortization EBIT Net interests Other financial items Pre -ta x profits Taxes Extraordinary items Ne t income Assumptions E 2018E 2019E Sold electricity volume (GWh) 7,211 8,197 8,935 9,113 9,296 Average sold el. price (EUR/MWh) Sold shale oil volume (t) Average sold oil price (EUR/t) Key comments Eesti Energia has ramped up both electricity and shale oil volumes, bringing down unit costs. We expect the trend to last throughout For 2017, Eesti Energia has locked most of the electricity price risk by forward contracts and fixed-price retail contracts, reducing the average sales price from will be impacted by one-offs from the sale of shares in the power station in Jordan and also from the fines that GE has to pay for the late delivery of the 300 MW Auvere power plant in Eastern Estonia. We expect a cleaner PL statement from 2018, without expected one-offs. We expect energy prices to start to slowly recover from Source: Swedbank Research, Eesti Energia 4

5 Credit summary Cash-flow bridge Our expected cash flows (EUR m) Source: Swedbank Research Key comments We expect roughly EUR m operating cash flows per annum in , with additional one-offs in Debt repayment schedule for Eesti Energia is relatively moderate EUR bond has a EUR 152m bullet payment left, but liquidity position for Eesti Energia is strong enough for the group to announce an early repayment of EUR 48m EIB loan in Q Our expectations include EUR 180m capex in 2017 and 2018, with a decline to EUR 120m in Largest investment items include the last payment for the Auvere power plant in 2017 and the planned Tootsi wind park. 5

6 ESTONE bond price performance Bond yields continue to decline Comments ESTONE bond prices Mid-term bond yields (2019/20 maturity) have largely remained stable for the closest peers near 0%. Also Eesti Energia s spread to closest peers has remained at bps. Long-term bond yields for closest BBB-rated Nordic utility peers (2023/24 maturity) have marginally declined to % from % a year ago, helped by ECB s CSPP. However, Eesti Energia s spread to closest peers has narrowed from bps to bps. ESTONE /02/18 CORP ESTONE /22/23 CORP ESTONE /18/20 CORP Source: Bloomberg Market has likely taken note of Eesti Energia s improved liquidity position and outlook clarity concerning its largest investment projects, leading to the narrowing of spreads. We regard the spreads to still be too wide and continue with our Overweight recommendation. 6

7 Z-Spread Relative valuation of ESTONE bonds Comparison to Nordic utility EUR bonds Comments TVO All peers are investment grade Nordic utilities, while TVO is rated BB+ by S&P and BBB- by Fitch ESTONE /22/23 Eesti Energia offers premium yields compared to all its closest BBB peers E.On, Vattenfall, Fortum and DONG Eesti Energia s strong balance sheet and very high liquidity, combined with the premium to closest peers, lead to our Overweight recommendation 40 ESTONE 4 1/2 11/18/20 FUMVFH 20 ESTONE 4 1/4 10/02/18 ELERIN 4 5/8 07/12/18 DONGAS EOANGR STATK VATFAL FINPOW STLNO STLNO Time to Maturity (Years) Source: Bloomberg 7

8 Credit summary Credit strengths and weaknesses Credit strengths Ownership structure Eesti Energia is 100% owned by the Republic of Estonia (AA-/A1). Market position Eesti Energia is the largest Estonian electricity producer, it is also the owner of the largest distribution grid in Estonia and is the largest retail seller of electricity in Estonia with roughly 60% market share in Estonia. Comfortable repayment schedule Eesti Energia s cash position covers the repayment and interest payment needs through Capex needs are comfortably covered by operating cash flows. Balance sheet strength Eesti Energia reported EUR 386m of liquid assets at the end of Q In addition, unused loans amount to EUR 220m. Total debt at the end of Q was EUR 943m. Credit concerns Exposure to volatile energy markets Out of Eesti Energia s three main revenue sources, one has a stable and regulated price (distribution grid service), while the other two (electricity and shale oil) are priced by the market. Moderately aggressive key financial ratios Interest-bearing debt/ebitda ratio stood at 2.6x at the end of Q2 2017, net debt/ebitda was at 1.5x Limited size Eesti Energia s total value of bonds outstanding amounts to EUR 758m Carbon-intensive production Eesti Energia produced net 8.7 TWh of electricity out of fossil fuels in 2016 and 0.4 TWh out of renewables kt of carbon dioxide was emitted by Eesti Energia in Eesti Energia currently receives a large portion of its carbon dioxide quotas for free. However, the share of quotas bought from the market will grow in the mid-term. 8

9 Financials Profit & Loss Profit & Loss E 2018E 2019E Re ve nue s Operating costs EBIT D A Depreciation Amortization EBIT Net interests Other financial items Pre -ta x profits Taxes Extraordinary items Ne t income Assumptions E 2018E 2019E Sold electricity volume (GWh) 7,211 8,197 8,935 9,113 9,296 Average sold el. price (EUR/MWh) Sold shale oil volume (t) Average sold oil price (EUR/t) Source: Swedbank Research, Eesti Energia E 2018E 2019E Sa le s Electricity Distribution Liquid fuels Other EBITDA Electricity Distribution Liquid fuels Other Source: Swedbank Research, Eesti Energia 9

10 Financials Balance sheet Ba la nce she e t E 2018E 2019E PP&E 2,474 2,469 2,526 2,567 2,545 Intangible assets Investment in associates Other non-current assets Tota l non-curre nt a sse ts 2,553 2,551 2,598 2,631 2,599 Cash Inventories Accounts receivable Other current assets Tota l curre nt a sse ts Tota l a sse ts 2,958 3,087 3,092 3,016 3,062 Equity 1,571 1,697 1,772 1,802 1,839 Minority interests Tota l e quity 1,572 1,698 1,773 1,804 1,841 Long-term borrowings Other non-current liabillities Tota l non-curre nt lia bilitie s 1,136 1,140 1, Short-term borrowings Shareholder loan Trade payables Other current liabillities Tota l curre nt lia bilitie s Tota l e quity a nd lia bilitie s 2,958 3,087 3,093 3,016 3,061 Total debt Ba la nce she e t me trics E 2018E 2019E IBD/ Capital 38% 36% 33% 30% 29% NIBD/ Capital 31% 27% 24% 24% 20% Equity ratio 53% 55% 57% 60% 60% Cash/ total assets 5% 7% 8% 5% 7% CA/CL 162% 216% 194% 144% 164% Source: Swedbank Research, Eesti Energia 10

11 Financials Sound credit metrics Credit metrics Cre dit me trics E 2018E 2019E EBITDA margin 34% 44% 36% 32% 32% IBD/ EBITDA NIBD/ EBITDA FFO/ NIBD 30% 39% 39% 37% 45% FCF/ NIBD 17% 12% 10% 10% 22% RCF/ IBD na 30% 22% 23% 25% EBITDA/ net interests NIBD/ Capital Employed 31% 27% 24% 24% 20% Equity ratio 53% 55% 57% 60% 60% ROCE 5% 7% 5% 4% 5% ROA na 6% 3% 3% 3% ROE 3% 10% 6% 4% 5% Key comments After the completion of its Auvere plant, capex needs should gradually decline. We expect strong OCF to be used for debt repayments in 2018, lowering debt ratios. Significant portion (EUR 758m) of EUR 943m total debt is fixed-rate bonds, lowering the risk of interest rate hikes. We expect EBITDA to cover net interest needs by above 10x in NIBD/ EBITDA and EBITDA/ net interests Source: Swedbank Research, Eesti Energia E 2018E 2019E NIBD/EBITDA (lhs) EBITDA/ net interests (rhs) 11

12 Financials Debt maturities and funding Debt maturity profile Funding profile 600 3, , , , ,000 1, Equity Minority interests Bank Bonds Bank & Other Bonds Source: Eesti Energia 12

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