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

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1 Published on at 15:40 Eesti Energia Swedbank Credit Research Q Credit Analyst Marek Randma Tel: Photo: Eesti Energia

2 Q3 results Eesti Energia Corporate ratings Recommendations Electricity Moody s Baa3/Stable CDS No instruments Bloomberg equity: Z ET S&P BBB/Neg EUR bonds Marketweight Bloomberg Debt: ESTONE Fitch - Date of data Key financials Comments Re sults analysis 3Q17 3Q16 % 9M17 9M16 % 2017E 2016 % Sa le s % % % Opex na na na EBITDA % % % Depreciation and amortization na na na EBIT % % % Net interests -5-4 na na na Other financials % % % Pre -ta x profits % % % Taxes 0 0 na na na Extraordinary items 0 0 na 0 0 na 0 0 na Ne t income % % % Net debt % % EBITDA margin 47% 29% 18.0 % 37.2 % 32.4 % 4.8 % 37% 54% % FFO/ IBD 35% 22% 12.8 % 28% 7% 21.2 % IBD/ EBITDA NIBD/ EBITDA EBITDA/ Interests Source: Swedbank Research, Eesti Energia Larger amount of maintenance works reduced sold volumes in both electricity and shale oil sales, but energy prices recovered in both segments. Electricity distribution tariffs were lowered in Estonia from July 1 by 7% on average due to lower investments. EUR 9m fines from Auvere late delivery helped consolidated EBITDA grow by 3% y/y. Total debt declined 6% q/q to EUR 885m, leading to net debt/ebitda ratio of 1.6x. Our 2017e NIBD/EBITDA of 2.2x implies q4 EBITDA decline due to lesser positive impacts from Auvere late delivery fines. Marketing Communication This material should be regarded as marketing communication since it has been produced in conjunction with non-independent units within Swedbank that can trade as principal in the instruments mentioned herein. Please see important disclosures at the end of this document Report was ready at :40 and published at :40 2

3 Q3 results Segment breakdown Segment breakdown 3Q17 3Q16 % 9M17 9M16 % 2017E 2016 % Sa le s % % % Electricity % % % Distribution % % % Liquid fuels % % % Other % % % EBITDA % % % Electricity % % % Distribution % % % Liquid fuels % 15-1 na % Other 6-2 na % % EBITDA ma rgin 34.3 % 30.7 % 3.6 % 37.2 % 32.4 % 4.8 % 36.8 % 44.1 % -7.3 % Electricity 23% 28% -5.6 % 30% 27% 2.6 % 31% 34% -3.1 % Distribution 52% 51% 0.8 % 47% 47% 0.4 % 45% 45% 0.5 % Liquid fuels 19% 8% 10.8 % 26% -2% 28.3 % 29% 12% 17.1 % Other 58% -20% 78.2 % 54% 34% 20.2 % 48% 121% % Source: Swedbank Research, Eesti Energia Comments Nordic electricity prices are recovering NPS average system price grew by 13% y/y to EUR 28.5/MWh, while Estonian average price grew by 14% to EUR 36/MWh. Due to large amount of fixed price contracts, Eesti Energia s average sold price grew by 5% to EUR 39 MW/h. However, sold volumes declined by 14% y/y due to maintenance works, reducing Electricity segment s EBITDA by 27%. Average distribution price declined by 8% y/y from July 1, slightly offset by 4% higher volumes, but EBITDA declined by 3%. Nearly all of Q3 shale oil was sold at formerly fixed prices. Therefore average sold price remained at EUR 210/t, even as ARA fuel oil price grew by 19% y/y. Decline in fixed and variable costs increased EBITDA by 31% y/y

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) Source: Swedbank Research, Eesti Energia Key comments Eesti Energia expects the new Auvere power plant s delivery to take place in Q We expect this to allow for larger generation volumes and also increased booked sales. Eesti Energia had 3.3 TWh of 2018e sales locked at EUR 34/MWh at the end of Q3, roughly a third of its annual sales. We expect the group to be able to ramp up production of its shale oil units after the completion of maintenance works. We expect average shale oil price to increase by 13%, as current low price contracts expire and as nearly 300 kt of 2018e is under contract to be sold at an average price of EUR 256/t. We expect distribution volumes to remain stable in the near future. However, we expect the Distribution segment s 2018e EBITDA to decline by 7% from 2017 due to the tariff decrease from July 1. Decline in Distribution segment s EBITDA and expiry of fines from GE in 2017 should result in 2018e EBITDA decline of 6%, in our view. While we expect recovery in energy prices to have a positive effect on future EBITDA, higher share of carbon dioxide quotas purchased from the market should offset part of the increase. 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 was strong enough for the group to announce an early repayment of EUR 48m EIB loan in Q Our estimates imply drawing down roughly EUR 50m from available loans in 2018 to repay the bond bullet. However, Eesti Energia s strong balance sheet would allow for full payment from existing cash. 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 Q and the planned Tootsi wind park. 5

6 ESTONE bond price performance Bond yields continue to decline Comments ESTONE bond prices Near- and mid-term yields for Nordic utilities have declined further, driven by ECB s CSPP. ESTONE spreads against the closest BBB Nordic utilities have declined further and ESTONE is now priced similar to Finnish Fortum. Given Eesti Energia s higher exposure to carbon dioxide and oil price risks, ESTONE s long-term bonds trade deservedly at a premium to closest peers (2023/24 maturity). Long-term spreads have declined from bps to bps in a year. ESTONE /02/18 CORP ESTONE /22/23 CORP ESTONE /18/20 CORP Source: Bloomberg We lower our recommendation on ESTONE bonds to Marketweight (Overweight) due to reduced premiums to closest peers. 6

7 Yield to maturity Relative valuation of ESTONE bonds Comparison to Nordic utility EUR bonds Comments TVO ESTONE STLNO FUMVFH VATFAL STATK FINPOW EOANGR DONGAS 0 ELERIN All peers are investment grade Nordic utilities, while TVO is rated BB+ by S&P and BBB- by Fitch Spreads against closest BBB peers E.On, Vattenfall, Fortum and DONG have declined to minimum in near-to mid-term, while the longer term spread for the 2023 bond has narrowed. We lower our recommendation to Marketweight, as the market seems to price in the low liquidity risks in the near-term, given the company s ability to cover near-term financing cash needs from existing cash with no required extra efforts 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 308m of liquid assets at the end of Q In addition, unused loans amount to EUR 150m. Total debt at the end of Q was EUR 885m. 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 2.4x at the end of Q3 2017, net debt/ebitda was at 1.6x 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 3,089 3,019 3,070 Equity 1,571 1,697 1,774 1,806 1,847 Minority interests Tota l e quity 1,572 1,698 1,775 1,808 1,849 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 3,089 3,019 3,070 Total debt Ba la nce she e t me trics E 2018E 2019E IBD/ Capital 38% 36% 33% 29% 29% NIBD/ Capital 31% 27% 24% 23% 20% Equity ratio 53% 55% 57% 60% 60% Cash/ total assets 5% 7% 8% 5% 8% CA/CL 162% 216% 195% 146% 166% Source: Swedbank Research, Eesti Energia 10

11 Financials Sound credit metrics Credit metrics Cre dit me trics E 2018E 2019E EBITDA margin 34% 44% 37% 33% 32% IBD/ EBITDA NIBD/ EBITDA FFO/ NIBD 30% 39% 39% 37% 47% FCF/ NIBD 17% 12% 11% 11% 23% RCF/ IBD na 30% 23% 24% 26% EBITDA/ net interests NIBD/ Capital Employed 31% 27% 24% 23% 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 885m total debt is fixed-rate bonds, lowering the risk of interest rate hikes. We expect EBITDA to cover net interest needs by above 12x 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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