H1 2014 operating results – a solid foundation for implementation of Lietuvos Energijos Gamyba's long-term strategy

 

The first half of 2014 was quiet in the power market: electricity demand was noticeably decreased by the considerably higher than the average temperatures in January–April; there were also no significant restrictions on intersystem capacities from other countries, so prices on the exchange remained relatively low. With the temperature in May hovering around the norm for this month, prices on the exchange began to rise slightly – as is common during the warm season – but still remained relatively stable. At 159.8 LTL/MWh, the average price of electricity in the Lithuanian bidding area on the Nord Pool Spot exchange in January–June 2014 was barely 0.8 per cent higher than it was in January–June 2013. For the sake of comparison, in September and October 2013, when import options were severely limited, the average price of electricity in the Lithuanian bidding area was 36 per cent higher.

 

Unlike in 2013, when temperatures dropped drastically in March, there was no need to turn on the Elektrėnai complex units during the first months of this year with the market situation as it was. Therefore, in line with the plan which was agreed with transmission system operator Litgrid, electricity only began to be produced at the combined cycle unit in early April, and by the end of June, 40 per cent less has been generated than during the first half of last year. In addition, production at the Kaunas HPP also fell by one fifth due to the dry spring. Lower electricity production volumes in the first half of the year are one of the reasons why the revenue of the Lietuvos Energijos Gamyba group of companies (hereinafter – the Group) decreased from LTL 498 million in the first half of 2013 to LTL 367.7 million for the same period this year (26 per cent less).

 

Another reason for the decline in revenue was the fact that the Group’s electricity sales decreased. In January–June 2014, 0.926 TWh of electricity were sold to the domestic market – this is 45 per cent less than during the same period in 2013, when 1.689 TWh were sold. The main reason for this decrease is that as of 2014, bilateral contracts are no longer being concluded to ensure that the needs of electricity distribution network operator LESTO are met. Meanwhile, the Group’s sales in the free market increased over the first half of 2014.

 

“During the first half of this year, Lietuvos Energijos Gamyba increased its sales on the free market by more than one third compared to the same period last year. Successful trading activities and favourable opportunities to purchase and sell electricity helped to compensate for the reduced electricity production at the company’s plants caused by market and weather conditions, and to achieve good results during the first half of the year,” comments Juozas Bartlingas, Chairman of the Board and CEO of Lietuvos Energijos Gamyba.

 

The Group’s EBITDA margin for the first half of 2014 was 33.2 per cent, which, compared to the same period last year, amounts to an increase of 5.9 percentage points (from 27.3 per cent). Nevertheless, the lower electricity generation and trading volumes still resulted in a decrease of EBITDA in absolute terms, from LTL 135.7 million to LTL 121.9 million. The Group’s net profitability increased by 9.5 percentage points: for the first half of 2013, the net profitability ratio was 11 per cent, compared to 20.5 per cent for the same period this year. During the first half of 2014, the Group earned LTL 75.5 million in net profit, or 37 per cent more than during the same period in 2013, when net profit amounted to LTL 55.2 million. Profit ratios were also increased by the favourable situation in the emission permit market (prices for emission permits have increased from 16.95 LTL/pc. to 20.06 LTL/pc. since the beginning of the year), so the value of the emission permits held by the company increased.

 

According to Mr Bartlingas, these operating results are an excellent starting point for implementing Lietuvos Energijos Gamyba’s 2014–2020 business strategy, which was approved at the end of H1 2014. The strategy includes plans to increase the company’s value, ensure the provision of quality services to customers, boost operational efficiency, and form a value-based organizational culture.

 

“The activities of all of the company’s employees during the first half of this year indicate that we can indeed achieve the goals that have been set: during this period, construction of new thermal energy generation capacities in Elektrėnai have made significant headway and an optimal operational scenario for the Elektrėnai complex was provided for. We will already begin producing heat from biofuel at the end of this year, and the competitiveness and efficiency of the Elektrėnai complex will increase upon eliminating excess capacity and producing electricity with the modern combined cycle unit and units 7 and 8 of the reserve power plant once connections are made,” says the head of the company.

 

 

In total, the power plants controlled by the company produced 0.597 TWh of electricity during the first half of 2014. Over the same period last year, 0.739 TWh of electricity, i.e. 19 per cent more, was produced. Compared to the same period last year, the largest decrease – as much as 40 per cent – was experienced in the production of subsidised electricity at the Elektrėnai complex. Production at the Kaunas HPP also decreased due to the dry spring.

 

This year the units at the Elektrėnai complex are operating in accordance with a schedule that has been agreed with transmission system operator Litgrid, so the first kilowatt hours were only produced at this power plant in the beginning of April. From then until the end of June, 0.13 TWh of electricity was produced in Elektrėnai. Meanwhile, 0.217 TWh were produced at the Elektrėnai complex during the first half of last year, with more than a third of this amount being produced during the first quarter, when the electricity demand increased sharply due to the unusually cold weather in March.

 

It is anticipated that electricity will be produced in Elektrėnai this year until mid-October. The units at the Elektrėnai complex are working from April to October in order to ensure reliable operation of the power system, since there is often a shortage of electricity during the warm season due to limited capacities and repairs of other sources of power generation, and prices increase on the exchange as a result. By orienting production at the Elektrėnai complex towards the months of this particular period, PSO funds will also be used more effectively. It is planned that the subsidised electricity production quota of 0.9 TWh that is allocated for the Elektrėnai complex in 2014 will be produced at this power plant during the period foreseen.

 

The Kaunas HPP produced 0.2 TWh of electricity over the first half of the year, which is 20 per cent less than in the first half of 2013 (0.251 TWh). The relatively dry second quarter had the greatest impact on the Kaunas HPP production indicators. The average monthly water flow in the Nemunas 2014 was higher than usual in January and February and closer to the long-term average in March, but when spring came there was no significant freshet in the Nemunas. April was drier than usual, and precipitation in May and June also did not exceed the standard climate rates. This resulted in a low water level in the Nemunas, and the Kaunas HPP subsequently operated at lower than normal capacity.

 

Production volumes at the Kruonis PSHP remained very similar to those of the first half of last year: the plant produced and sold 0.267 TWh of electricity in the first half of 2014. During the same period in 2013, 0.271 TWh were produced (not quite 2 per cent more).

 

 

During the first half of 2014, Group revenue decreased by roughly one quarter in both regulated and commercial activities, so the overall structure of the income basket remained practically unchanged: income from commercial activities made up 59.6 per cent of all revenue during the first half of last year, and 58.8 per cent during the same period this year.

 

The Group’s regulated activities include electricity and heat production at the Elektrėnai complex as well as capacity reservation services provided by the Kruonis PSP and the Elektrėnai complex. Since, as previously mentioned, no electricity was produced at the Elektrėnai complex during the first three months of the year, the Group’s revenue from regulated activities during the first half of 2014 was 24.6 per cent less than during the same period in 2013: LTL 151.6 million (versus LTL 201.1 million last year).

 

Revenue from commercial activities, which consist of electricity production at the Kruonis PSP and the Kaunas HPP as well as wholesale and retail trade of electricity on the free market and other commercial services, decreased by 27.2 per cent. Due to the new arrangement for the sale of electricity to LESTO, which resulted in electricity sales to LESTO decreasing by 89 per cent (as of 2014, LESTO only purchases subsidised electricity produced at the Elektrėnai complex from Lietuvos Energijos Gamyba), revenue from commercial activities dropped from LTL 296.8 million during the first half of 2013 to LTL 216 million during the first half of 2014.

 

Nevertheless, the experience accumulated in trading on the free market was put to good use: sales to independent suppliers and on the exchange increased by 36 per cent, from 0.592 TWh in the first half of 2013 to 0.803 TWh in the first half of 2014. This helped the company achieve good results in the first half of 2014. In order to continue to meet shareholder expectations and increase its value, the company will proceed to take full advantage of the potential offered by the Kaunas HPP and the Kruonis PSP to compete in the regional wholesale electricity market.