VILNIUS. According to preliminary non-audited data, the group of energy transmission and exchange companies EPSO-G earned income of 248.2 million euros in full year 2018, a 10.2 percent rise from 225.3 million euros the year before. This was mainly due to the demand of energy transmission services growing faster than the domestic economy also higher volume of balancing and systemic services.
Within the same period, the operating profit of EPSO-G group (EBITDA) was 58.0 million euros, down 24.9 percent from 77.2 million euros in 2017. This was mainly due to significantly lower electricity and gas transmission fees applied to system users' since the start of the year – 7.1 and 35.5 percent respectively. The bottom line was mainly affected by the asset revaluation reflecting the influence of the decisions taken by the market regulator at the end of October on the income going forward.
“In 2018 we made the essential progress in the projects of synchronization and integration of gas markets, operated in a stable way, provided more services for lower price and scored top evaluation of our governance practices among the state-owned companies.
Due to active and close cooperation with the Polish, Latvian, and Estonian partners, we were invited to become a part of the energy system of continental Europe. The most important point on this path was the political road map signed on the 28th by the European Commission, three Baltic States and Poland. Every next step was in compliance with that accord– we agreed on synchronization scenario and mapped out concrete plan of actions, the homework we have to do to ensure smooth synchronization of the Lithuanian energy system with continental Europe. The contract on linking gas transmission networks was signed between Lithuania and Poland. The procurements of are well in progress with an aim to start the GIPL gas pipeline construction works as scheduled. On top of it we began to install smart solutions for gas-pipe diagnostics that will help us save operating costs and labour time also ensuring higher safety level.
GET Baltic that belongs to the group has become a regional gas exchange de facto. Its turnover and liquidity are growing rapidly. The unique trade platform created by the colleagues from Baltpool has changed essentially the situation in the biofuel market and prices in different municipalities. The know-how of Baltpool was exported to conduct biofuel trade in Denmark, Latvia and Estonia with an eye to launch operations in Finland in the nearest future.
The heat auctions that were and roundwood trade that have been launched last year are demonstrating clear benefits. The created and announced index of prices of wood chips has become a reliable point of reference to all market participants. We are moving in this direction in the wood trade market.
The joint activities of the group’s companies are creating increasingly bigger synergy. We started joint procurements that save expenditure. We are implanting efficient cashpool solutions within the group that create alternative for short-term lending from credit institutions. Due our strong focus on management quality, implementation of business strategy, transparency and accountability we have received A+ valuation of our governance quality”, - chief executive officer of EPSO-G Rolandas Zukas said in his comment on key performance aspects of the group in 2018.
Services and reliability
In 2018 the demand for electricity, including transmission services, outpaced the growth of the country’s economy growth.
10 491 million kilowatt-hours (kWh) of electricity were transmitted to the residents and business entities of the country through high-voltage networks in full year 2018, a 5.0 percent growth year-on-year. According to the first estimate of the Lithuanian Department of Statistics, Lithuania’s gross domestic product (GDP) was growing by 3.6 percent in 2018 year-on-year.
The volume of transmission services provided in Lithuania in 2018 in the sector of natural gas decreased by 8.1 percent in 2018. That was offset somewhat by the transported gas to the neighbouring countries which rose by 6.6 percent year-on-year.
As the volume of provided services was growing, the energy transmission network and links were operating reliably – only 0.95 MWh electricity was not provided to the users in 2018 due to disfunction of high-voltage networks, for which the operator was responsible. This number compares to 1,68 MWh in 2017. The accessibility of gas transmission network to the system’s users was 100 percent.
The asynchronous links were working reliably. The accessibility of the “NordBalt” link to the market in 2018 was 97 percent when discounting the planned replacement period of the link’s couplings. It compares to 84 percent in 2017. The accessibility of the “LitPol Link” link to the market in this period was 98 percent (it was 99 percent in 2019).
The volume of natural gas trade on GET Baltic exchange in 2018 made 982 GWh. After having become the de facto regional gas trade platform, the trade volumes in the GET Baltic exchange increased almost by three times if compared to the same period in 2017.
The centralized heat-supply companies, independent heat producers and industrial companies acquired 325.4 thousand tons of biofuel in the exchange of energy resources Baltpool in 2018. This value is higher by 5.0 percent if compared to the same period in 2017.
The International Financial Reporting Standards (IFRS) determine the procedures that are mandatory in order to guarantee that the property is accounted by real value. The companies of the group EPSO-G are assessing regularly internal and external features of possible reduction of value. If such features are present, the companies shall assess the real value of such property.
The changes in the regulatory environment independent of the activities of the companies of the group EPSO-G that happened in the accounting year were evaluated in the end of 2018, as well as their influence on the property’s value using the income method for accounting and method of discounted cash flows.
The key changes in the regulatory environment in 2018 are the following:
The National Commission for Energy Control and Prices passed the resolution No. O3-E-300 “Regarding recalculation of upper threshold of transmission service’s price of LITGRID AB for 2019” on 02 October 2018, whereby it decided on the amount of return on investments of the company that exceeded the amount set in 2016−2017. The factual capital costs in 2016-2017 were evaluated by historical value and the model of long-run average incremental costs – LRAIC, where the costs of optimized property capital are assessed by reconstructive value, approved by the commission was not applied. With regard to this resolution and presuming that the commission is going to apply the same assessment method of capital costs in 2018-2019 as was applied in 2016-2017, as well as possible change in the application of LRAIC model, “Litgrid” assessed impact of these presumptions on future cash flows from the beginning of a new regulatory period in 2021.
As the new regulatory period of prices of natural gas transmission services was started in 2019 (2019-2023), the rate of return on investment of 3.33 percent was set for the company “Amber Grid” from the property attributed to the regulated activities. It is lower than 7.09 percent applied in the regulatory period 2014-2018. According to the Methodology of Establishment of the Rate of Return on Investment approved by the National Commission for Energy Control and Prices, it shall be revised every year with regard to the factual borrowing costs of the company.
Due to these reasons and other changes in assessment method of smaller significance, the reduction in the property of “Amber Grid” in the amount of 37.7 million euros was recorded, and 56.3 million euros for “Litgrid”. The reduction of value of 75.4 million euros was recorded with regard to EPSO-G, including reduction of reappraisal reserve of 5.3 million euros due to deferred profit tax. The assessment influence on the reduction of own capital in the statement of profit/loss made 88.7 million euros, including influence of the deferred profit tax.
It should be noted that the physical property’s amount or its characteristics did not change, whereas the reduction of the value reflects only the assessment of income earning potential according to conservative presumptions.
Income and costs
The consolidated income of the group EPSO-G in 2018 increased by 10.2 percent up to 248.2 million euros, if compared to the same period the year before, despite lower service rates applied from the beginning of the year. The increased transit of transmitted electricity and natural gas to the neighbouring countries and the increased demand for balancing and systemic services than in 2017 had the biggest impact on such results.
The costs of the group increased by 39.1 million euros to 229.1 million euros in 2018, excluding the impact of asset revaluation. This was determined by higher cost of systemic services and the price of energy resources. Other operating costs were lower year-on-year.
Dėl pasikeitusios reguliacinės aplinkos apskaitytų „Litgrid“ ir „Amber Grid“ ilgalaikio materialiojo turto perkainojimo sąnaudų, konsoliduotas grynasis nuostolis 2018 m. buvo 47,4 mln. eurų
Due to the changed regulatory environment, the consolidated net loss after the revaluation of non-current tangible assets of “Litgrid” and “Amber Grid” in 2018 was 47,4 million euros. Excluding the impact of asset revaluation in the accounting, the normalized net profit of the EPSO-G group in 2018 was 14,7 million euros, whereas the normalized return on equity was 7,0 percent. The average return on equity of EPSO-G group of companies in 2016-2018 was 11.4 percent, i.e. 2.6 percentage points higher than 8.8 percent set by the Government of the Republic of Lithuania for the state-owned companies for this period.