The significance of the present Baltic TOP-10 lies in the fact that since the very beginnings of the Baltic TOP-10, Latvenergo from Latvia has become the most valuable energy company in the region, which has been achieved due to a faster increase in value than that of the previous leader, Estonia's Eesti Energia.
If you examine the operation of the energy companies from each of the Baltic countries, although they are essentially similar and operate as electricity production and trade companies, each of them has its own special advantages, which are used for the increase of the value.
For example, for a long period of time, Eesti Energia was in a privileged situation due to the high oil prices, as the result of which the oil shale oil extraction and sales executed by Eesti Energia, allowed the company to work with high productivity, and consequently, preserve a stable, large business value. At the same time, when the oil prices started dropping, the profitability and cost-effectiveness of Eesti Energia also started gradually decreasing, as the result of what, during the latest 4 years the value of Eesti Energia has stagnated, or the rise against the 2014 value was only 1% this year. The management of Eesti Energia has developed a series of measures to improve the company's performance in the future, however, as the result of the decisions taken at Paris Climate Conference, the company will be required to make additional investments, and, consequently, it is going to affect the value of the company in the future.
While the fall of the oil prices has negatively affected Eesti Energia, it has caused quite the opposite effect to the financial results of Latvenergo, because with the decrease of natural gas prices, the operation of Riga heat-electric generating plant (TEC), belonging to Latvenergo, has become more effective. In combination with the substantial rise of the water intake in the Daugava and the subsequent increase of the amount of electricity produced at the Daugava HES, in 2016 Latvenergo reached a 28% increase in EBITDA compared to the preceding year. Liberalization of the natural gas market in 2017 is considered a positive factor for the growth of the Latvenergo value, however, we should be aware that the impact of the Daugava HES operation on the company value will remain substantial also in the following years. The good financial performance of Latvenergo has been positively evaluated also from the part of international rating agencies, so in June 2017, Moody's gave the GB1 (excellent) rating to the Latvenergo so-called "green" bonds.
Lietuvos Energija, in turn, might be considered the most active company in the Baltic market, especially in relation to geographic expansion both in the field of electricity trade, and the development of electricity production capacities. Since year 2014, the company's EBITDA and value have grown by 21%, meanwhile also gaining raise in the EBITDA profitability. Continuing this trend, and, in case of no significant growth of the oil and natural gas prices in the coming years, the value of Lietuvos Energija could soon outpace that of Eesti Energia. The increased focus on the development of renewable energy production capacity from the part of Lietuvos Energija is noteworthy and has been highly evaluated also by the international credit rating agency S&P, by allotting to the” green” bonds of Lietuvos Energija to the amount of 200 MEUR, the BBB+ rating.
It should be noted that Eesti Energia and Lietuvos Energija are actively following the trends pursued by the world’s energy companies and invest in the development of new electricity capacities, based on renewable energy. Although, due to the hydroelectric stations, Latvenergo occupies the leading positions in the "green" energy production in the Baltics, Eesti Energia and Lietuvos Energia have been more active in the diversification of their production capacity –by purchasing and developing new electrical energy production, mainly in the spheres of wind and biomass cogeneration. Seeing how rapidly the cost of wind and solar energy declines, it can be estimated that investments in such projects have a positive impact the value of the companies in the long term.
By Ivars Pinkulis, Prudentia partner
