Eesti Energia nine-month profits actually total €1.2 billion

Eesti Energia employees in an oil shale quarry in Northeastern Estonia.
Eesti Energia employees in an oil shale quarry in Northeastern Estonia. Source: Sergei Stepanov/ERR

Eesti Energia recently reported a normalized nine-month net profit — i.e. excluding derivatives — of €111.9 million, but in reality, the Estonian state-owned energy group has actually fared much better than that. In the first nine months of 2022, Eesti Energia earned a comprehensive income of €1.2 billion.

In accounting terms, different numbers can simultaneously be accurate. Thus both Eesti Energia's estimated normalized nine-month net profit totaling €111.9 million and the energy group's nine-month profit totaling €306.6 million as reported in its third quarter financial report, which partly includes future transactions, are true. Eesti Energia's three-month profit, moreover, is a completely realistic one for the group.

CFO Andri Avila told ERR that the company reports the normalized profit figure, which for them is an analytical one, in order to represent the company's actual situation. Subtracted from it are profits earned from risk derivatives or potential losses which are otherwise represented in its income statement, or profit and loss account.

"Energy price fluctuations can be in very large figures — this or that way, and they don't provide a picture of how a company is actually doing," he explained. "Which is why we've simply eliminated the market price fluctuations from that normalized number."

In reality, the state-owned energy group's third quarter results included yet another profit line, according to which Eesti Energia's third quarter comprehensive income totaled €568 million, and nine-month comprehensive income totaled €1.2 billion — largely due to the revaluation of hedging instruments, according to the report.

How did Eesti Energia earn a €1.2 billion profit in nine months?

The answer is somewhat a matter of accounting, but nonetheless entirely realistic. Starting at the end of last year, the company started increasingly offering its clients long term power purchase agreements (PPAs). According to Avila, with terms of up to 12 years, but primarily 7-year terms.

To date, the state-owned energy group has sold some 15 terawatt-hours of electricity in advance, including 3 terawatt-hours to household consumers and 12 to businesses, the CFO said. In comparison: 15 terawatt-hours equals just under the entire country's two-year electricity consumption. The majority of this electricity has been sold in advance in Lithuania and Latvia.

Now onto the profit. Once Eesti Energia has sold off the electricity and fixed its price, it's then clear for buyers how much they will have to pay for electricity over the next seven years, for example. Just as Eesti Energia will know how much they will get paid for this energy produced.

According to Avila, PPAs are signed at prices that are slightly cheaper than current prices, but significantly higher than futures prices on the markets. In other words, Eesti Energia has managed to sell energy to be supplied in the future at higher prices than electricity futures were trading on electricity markets as of the end of September.

Thus it's possible for Eesti Energia to take profits earned on PPAs into account. Simply put, the power company takes the difference between the number and prices of future transactions and concluded PPAs into account as its profit. Thus it has calculated a profit of €891 million this year, €445 million of which was in the third quarter.

Post-Enron accounting rules

Nonetheless, under International Financial Reporting Standards (IFRS), Eesti Energia cannot report this as either this year or this quarter's profits. If you were to show all potential profits at the time of transaction, that could lead to fairly negative results fairly quickly. The most famous example of this is the Enron scandal and collapse in the U.S. in 2000-2001.

Largely following Enron's collapse, international accounting rules were changed, after which companies could only show profits earned on PPAs in parts: during the periods in which energy supplies were delivered, not during the period in which the PPA was concluded.

Thus, while Eesti Energia has earned a calculated €891 million in additional profit on PPAs in the first nine months of 2022, the energy group can only count this as a profit during periods in which the electricity in question actually reaches its clients — as a rule, on a quarterly basis over the next seven years.

The risks to Eesti Energia are related to electricity getting more expensive. Should the price of electricity in the region fall, the Estonian state-owned energy group will continue to be able to sell it off via PPAs. Should it increase significantly in the region compared with current futures prices, however, Eesti Energia's high electricity prices wouldn't provide as much of a benefit.

Nonetheless, it can currently be said that Eesti Energia essentially managed to earn a comprehensive income of €1.2 billion on €1.6 billion in revenue in the first nine months of the year. The energy group is nevertheless emphasizing that much of that €1.2 billion is the expected result of up to 12 years, and prices changing in the future can change that.


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Editor: Aili Vahtla

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