`Good day, and thank you for standing by. Welcome to the Ignitis Group Nine-month 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Alternatively, you may submit your question via the webcast. Please be advised that today's conference is being recorded. Thank you. Speakers, you may begin.
Good afternoon, everyone. It's a pleasure to welcome you to Ignitis Group nine- months results call. Today, the group's management will share with you the key highlights of the strategic and financial performance in the first nine months of this year. The presentation will be followed by a Q&A session. We encourage everyone to take the opportunity to ask any questions you may have. With that, I will hand over to the group CEO, Darius Maikštėnas.
Thank you. Good afternoon, everyone, and welcome to our earnings call today. Let me start with the performance highlights of the past nine months of 2023. We continue to deliver on our strategic performance, particularly in renewables, where we developed the largest projects in the Baltics. First, we started construction of the largest onshore wind farm capacity of 300 MW in Lithuania. Second, we made a final investment decision for the 239 MW solar portfolio in Latvia, which is also largest in Baltics. Looking at the sustainability progress, our leadership continues to be reflected in ESG risk ratings, this time with an upgrade of our ISS ESG rating, upgrade in ESG risk ratings, this time, with an upgrade from C to -B.
Finally, we made a record- level of investments up to 72.3% year-over-year to EUR 633.7 million. Investments in green generation more than doubled, and the networks more than 1/3 higher than the last year. Nevertheless, we have continued to maintain a strong balance sheet, which is reflected in S&P's credit rating of BBB+ with a stable outlook. Lastly, following our nine months of 2023 performance, which was in line with our expectations, we reiterate our 2023 adjusted EBITDA guidance of EUR 430 million-EUR 480 million. Let me now deep dive into each of the highlights.
So far this year, we have achieved significant milestones in the expansion of development of our green generation portfolio across all project development phases. On this slide, we highlight the progress made since January. However, let me highlight those that we were added after a half- year results. Starting with offshore wind development. The group, together with partner Ocean Winds, was confirmed as the winner of 700 MW Lithuania offshore wind tender and established a joint company for its development. On the onshore wind front, we have completed the acquisition of two projects in Lithuania, with the total capacity up to 300 MW and have already started construction on sites. This wind farm in Kelmė, Lithuania, is the largest wind project being constructed in the Baltics.
On top of that, we signed the largest external corporate PPA to- date with Umicore Poland electric vehicle battery materials plant in Poland. It covers a substantial part of the expected electricity production of Silesia wind farm II , which is currently under construction, with total and expected total capacity of 137 MW. The conclusion of this PPA is the strategic milestone for us, supporting our commitment to providing green and flexible energy solutions and enhancing the group's ability to deliver a consistent supply of clean, energy to partners in our home countries. In our solar portfolio, we made a final investment decision for 239 MW solar portfolio in Latvia, with an expected total investment of around EUR 179 million. As mentioned previously, there is no other solar projects in the Baltics of such size.
In addition, we further increased the capacity of secured grid connections to up to 620 MW. Finally, as planned, for this heating season, we started generation and supply of heat by Vilnius CHP biomass unit in Lithuania. This, in turn, has led to the key highlights of portfolio development in absolute terms. Since the beginning of the year, our portfolio has grown by 1.2 GW, from 5.1 GW to 6.3 GW. Of this, 1.3 GW has been converted to secured capacity, bringing the total to 2.9 GW as of today. In terms of our portfolio split, there we have been no significant changes, as largest share of 6.3 GW is onshore wind and solar projects, and most projects being developed in Lithuania and Latvia.
Next, I would like to highlight the progress the group has made on the sustainability front. Continue our decarbonization initiatives to minimize group's environmental impact. During the reporting period, the group's total greenhouse gas emissions decreased by 3.9% compared to the previous year. This was mainly due to a 20.1% decrease in Scope 1 emissions, driven by the improved natural gas accounting measures and the lower retail natural gas sales. In addition, the green share of our generation remains stable at 89% compared to the prior year. The group's net electricity generation increased by 2.5%, driven by Mažeikiai onshore wind farm in Lithuania, which became fully- operational in August. Turning to occupational health and safety, this remains to be one of our top priorities this year.
We continue to take proactive measures to improve the health and safety culture, both inside and outside our group. This is reflected in an improvement of total recordable injury rate of our employees to 0.89, as the number of safety incidents fell from 11 to five. Finally, we are pleased to share that our efforts have, again, resulted in high ESG ratings from international ESG rating agencies, placing the group among the top utility peers globally. ISS ESG has awarded the group a rating of B - and Prime status. Last year, the group was rated C. The group's ESG ratings have also been updated by other global rating agencies, with MSCI and EcoVadis maintaining the same high ratings as last year. And Sustainalytics changed the group's ESG rating to 25.2.
With that, I will conclude the strategic overview for now and hand over to Jonas to continue with the financials.
Thank you, Darius, and hello, everyone. Let me start with the financial highlights for the first nine months of 2023. Our adjusted EBITDA amounted to EUR 345.3 million and was 3.3% lower than a year ago, driven by lower- captured electricity prices. This in turn led to a 4.6% decrease in the adjusted net profits to EUR 193 million. Despite the slight decline, profitability figures remained at historically- high levels. This year, we have substantially increased our investments, reflecting our progress in developing green generation portfolio. Compared to last year, the group's investments increased by 72.3% and reached a record- high level of EUR 633.7 million in the first nine months of the year.
As a result, our adjusted return on capital employed decreased by 2.2 percentage points year-over-year to 8.6%, due to the time lag between the deployment of capital and investments and subsequent realization of returns. Despite such a high investment level, our leverage metrics remain strong, with FFO to net debt remaining at solid 39.6% and net debt to adjusted EBITDA at 2.4 x. The group's balance sheet strength is also reflected by S&P's affirmation of BBB+ credit rating with stable outlook, which is in line with our commitment to maintain a solid investment-grade credit rating of BBB or above. Finally, in line with our dividend policy for the first six months of 2023, we paid a dividend of EUR 0.643 per share, 3% higher than last year.
Now let's look at our main numbers in more detail. Adjusted EBITDA, as mentioned before, has decreased by 3.3%, but remained at the historically- high levels. Reasons for the decline were as follows: In Green Generation, where adjusted EBITDA was EUR 31.4 million lower, the main driver were lower- captured electricity prices and significant expansion, which led to higher operating expenses. In Customers and Solutions, where Adjusted EBITDA was EUR 14.4 million lower, the main driver was lower volume supplied, mainly as a result of overall lower consumption levels this year. These two segments, Green Generation and Customers and Solutions, were the main drivers behind adjusted EBITDA decrease, as was expected in the beginning of the year.
In terms of other segments, Reserve Capacities recorded an increase of EUR 20.6 million, mainly as a result of often utilized option to earn additional return in the market on top of the regulated return by fixing a positive forward Clean Spark Spread. And Networks increased by EUR 12 million, mainly due to higher RAB. Next, let's deep dive into the financial results of each of the segments. Starting with Green Generation, it remains the largest contributor to the group's adjusted EBITDA, accounting for 44.7% of the total. This year, however, it has declined by 16.9% from EUR 185.8 million to EUR 154.4 million.
The main drivers behind that were, firstly, lower captured electricity prices due to a decrease in overall electricity market prices, and especially in Pomerania wind farm, where last year we sold around 80% of electricity on high market prices, while this year we are selling 100% under lower CfD subsidy scheme as a result of price cap introduced in Poland. Another factor was the increase in OpEx as we continued to expand and build our renewables organization and develop more and more projects. Moving on to Networks. adjusted EBITDA of the segment grew by 10.3% and amounted to EUR 128.7 million. The increase was mainly due to a higher RAB value, which increased by 6% from EUR 1.3 billion to EUR 1.4 billion .
Also, worth to mention that tariffs for the next year have been approved, and we know that RAB for 2024 will be increasing by 11% to EUR 1.6 billion, while WACC has been increased to above 5%. Reserve capacity adjusted EBITDA increased by EUR 20.6 million and reached EUR 38.3 million. No news here. The increase was mainly a result of utilized option to earn additional return in the market on top of the regulated return in Q1 this year. Lastly, our year-over-year Customers and Solutions adjusted EBITDA decreased by EUR 14.4 million, and it reached EUR 20.9 million. The overall result was driven by a decline in the natural gas result, driven by lower supply volumes as a result of lower consumption. Next, investment.
This year so far, we have invested EUR 633.7 million, which is the highest level ever, and 72.3% higher than last year during the same period. The main drivers of this increase were the following: firstly, more than a two-fold increase in green generation investments, mainly, in new wind farm projects in Lithuania and Poland, but also in Vilnius CHP biomass unit and Kruonis Pumped Storage expansion project. It is worth highlighting that investments made in green generation accounted for 57% of the group's total investment. Secondly, higher investment in electricity network expansion, driven by new connection points and higher contractor fees, as well as smart meter rollout. Turning to net working capital and free cash flow figures.
Lower energy market prices led to lower inventory value and, in turn, a reduction in net working capital, which has decreased by 51% since the end of 2022 and reached EUR 216.8 million at the end of September this year. However, despite the improvement in net working capital figure, our free cash flow remained negative at EUR 115.3 million in the first nine months of 2023, driven by our sizable investment program. Next, our leverage metrics. Since the end of 2022, our net debt increased by 12.9% and stood at EUR 1.1 billion at the end of the first nine months of 2023, mainly due to negative free cash flow influenced by high investments.
Despite the increase, the group's FFO to net debt stood at a solid level of 39.6%, remaining well- above the 23% threshold required by S&P for BBB+ credit rating. Net debt to adjusted EBITDA increased from 2.1x to 2.4 x and continues to be well- below the 5 x threshold of our strategic plan. Finally, our guidance for 2023. No changes here. As a result of group's performance in the first nine months of 2023, which was in line with our expectations, we reiterate our adjusted EBITDA guidance for the full year and expect it to be in the range of EUR 430 million-EUR 480 million. There are also no changes in the directional guidance of our segments. With that, I will hand back to Darius to conclude our earnings call.
Thank you, Jonas. Let me summarize the performance of Ignitis Group in the first nine months of this year, of this year. We made a significant progress in developing our renewables portfolio. Our green generation portfolio increased by 1.2 GW to 6.3 GW, while our secured capacity grew by 1.3 GW to 2.9 GW. Next, we are working on the largest onshore projects development in Baltics. The group started construction of the largest wind farm in Baltics, with capacity of 300 MW in Kelmė region, Lithuania. Also, we made a final investment decision for Latvian solar portfolio one, with total capacity of 239 MW, which is the largest solar portfolio in Baltics.
Finally, we signed the largest external corporate PPA to- date in Poland, for which electricity will be supplied by our Silesia wind farm II .
In addition, progress on sustainability is reflected in upgrade in the ISS ESG risk rating from C to -B , placing Ignitis Group in the second decile of global utility peers. Finally, on our financial highlights, we made a record- high investments amounting to EUR 633.7 million, mainly in Green Generation and Networks. Despite this, we maintain our strong balance sheet with a BBB+ credit rating affirmation from S&P. Lastly, as the result of the first nine months of 2023 results, being in line of our expectations, we maintain our adjusted EBITDA guidance for 2023, and expect it to be in the range of EUR 430 million-EUR 480 million. With that, I would like to thank you for staying with us, and we now are open for your questions.
This concludes the management presentation and opens the floor for a Q&A session. We will start with the first question received. It was reported that Vilnius CHP biomass unit is already supplying the heat to the city of Vilnius. Is electricity already produced in the biofuel unit two? If not, what are the reasons, and when is it planned to produce the first electricity?
As communicated, Vilnius CHP biomass unit in Lithuania started to generate and supply heat to Vilnius as planned for this heating season. Regarding electricity generation, we also generate electricity and supply it to the grid. However, it's important to understand that the power generation capacity depends on the heat production capacity. And both are synchronized, meaning that when the unit is not working, it heats at the full capacity. Generally, biomass unit is currently undergoing final testing procedures and expect to reach COD by 2024.
Our next question: There have been demands from politicians to change the dividend policy of Ignitis by allocating profits to reinvestment into the network sector. Are you going to change the dividend policy? Should we expect a suspension or reduction of dividend payments?
So, I mean, in short, our commitment to the existing group dividend policy is very strong, and we don't expect any changes to it. It is also worth highlighting that the comments were more related to the dividend policy of our Networks business, not the group.
Our next question: EUR 160 million historic. Is it possible to return regulatory differences through the tariff later than previously -planned? Are these regulatory differences already included in adjusted EBITDA and profit indicators? Or maybe after the start of repayment, the mentioned indicators will also decrease accordingly?
Yes. So first of all, to set some context, so EUR 160 million is a temporary regulatory difference related to 2016-2021 networks regulatory period. The amount was calculated and approved by the regulator back in 2021, as well as agreed repayment structure during 2032-2036. And yeah, and this year, the State Audit Department completed the audit of the energy sector, and one of the remarks was that there were no clear criteria how this 2032-2036 period was determined. So what we are doing right now is discussing with the regulator how to address this remark, and we plan to have an agreement by the end of this year.
In terms of adjusted EBITDA, all those... So since, since conceptually, we show adjusted EBITDA before, well, eliminating those temporary regulatory differences, so it, it will not have any impact on adjusted EBITDA, independently, on in which period those amounts are returned.
The following question: Polish solar portfolio two has already generated its first electricity. At the same time, it is expected to be delayed until 2024, quarter four, which would mean the loss of the entire season. What part, in megawatt, of this project is expected to be delayed?
Yes. So the Polish solar portfolio two is around 40 MW. And the part which is expected to be delayed is around 10 MW from the total amount. So the amounts are very insignificant, and generation of 10 MWh solar plant is not big compared to the overall portfolio.
The next question: Development of EV charging station. Do you see their usage is already growing? When could this project reach financial break-even point?
Yes. So, in terms of EV network, we need to understand that we are still in the initial stages of the both adoption of EVs and network development. So yes, we are seeing the usage constantly growing. But, break-even point is still a few years ahead of us.
The following question: Silesia first wind farm turbines are already complete, and Silesia second wind farm is more than half- built. When is the plan to start producing the first energy?
Yes. So the first energy for Silesia I should be relatively soon. Best case, this year, but in any case, early next year. And for Silesia II, we also expect to see the first generation next year. And yeah, so and both projects, in any case, will be completed by the end of the next year with full generation.
Our next question: the planned COD of Kelmė wind farm portfolio is in 2025. When is the first energy plan for this large project? More in 2025, in the first half or the second half?
Since it's a two-stage project, the first part will be launched a bit earlier than the second one. Usually for the project of similar type, you know, the first electricity, first power starts to be generated one year before the full completion. In the beginning of 2025, we can expect to see first generation, but the major amounts will come only towards the end of 2025.
One more question: Could you please disclose the price in the ten-year corporate PPA with Umicore in Poland?
Yeah. So as much as I would like to do so, we are bound by confidentiality agreement, and we can't disclose the price due to the contract conditions with Umicore.
Following question: What are your thoughts on the Ørsted offshore wind development project missteps in the U.S.? A nd how do you avoid that something similar does not happen with Ignitis large offshore mega projects in Lithuania and potential projects in Estonia and Latvia? What are your thoughts on large offshore projects versus smaller onshore projects?
Yeah. So, so in case of Ørsted, the situation was relatively straightforward, right? So, securing CapEx, well, securing the tariff before securing CapEx can lead you to similar situations. In our case, we have not made any commitments, neither on offtake side, nor on CapEx side. And we will try to align those as much as possible so that to avoid the similar situations which we're seeing in the sector. In terms of large offshore versus onshore projects, you know, in the offshore is where the main capacity lies and where more stable generation lies. So in the increasingly volatile generation environment, offshore is key component to the system stability.
Following question: What is Clean Spark option?
Clean Spark Spread is effectively the ratio between power prices, gas prices, and emission allowance prices. And when that spread is positive, we can launch our gas-fired units. So effectively it makes economic sense to generate when price of electricity exceeds the price of gas and emission allowances. So that's the short explanation.
Next question is: The largest shareholder of the group is the Ministry of Finance. What risks do you see in that, especially during periods of political elections? Do minority shareholders have the power to defend themselves against the imposition of a political agenda on the company?
Ignitis Group has very strong corporate governance framework with independent Supervisory Board, chaired by Independent Supervisory Chairman. Ministry of Finance is applying and was applying all the time best corporate governance practices, while executing shareholder duties by expectation letter. And I have to note that independently of political changes, the strategy of Ignitis Group is very well- aligned with the National Energy Independence Strategy. Therefore, we will not expect significant changes in policies and execution.
We have one more question. Hi there, and thank you for the presentation. I wonder, what could be investment range for 2024? Also, have you discussed about increased dividends more than in the stated dividend policy of 3%? One more question would be on geography of operations. Does Ignitis considers investment for Poland more than previously, as well as to start operations in other European countries?
Yes. So regarding the range of investments for 2024, we are not disclosing that as part of our guidance yet, so I can't comment on it. Can only refer you to our strategic plans, where we state the investment plans for the next four years. In terms of increase in dividends, I can, you know, repeat it once again. We are strongly -committed to our existing dividend policy, which stipulates a 3% annual dividend growth. Currently, we have no plans to increase the growth rate. And then the last bit, in terms of geography of operations, so our main focus is on Baltics and Poland. And we look at investment on a case-by-case basis.
So if there is an attractive investment in Poland, we look at it. If it's in Lithuania or Latvia, we also look at it. So I wouldn't say that we started to look more in Poland. We are looking at Poland consistently and constantly, as we did before. And regarding new markets, currently, there are no plans to enter other markets.
Next question: How is your average interest rates on your newest loans affected your average interest rates on your loans? What was the average interest on your loans last year, and what is it now?
Yes. So our current effective interest rate is 2.5%, while at the end of last year, it was 2.1%. So, the increase is not material because majority of our borrowing portfolio is with fixed interest rates.
We have one more question. On what electricity price is your EBITDA guidance for 2023 and 2026 based on? Could you provide sensitivity of EBITDA guidance to electricity price?
Yes. So regarding both 2023 and 2026, so we base our EBITDA guidance on forward prices, which we see at the time of publishing the report or the guidance. And in terms of 2023, since majority of our green generation portfolio is contracted, the market price does not have a significant impact, right? So if you would look at the numbers, 78% of our 2023 portfolio is fixed, and only 22 is exposed to electricity prices. For 2026, naturally, the sensitivity is bigger because lower part of portfolio is fixed for 2026.
The following question: Does Ignitis plan to take part in the next tender for offshore wind in Lithuania? Is it necessary with subsidies?
As announced earlier, Ignitis Group does not have currently plans to participate in this tender. Having said that, we have the plans to secure at least two wind parks, offshore wind parks, across three Baltic states. Currently, we are focusing our efforts towards Estonia seabed lease tenders.
As there are no further questions, we will now conclude our call. Thank you for joining us today. If you have any questions, please contact our IR team. Thank you, and enjoy the rest of your day.
Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.