This report outlines Federal Grid’s financial position and operating results as of 31 December 2015 and should be reviewed together with the Company’s financial statements for 2015, including the explanatory notes thereto, issued in accordance with the Russian Accounting Standards (RAS).
Federal Grid’s RAS-based financial statements for 2015 are available in Appendix 11 to the Annual Report
This report contains forward-looking statements regarding the financial position and results of operations of Federal Grid Company and its consolidated entities. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are statements of future expectations based on the management’s current views and assumptions that are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed in or implied by these forward-looking statements.
Forward-looking statements include, among other things, statements of possible market risks that may affect our business and statements of the management’s expectations, predictions, estimates, forecasts, plans and assumptions. Such forwardlooking statements can be identified by the use of conditional or forward-looking terminology such as “imply”, “anticipate”, “assume”, “may”, “estimate”, “expects”, “intend”, “could be”, “plan”, “goals”, “view”, “likely”, “project”, “will”, “strive”, “achieve”, “risks”, “tasks”, “should” or similar words and expressions.
There are a number of factors that could affect our future activities and cause actual results to differ materially from those contained in the forward-looking statements, including but not limited to: (а) environmental and financial risks; (b) change in demand for the Company’s products; (c) change in currency exchange rates; (d) risks associated with failure to find appropriate property and assets for acquisition and to succeed in negotiations and complete such transactions; (e) reserve evaluation; (f) loss of market share and industry competition; (g) economical and financial market conditions in various countries and regions; (h) political risks, delay or acceleration of project implementation, cost estimation; and (i) change in trade conditions.
WHAT ARE THE FACTORS THAT CONTRIBUTED TO THE COMPANY’S BEST FINANCIAL PERFORMANCE THIS REPORTING YEAR OVER THE LAST FOUR YEARS?
There are two key factors – increased revenue from technological connections and cost cutting measures. Both of them are continuation of actions launched by the Company’s management in 2014.
DO FINANCIAL INDICATORS ACHIEVED IN 2015 DEMONSTRATE ACTUAL IMPROVEMENT OF FEDERAL GRID’S OPERATING EFFICIENCY?
It is absolutely true. In the environment when the tariff increment is lower than the inflation rate for two consecutive years, the Company is demonstrating the growth of earnings. Such results could not be achieved without efficiency improvements. One of our priorities is cost cutting. Unit operational costs were reduced by 40% versus 2012, which is 2.5-fold above the target set in the strategy for the electric grid complex (15%). Irrespective of the large-scale investment programme currently being implemented and an increase in equipment to be maintained, we managed to reduce the headcount by 4% and considerably the cost of materials and services – by 8.8%. Moreover, in 2015 Federal Grid reduced management expenses (less depreciation and property tax) by 1.3% thanks to the reduction of administrative and management staff by 9% among other things.
DO YOU THINK FEDERAL GRID HAS SUFFICIENT FUNDS TO FINANCE ITS DEVELOPMENT PLANS FOR 2016?
We have sufficient funds. The Company’s investment programme is well-balanced as regards its sources of financing, including both tariff revenue and loans.
It is planned to obtain external financing of up to RUB10–15 billion for the 2016 investment programme, which amounts to RUB99 billion. Given the stable financial position of Federal Grid Company, various instruments of debt financing, including loans of the largest Russian banks under signed facility agreements and issue of bonds for direct public offering, are available for the Company. Moreover, we will continue our attempts to receive funds from the National Welfare Fund and other government sources. Decisions whether to use external financing will be taken in the light of minimisation of such financing costs and Company’s financial stability.
HOW CAN THE COUNTRY’S ECONOMIC ENVIRONMENT AFFECT fEDERAL GRID’S PERFORMANCE IN 2016?
There is no doubt that the growth of USD exchange rate and high inflation may impact Federal Grid’s financial performance. For this purpose, we are optimising our investment programme and implementing action plans to maintain liquidity and cut costs. I believe that such actions will help us to mitigate the negative impact of external factors.
Key Financial Performance Indicators, RUB million
|2011||2012||2013||2014||2015||Change 2015/2014||Change 2015/2014, %|
|Electricity transmission services||134,875||136,581||152,710||159,881||158,986||-895||-0.56%|
|Full cost, including *||85,390||108,213||124,783||132,459||134,938||2,480||1.87%|
|Electricity transmission services||84,417||107,202||123,526||130,965||133,535||2,570||1.96%|
|Other operations||973||1,011||1,257||1,494||1,403||- 91||-6.09%|
|Profit (loss) before tax||11,444||-14,270||-17,672||14,338||27,884||13,546||-94.48%|
|Deferred tax assets||46||-55||1,776||-816||-294||523||-64.01%|
|Deferred tax liabilities||-5,545||-8,736||-9,977||-8,367||-9,530||-1,164||-13.91%|
|Current profit tax||-8,389||-1,471||-||-||-70||-|
|Other similar mandatory payments||-3||-0.3||-5||- 18||-120||-102||558.42%|
|Profit tax adjustment for previous periods||- 21||-||- 20||-||-|
|Net profit (loss)||-2,468||-24,532||-25,898||5,137||17,870||12,733||-247.89%|
|* Including retrospective changes in indicators
** Other income includes income from participation in other entities and interest receivable.
*** Other expenses include interest payable.
**** Not including accruals and recovered provisions for bad debt, revaluation of assets and revenue from technological connections.
Federal Grid’s performance in 2015 demonstrates the improvement of its operating efficiency attributable to the growth of its earning and cost optimisation under tariff increase constrains.
Revenue, Full Cost and Net Profit, RUB million
Revenue Structure, RUB million
|Change 2015/2014, %|
|Revenue from electricity transmission services||134,875||136,581||152,710||159,881||158,986||-895||-0.6%|
|Revenue from technological connection services||2,127||1,077||986||7,002||12,397||5,395||77.1%|
|Revenue from other operations||1,135||1,178||1,656||2,058||1,883||- 175||-8.5%|
Revenue Federal Grid’s revenue in 2015 increased by 2.6% versus 2014, including the increment of RUB5.396 million from technological connection services due to completed connection of power plants and the regulator’s introduction of a technological connection fee that compensates the investment component of services rendered.
The revenue from electricity transmission services fell by RUB895 million, including because in 2015 direct consumers started paying for power transmission services based on actual capacity (previously payments were based on committed capacity).
Full cost Main factors that contributed to the full cost change in 2015 as compared with 2014 are as follows:
Cost of Services, RUB million
|Fixed asset depreciation||39,784||58,993||69,669||76,332||75,383||-949||-1.2%|
|Electric power and capacity||12,183||11,662||12,285||11,809||14,332||2,523||21.4%|
|Labour and social charges||15,836||18,103||20,244||20,698||20,574||-125||-0.6%|
|Repair and maintenance||5,291||5,446||5,464||3,940||2,933||-1,007||-25.6%|
|Raw and other materials||2,424||2,702||3,147||2,879||2,878||-1||0.0%|
|TOTAL, full cost||85,390||108,213||124,783||132,459||134,938||2,479||1.9%|
- Electric power/capacity cost increase by RUB2,523 million (21. 4%) mainly (RUB2,473 million) due to changes in the grid operating modes
- Property tax increase by RUB1,848 million (34.2%) that is explained by the phased elimination of property tax relief for transmission lines from January 1, 2013 in accordance with Federal Law “On Amendment of RF Tax Code Section II” No. 202-FZ dated 29 November 2012
- RUB1,007 million (25.6%) reduction in the scope and cost of repair and maintenance performed by contractors under the Company’s operating efficiency improvement programme
- Increase of power transit costs by RUB745 million (37. 3%) due to the RUB devaluation (power transit is performed via grids abroad) and respective adjustment of the transit tariff
- Reduction of depreciation costs by RUB949 million due to revision of useful life for fixed assets
- Reduction in labour costs and mandatory social charges, property insurance, rent and security costs as a part of the Company’s cost optimisation and operating efficiency improvement programme
Structure of actual revenue for maintaining the Company’s grids in 2015
Management expenses Main factors that contributed to the change in management expenses in 2015 as compared with 2014 are the following:
Management Expenses, RUB million
|Depreciation of tangible and intangible assets||994||1,248||1,175||1,668||1,832||23.3%||9,83%|
|Labour and insurance payments||2,451||2,555||2,685||2,470||2,559||32.6%||3,60%|
|TOTAL, management expenses||7,510||8,297||8,165||7,800||7,851||100%||0,6%|
|Management expenses without property tax and depreciation||6,485||6,861||6,819||6,081||5,999||76.4%||-1,3%|
- Increase in depreciation charges mostly due to registration of intangible assets
- Growth of labour costs including insurance payments due to the increase in marginal base subject to a higher tax rate (30%) from RUB624 thousand to RUB711 thousand as well as introduction of mandatory medical insurance charges on total payments (previously there were no charges on payments in excess of the set base)
- Reduction of other management expenses mostly related to the upkeep of property (lease, insurance, security, other)
Irrespective of high inflation rate in 2015 (15.5%), management expenses remain at the level of 2014 (variance is only 0.6%). Without property tax and depreciation charges there is a trend of management expenses reduction by 1.3% in 2015versus 2014.
Cost management programme To increase the efficiency of Federal Grid’s operations and optimise production and management costs and their structure, the Company developed a comprehensive Programme for Improving Efficiency of Operations approved as a part of the Federal Grid Business Plan for 2015–2019.According to the 2015 performance results, the Company fulfilled the operating efficiency improvement targets set for 2015:
- OPEX reduced by 40.1% as compared with 2012 (the aggregate OPEX reduction effect as a part of the Cost Management Programme reached RUB14,100 million)
- OPEX reduction against 2012 was more prominent than envisaged in the Strategy of the RF Electric Grid Complex Development pursuant to RF Government Directive No. 511-р dated 03.04.2013
- The Company’s earned net profit reached RUB17,870 billion.
For the purpose of RF Government Directive No. 2303p-P13 dated 16 April 2015 to reduce OPEX by 2–3% annually, the Board of Directors of Federal Grid approved the Methodology for Calculation and Evaluation of Key Performance Indicators for Federal Grid’s Senior Management and set the OPEX reduction KPI for 2015 at no less than 14.2% as compared to 2014. In 2015, the Company managed to reduce OPEX by 24% as against 2014.
|Expenses included into the basis of the Cost Management Programme (in 2012 prices), RUB million||37,534||36,708||32,343||26,854|
|Number of equipment to be maintained, c.u.‘000*||1,139.5||1,227.4||1,254.8||1,361.2|
|C.u. increment vs 2012 (including the OPEX elasticity coefficient based on the number of assets, К = 0.75)||-||1.058||1.076||1.146|
|Adjusted fixed costs per 1 c.u. (in 2012 prices), RUB‘000 / c.u.||32.9||29.9||25.8||19.7|
|Unit Opex reduction vs 2012, %||-||-9.2%||-21.7%||-40.1%|
|Adjusted fixed costs (covering the c.u./consumer price index increase), RUB million||37,534||34,700||30,062||23,434|
|* Corresponds to parameters approved by the Board of Directors for the 2015–2019 Business Plan based on old standards.|
|OPEX (administered), RUB million, including:||42,135||37,426|
|Labour costs, RUB million||18,564||18,237|
|Other OPEX (administered), RUB million||23,571||19,188|
|Adjusted OPEX, RUB million||39,086||33,773|
|Consumer price index (plan)||-||1.067|
|Consumer price index (actuals)||1.078||1.155|
|Conventional units, c.u. 000’ (*)||1,224.3||1,296.4|
|Unit OPEX in the reporting year prices, RUB ‘000 / c.u.||34.4||28.9|
|Adjusted unit OPEX, RUB ‘000 / c.u.||-||26.1|
|OPEX reduction benefit||-||-24%|
|* The c.u. estimate is based on new standards for electricity and gas.|
The Company was able to reach the above results thanks to the following:
- Reduction in the cost of purchases
- Reduction in costs under long-term agreements (supply of transformer oil, protective clothing, inputs; maintenance services for compressors; clean-up of transmission line right-of-way; ESS maintenance and repair)
- Reduction in the value of security contracts
- Reduction in the value of IT services contracts (signing of amendments to reduce the cost but preserve the same scope of services)
- Headcount optimisation
Other income and expenses Other income in 2015 increased by RUB9,307 million versus 2014. Main factors thereto: booking of gains from the revaluation of JSC INTER RAO stock (the loss from stock revaluation was booked in 2014) and fixed assets, and increase in earnings in the form of interest from placement of free funds at deposits. Other expenses fell by RUB2,444 million irrespective of the growth of interest payable and provisions for bad debt and investment impairment because the number of promissory notes purchase/repayment transactions reduced and the loss from PJSC INTER RAO stock revaluation was booked in 2014.
EBITDA Adjusted earnings before interest, profit tax, depreciation and amortisation (EBITDA) increased by RUB4,064 million (4.1%) as compared with the same period of 2014 and reached RUB103,667 million.
Net profit (loss) In 2015, Federal Grid earned net profit of RUB17,870 million