Special report: Economics and Finance

Yuri Shevelev, Deputy General Director for Economics and Finance reported 2012 financial results in an exclusive interview.

Good afternoon, Yuri Petrovich! We are discussing the Company’s 2012 financial and economic results. Our first question is what are the Company’s achievements?

– The Company’s revenues decreased by RUR 3 237 mln. (10%) on 2011 and totaled RUR 51 335 mln. Our prime cost decreased by RUR 706 mln. (1.4%), in comparison to the previous year, and equaled RUR 49 358 mln. Gross profit decreased by RUR 2 531 mln. and reached RUR 1 977 mln. Pre-tax profit totaled RUR 783 mln. (- RUR 2 257 mln. on 2011). Therefore, net profit in 2012 totaled RUR 626 mln. (- RUR 1 922 mln. on 2011), including profit from connection – RUR 914 mln., loss from operating activities – RUR 288 mln.

Item, RUR thous.201220112010
Revenues51,334,97854,571,74649,783,796
Prime cost49,357,68050,063,73144,842,725
Gross profit1,977,2984,508,0154,841,072
Business expenses000
Operating profit1,977,2984,508,0154,841,072
Interest receivable49,52724,27615,715
Interest payable487,901240,650391,864
Revenues from other companies251,708291,161118,784
Other revenues11,784,6885,556,8835,778,541
Other expenses12,791,8557,099,8698,071,661
Pre-tax profit783,4653,039,8162,390,587
Income tax and other payments157,651491,766705,814
Net profit625,8142,548,0501,684,773
- Operating activities-288,1361,602,143458,478
- Connection913,950945,9071,223,295

Transmission revenues contribute most to the revenue structure of the Company. As of 2012 these revenue gains reached RUR 49 691 mln. comprising 97% of the revenues (-6.0% on 2011). In absolute terms this increase totaled RUR 3 175 mln. The revenues decreased due to the reduction of productive supply caused by the transfer of SUAL BAZ, Rusnenergosbyt, Rusenergoresurs to FSK since 01.01.2012. Connection revenues as of 2012 totaled RUR 1 268 mln., contributing 2.5% to overall revenues (-4.5% on 2011). Other revenues totaled RUR 375 mln., contributing 0.73% to the overall revenues (-0,7% on 2011).

Revenues201220112010
Overall revenuesRUR thous.%RUR thous.%RUR thous.%
Transmission51,334,97810054,571,74610049,783,796100
Connection49,691,27696.8052,866,14496.8747,763,29195.94
Other revenues from1,268,3602.471,327,6172.431,685,7273.39
main activities371,7420.72373,0120.68329,1170.66
Non-core revenues3,6000.014,9740.015,6610.01
Expenses201220112010
RUR thous.%RUR thous.%RUR thous.%
Overall expenses49,357,68010050,063,73110044,842,725100
Purchased energy for loss compensation7,918,83516.08,253,11816.510,764,31224.0
Payments to OAO “FSK UES”13,397,49027.113,296,28626.610,938,48424.4
Payments to other distributive companies12,867,88226.114,192,64028.310,512,17423.4
Wages and other social benefits6,833,55413.86,245,41412.55,221,32111.6
Depreciation and amortization3,196,7086.52,640,3485.32,341,9575.2
Taxes and dues141,9590.3115,4330.2112,3750.3
Other expenses5,001,25310.15,320,49210.64,952,10211.1
For information: Repair expenses1,364,4602.81,296,6712.61,228,5742.7

Earlier you have said that the prime cost exceeded RUR 49 bln. What is included into the item?

– The prime cost includes various charges, for example, expenses on purchased energy for loss compensation. In 2012 they totaled RUR 7 919 mln. (16% of overall expenses). In absolute terms the decrease totaled RUR 334 mln. and was due to the decrease of free non-regulated price as well as decrease of real losses as a result of our energy efficiency program. Besides, the prime cost includes payments to FSK UES that reached RUR 13 397 mln. (27.1%). In absolute terms the increase totaled RUR 101 mln. and was caused by the growth of the FSK tariff. The prime cost also comprises payments to other distributive companies that equaled RUR 12 868 mln. (26.1%). In comparison to 2011 the decrease totaled RUR 1 325 mln. and was due to the reduction of energy transmission tariffs. Wages and other social benefits in 2012 totaled RUR 6 833 mln. (13.8% of overall expenses, +9% on 2011). The key reason for the growth is transition to non-contracted transportation services since 01.09.2012. Depreciation and amortization increased by RUR 556 mln. on 2011 due to the growth of fixed assets value as a result of our investment program.

What are the Company’s plans on net profit distribution?

– According to the Charter of the Company the final resolution on profit distribution is adopted by the General Shareholder Meeting. A considerable share of net profit equaling RUR 438 022 thous. is planned for distribution on enterprise development. Funds totaling RUR 156 501 thous. shall be proposed as 2012 dividends. The reserve fund, according to our plans, will obtain RUR 31 291 thous.

As of 2012As of 2011As of 2010
Net profit625,8142,548,0501,684,773
Reserve fund31,291127,40384,239
Dividends156,501244,805244,805
Enterprise development438,0222,175,8421,355,729
Dividends/Profit25.0%9.6%14.5%
Dividend per shareRUR 0,00179RUR 0,0028RUR 0,0028
We plan to spend over RUR 156 mln. for 2012 dividend payout

Well, we have sorted out the revenues and expense structure. What about receivables of the Company and what enterprises are your main debtors?

– Overall receivables at the beginning of 2012 equaled RUR 5 400.1 mln., but at the end of 2012 it decreased down to RUR 4 115.4 mln. Main debtors in terms of transmission are Sverdlovenergosbyt (RUR 788.6 mln.), Chelyabenergosbyt (RUR 520.7 mln.), Perm Energy Supply Company (RUR 329.5 mln.), Magnitogorsk Energy Company (RUR 253.9 mln.) and UAZ SUAL (RUR 116.1 mln.). In terms of connection main debtors are South Urals Corporation of Residential Construction and Mortgage (RUR 59.3 mln.), Technological and Agricultural Mechanisms and Equipment (RUR 10.7 mln.), Domostroitelnaya Kompaniya #1 (RUR 7.4 mln.) and Prospekt (RUR 6.9 mln.). In terms of other services main debtors are Mobifon (RUR 10.4 mln.) and Sverdlovenergosbyt (RUR 7.0 mln.). Besides, as of 31.12.2012 we formed a bad debt reserve equaling RUR 3 717.9 mln., including doubtful receivables - RUR 3 717.7 mln. (in balance sheet shown as decrease of receivables) and doubtful advances given to acquire main assets – RUR 0.17 mln. (in balance sheet shown in non-current assets as decrease of advance debts). We work closely with contractors on reconciliation (both pre-trial cooperation and litigation). We also have written off unreal receivables equaling RUR 3.55 mln. during 2012.

How can you characterize payables of the Company??

– In comparison to 2011 payables decreased by RUR 30.2 mln. and as of 31.12.2012 totaled RUR 5 851.1 mln. The payables structure underwent the following changes: debt on item “Suppliers and contractors” decreased by RUR 584.4 mln. due to the reduction of debt to construction companies (RUR 111.73 mln.), repair contractors (RUR 40.0 mln.) and suppliers in terms of connection (RUR 123.24 mln.). Debt on item “Advances received” grew by RUR 387.5 mln., 73% of debt being connection advances. There was also an increase on item “Debt to personnel” (+RUR 206.4 mln.). Debt on tax and dues decreased by RUR 65.2 mln. The debt on two latter items is current. We have no overdue payables as of 2012.

Item201220112010
Receivables (line 1230), including4,115,4125,400,1076,228,109
- Receivables with payments within over 12 months since the reported period (line 1231)92,02776,564278,410
- Receivables with payments within 12 months since the reported period (line 1232)4,023,3855,323,5435,949,699
Payables (line 1520)5,851,1375,881,3626,541,165
Indicator31.12.201031.12.201131.12.2012(2012/2011)
Net assets, RUR thous.28,996,13831,290,24731,667,063+376,816
Debt/Equity , %49.1951.0759.06+7.99
Long-term debt/ Long-term debt and Equity, %20.6920.9126.28+5.37
Debt coverage, %9598122+24
Profitability indicators
ROA (%)3.785.401.25-4.15
ROE (%)5.648.161.98-6.18
Financial stability indicators
Equity/Assets0.670.660.63-0.03
Equity/Debt2.051.971.70-0.27
Liquidity indicators
Current liquidity ratio1.231.000.95-0.05
Quick liquidity ratio1.060.840.80-0.04
Debt
Debt, RUR thous.5,537,6336,064,5209,131,280+3,066,760
Net debt, RUR thous.4,365,5725,341,8347,621,133+2,279,299
Debt/EBITDA1.11.022.04+ 1.02
Debt/Equity0.190.190.29+0.10
For information: EBITDA5,124,4035,920,8144,468,074-1,452,740
The Company is able to discharge its liabilities in full without losing its financial stability

How can you characterize the Company’s financial status?

– The Company is able to discharge its liabilities in full without losing its financial stability. We have a low risk of solvency loss in case debt grows in comparison to the current figures. Financial indicators correspond with normative values of key financial ratios. As of 2012 Debt/Equity ratio increased by 8% on 2011 due to increased long-term loans and borrowings attracted to finance the investment program. Debt coverage ratio demonstrates current solvency of the Company (122%). Equity/Assets ratio is very high and demonstrates the sufficiency of internal resources. Debt/EBITDA is 2.04 (within generally accepted norm – up to 4). Liquidity ratios characterize the ability of the company to discharge short-term liabilities. Current liquidity ratio inconsiderably decreased on 2011 and is within the specified limits, quick liquidity ratio is within minimal value (0.8-1).

For several years in a row the Company’s investment policy is very positive. From year to year you increase your investments. How about the Company’s credit portfolio and its interest rate?

Terms of liabilities31.12.201031.12.201131.12.2012(2012/2011)
Short-term loans and borrowings-219--219
- Including bonds-219--219
Long-term loans and borrowings5,537,6336,030,9289,071,231+3,040,303
- Including bonds219--
Debt on interest payable233,37360,049
TOTAL5,537,6356,064,5209,131,280+ 3,066,760

– As of the reported period long-term debt increased by 33.5% (RUR 3 040.3 mln.) and totaled as of 31.12.2012 RUR 9 071.2 mln. This growth is due to loans and borrowings for our investment program. In 2011 our bond issue became a short-term one and totaled RUR 0.219 mln. In 2012 we discharged all liabilities on our bonds. As of the end of 2012 our credit portfolio consists only of long-term loans and borrowings (over year).

In 2012, after credit tenders, we concluded 7 contracts worth RUR 3 990 mln. to finance our investment program. Our major creditor banks are Urals Bank of Sberbank of Russia and Gazprombank (Ekaterinburg branch). On the whole, during 2012 the situation on credit markets was stable. Interest rate on borrowings have not changed, newly concluded contracts stipulated interest rate at 10.5-11.0% per annum. In this respect as of 31.12.2012 average interest rate on the Company’s credit portfolio totaled 8.5% per annum, whereas as of the end of 2011 it was 7.84% per annum. In 2012 funds were raised at rates below the set limits of debt value parameters. The Company retained its debt position according to the set limits and solvency rating A.

What transmission tariffs have you obtained for 2012?

– 2012 tariffs were approved by the local regulators according to Government Decree #1178 dd. 29.12.2011 on the pricing in terms of regulated tariffs in energy sector. The decree set united boiler transmission tariffs for 1H 2012 at 2011 level, for 2H 2012 – up to 11% on the approved one. Dynamics of average tariffs in branch breakdown has a positive tendency. In 2010 the growth of average tariff was considerably high and totaled 39.6% on 2009. A considerable growth of average tariff in 2010 was due to recession (15.7% decrease of productive supply on 2009). At the same time the growth of required gross revenues was at 17.8%. In 2011 the growth of average transmission tariff (taking into account two tariffs) totaled 11.6%, RGR growing by 15.9% on 2010. In 2012 the average transmission tariff increased by 1.12% on 2011. The growth was due to the influence of productive supply in comparison to 2011. In 2012 Chelyabenergo’s energy balance sheet included a large last mile consumer (ChEMK) that was excluded from the balance sheet in 2011.

M.u.20102010/
2009
2011*2011/ 201020122012/
2011
Permenergo
Average transmission tariff, cop. kW/h76.130.1%81.26.7%84.23.7%
Sverdlovenergo
Average transmission tariff, cop. kW/h72.332.7%83.916.1%88.66.9%
Chelyabenergo
Average transmission tariff, cop. kW/h74.061.3%73.0-1.4%67.3-7.8%
IDGC of Urals
Productive supply Mln, kW/h69,339-15.7%69,6793.3%72,8794.6%
Overall RGR51,17917.8%55,58215.9%58,7845.8%
Average transmission tariff, cop. kW/h74.939.6%79.86.5%80.71.12%
Dynamics of average tariffs in branch breakdown has a positive tendency
RGR minus loss compensation for long-term regulation
period till 2017: RUR thous.
YearSverdlovenergoPermenergoChelyabenergoIDGC of Urals
201215,940,6258,010,41612,146,36736,097,407
201316,561,9149,113,32510,043,31235,718,550
201415,089,7639,342,32911,733,13036,165,222
201516,745,70310,709,83613,017,81540,473,354
201618,495,18912,272,01014,771,65645,538,854
201719,680,04413,968,56416,674,60650,323,214

What about connection tariffs?

– In the Sverdlovsk region since 01.01.2012 to 24.05.2012 we had the following connection fees:

Tariff groupGroup 1-2Group 3
Connected
capacity, kW
15-100 inclusive100-4500 inclusive15-100 inclusive100-4500 inclusive
Amount of
connection fee,
RUR/kW (excl. VAT)
3,7934,5851,9261,779

Since 25.05.2012 to 31.12.2012 we had the following fees:

Tariff groupGroup 1-2Group 3
Connected
capacity, kW
15-100
inclusive
(+ connected earlier)
100-1300
inclusive
(+ connected earlier)
15-100
inclusive
(+ connected earlier)
100-1300
inclusive
(+ connected earlier)
Amount of
connection fee,
RUR/kW (excl. VAT)
4,2085,1112,1011,992

These rates are used for applicants demanding third category of energy reliability supply. If an applicant demands second or first category of energy reliability supply, the amount of connection fee is determined according to the approved connection rates per each connection to a separate power source. Applicants are connected to a power source (with maximum capacity over 100 kW, taking into account the ones connected earlier) at open main substations in the Sverdlovsk region according to individual projects. In the Perm region since January 01, 2011 we have new connection fees (efficient till 01.01.2013).

Basic connection fee, RUR/kW (excl. VAT)
Voltage levelConnected capacityReliability category
III categoryII categoryI category
LV (0.4 kV)15 - 30 kW inclusive9,81212,75514,226
30 - 100 kW inclusive981212,75514,226
100 - 750 kW inclusive10,33813,43814,990
MV II (6-10 kV)Up to 100 kW inclusive9,60612,48713,928
100-750 kW inclusive9,00011,70013,050

To calculate the price of connection we use differentiation ratios depending on energy supply zones adding them to the basic connection fee:

Ratio
Perm Municipal Grids1,31
Central grids (Perm and Dobryanka districts)1,25
Central grids (other districts)0,60
Berezniki grids, Kungur grids, Ocher grids, North grids, Chaikovsky grids, Chusovoy grids0,60

In 2012 in the Chelyabinsk region we were guided by Decree #47/2 dd. 29.12.2011 that stipulated only rates for applicants up to 15 kW - RUR 550 (incl. VAT) per one connection. We set connection fees for all other applicants on the basis of individual calculations. In 2012 the present guidelines on the determination of connection fee were cancelled, new guidelines were approved by Decree #209-e/1 dd. 11.09.2012. According to the guidelines all branches obtained standardized rates and rates per 1 kW that came into force since 01.01.2013. These rates are approved for the regulatory period.

Thank you for a very informative interview!