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Social responsibility and corporate sustainability report 2015
RU

Managing Economic Development

Operation in Volatile Economic and Market Conditions

Based on the near-term economic outlook Federal Grid Company expects the restrictive tariff regulation policy to proceed with the transfer to the “inflation minus” principle in setting grid tariffs. In such conditions the reduction of operating and investment costs is one of the main priorities of Federal Grid. However, the cost reduction should not have a negative impact on reliability and entail cost increase in future.

With the focus on cost reduction, the Company shall select critically investment projects for grid modernisation and development. Some projects of national importance may be implemented only with the use of cheap sources of financing in the context of cost reduction and restrictive tariff regulation policy. Therefore, it is necessary to avoid long-term debt at market rates and apply for government support.

Due to stagnating services and restrictive tariff policy even in the conditions of investment programme curtailment it becomes more difficult for the Company to repay debt, cover other mandatory expenses and generate income for shareholders. It is necessary to agree an acceptable threshold for the return on invested capital (ROIC) simultaneously creating internal conditions for this index increase.

Federal Grid’s innovative development should focus on the selection of most advanced and currently relevant areas. Focus areas of innovative development are listed in the Innovative Development Programme for Federal Grid Company and include the design of substations with highly automated process controls (“digital substation”), digital design, reliability/assets management and energy saving.

Grid facilities are still underloaded, which is a result of structural changes in electricity consumption reflecting the UNPG planning principles and reliability assurance methods previously formed over decades. The loading factor is still far below the loading factor of comparable foreign companies.

Under restrictive tariff policy, it is extremely important to resolve the issue of recovery of technological connection expenses. Technological connection costs reached almost RUB130 billion in 2010–2014, while Federal Grid’s revenue gained from technological connection was only RUB12 billion. This problem was partially resolved in 2015 by imposing obligations on nuclear and hydropower generation facitilies to pay for their technological connection to power grids; however, the requirement to pay on time for technological connection services was not formalised, thus, threatening the Company’s financial standing.

Overall, economic environment predetermined both rapid growth of non-payments of some of Company’s clients and considerable restriction of Company’s financing of its investment programme by borrowings.

In 2015, certain actions targeted to resolve some of the above issues were implemented.

The investement focus area: construction-in-progress assets were audited, as a result the construction of some facilities was carried forward or terminated; targeted programmes “Fixed Assets Renovation Programme”, “Facilities providing reliable electricity supply to the 2018 FIFA World Football Cup”, “Actions ensuring reliable operation of the UES of Russia working separately from the Baltic States’ electricty grids”, etc. were adopted.

In the operational focus area, some changes were made in the organisational and staff structure of Federal Grid’s Executive Office and its branches (interconnected power systems and their enterprises) to improve the efficiency of Company’s operations. Standard organisational charts and guidelines for formation of organisational charts for branches were developed and approved. The Company continues optimising its expenditure. Based the comparison analysis of the costs of interconnected power systems and their enterprises in 2015, the cost optimisation potential was preliminary assessed and an action plan to reduce costs in 2016 is being developed. The Company expects that the reduction of unit operating costs will exceed the target (23%).

In the import substitution area the rules for implementation of the Federal Grid Company’s Programme for Import Substitution of Equipment, Technologies, Materials and Systems for the period of 2015–2019 was adopted. The Methods for Assessment of Electrical Equipment Manufacture Localisation in the Russian Federation had been adopted earlier.

To improve relations with clients and to increase the transparency of Company’s operations, the Council of Federal Grid’s Consumers was established in 2015. The Consumer Council is a collective expert panel on Company’s operations representing the interests of all groups of consumers and public associations, and such capacity it helps to create a public control institution. G4-DMA

Economic Performance G4-EC1

Parameter Total in 2015, RUB thousand
Economic value generated  
Revenue 183,271,075
Economic value distributed 83,294,159
Operating costs 41,370,626
Wages and salaries, other payments and benefits for personnel 19,768,400
Payments to equity contributors 9,748,336
Payments to the state budget 12,327,332
Community investments 79,464
Economic value retained 99,976,916

Investment Activities

Main goals of investment activities:

  • maintain the reliable operation of the Unified Energy System to assure uninterrupted electricity supply to consumers;
  • supply electricity to the facilities of national importance (actions to ensure uninterrupted electricity supply in the conditions of separate functioning of the Unified Energy System of Russia and Energy Systems of the Baltic States and to compensate the reduction in the transfer capacity of interconnections of the IPS of Center and the IPS of the Northwest and changes in operating modes of the BRELL (Belarus – Russia – Estonia – Latvia – Lithuania) energy ring, ESPO pipeline, development of the electric grid infrastructure in Eastern Siberia and Far East);
  • ensure uninterrupted electricity supply in the conditions of separate functioning of the Unified Energy System of Russia and the Integrated Power System of Ukraine;
  • ensure high quality of electricity transmission/consumer connection services and provide access to electric grids;
  • align in time the development programmes for generators and distribution grids;
  • improve the efficiency of backbone electric grids through cost reduction and energy efficiency programmes;
  • create an efficient management system for UNEG operations with the view to improve the monitoring of grid facilities.

The financing under the approved adjustment of Federal Grid’s Investment Programme for 2015 amounts to RUB102 billion.

Resolution No. 979 of the RF Ministry of Energy dated 18 December 2015 approved the adjustment of main parameters of Federal Grid’s Investment Programme for the period of 2015–2019 approved by the RF Ministry of Energy.

The adjustment of the 2015 Investment Programme addresses a set of measures targeted to improve investment efficiency as required by the RF Ministry of Energy in the following areas:

  • procurement, including the increase in the share of open tender-based purchases, development of the transparent process for tender winner selection, planning of bid value, centralised procurement of standard work and materials, promotion of the development of domestic producers and small/ medium businesses;
  • review of cost estimates;
  • design and replication of best design solutions based on standard process approach, including review and and selection of the most appropriate design solutions minimising construction and operating costs and meeting all technical requirements;
  • reduction of management costs, including automation and optimisation of project management structure.

Investment Funding, RUB billion

2011 2012 2013 2014 2015
184,7 179,9 149,7 90,9 85,9

In 2015, the investment programme was funded solely by Federal Grid without utilising funds from the federal budget.

The 2015 Investment Programme adjustement envisages the implementation of 60 new projects (including 42 technical connection projects and 10 reconstruction of fixed assets) as compared to the Federal Grid’s investment programmes approved eairlier.

The financing under the approved adjustment of Federal Grid’s Investment Programme for 2015 amounts to

102
RUB billion.

Investment Programme for 2016–2020 G4-EU10

The financing of Federal Grid’s Investment Programme for 2016–2020 amounts to RUB471,116.38 million.

The financial plan was formed in the conditions of tariff constrains and more expensive borrowings in 2015–2016 exceeding the set internal rate of return.

The RF Ministry of Energy’s Order No. 980 dated 18 December 2015 approved Federal Grid’s Investment Programme for the period of 2016–2020.

The tariff is constrained by inflation rate and social and economic projections; while the assets commissioned in 2014 were not included into the tariff and balance solutions; therefore, tariff and balance solutions cannot compensate growing depreciation costs of the Company.

Federal Grid as a “Too Big to Fail” company has to be financially sound and cost efficient that means unconditional growth of Company’s profit in the long-term perspective. Consequently, under tariff constrains the cost increase should be reduced even more:

  • OPEX should not grow at a higher rate than tariffs (the target is to reduce OPEX by 2–3% annually);
  • targeted financing of the Investment Programme should not exceed depreciation costs, and for this purpose it is necessary to:
    — reduce unit CAPEX;
    — limit the investment programme and simultaneously retain the reliability and implement macroprojects in a timely manner;
    — reduce borrowings with the view to decrease the aggregate interest down to 20% of EBITDA, which is approximately equal to Debt/EBITDA 2.0.

Macroprojects to be financed with the involvement of the National Welfare Fund and consumers

Development of Electric Grid Infrastructure nearby BAM and TransSib

Under this project, it is planned to construct and upgrade the UNEG electric grid infrastructure in Siberian and Far- East Federal Districts. Grid infrastructure facilities to be constructed and modernised are of key importance for functioning of the railways and large industrial enterprises in the region. In total, RUB128.33 billion should be invested into construction and modernisation of 21 UNEG facilities to cover projected loads of BAM and Transsib G4-EC4

In 2015, Federal Grid’s proposal to implement the project in three stages from 2016 to 2020 was approved.

To ensure financing of the project implementation, an application has been filed with the National Welfare Fund to raise funds in the amount of RUB36.6 billion on a repayable basis. As at the date of the Report, the above application is under consideration in the federal executive authorities.

The second and third stages of the project will be financed by Company’s own funds.

New Facilities

The draft investment programme for 2016–2020 as compared with earlier approved investment programmes of Federal Grid Company contains 188 new projects, 25 of them relate to technological connection and 156 are components of Federal Grid’s Fixed Assets Renovation Programme.

In general, the investment programme for 2016–2020 was optimised to address the need of improving the reliability of the bulk electric grid with the view to ensure continuous electricity supply, complete electric grid facilities, which construction was started before, and be able to finance the implementation of new investment projects by using all sources of funding.

The implementation of the investment programme will resolve key issues of the UNEG maintenance, including tasks of national importance to assure the continuous operation of the most important facilities and electricity supply to socially significant facilities.

Further details on the on-going UNEG development projects are available in section 4. Specific Sustainable Development Activities > Ensuring Reliable and Uninterrupted Operation of UNEG.

Tax Payments

Tax Payments and Extra-Budgetary Contributions of Federal Grid Company in 2015, RUB thousand

No. Tax (extra-budgetary contribution) Taxes remitted, RUB thousand Tax, RUB thousand Penalties and fines, RUB thousand
  Federal taxes and charges      
1 VAT 11,927,721 11,828,286 99,435
2 Personal income tax 2,524,711 2,524,709 2
3 Profit tax 169,707 169,707  
4 Tax on foreign source income 5,193 5,193  
3 Water tax 331 331  
6 National duty 64,581 64,581  
  Regional taxes 0    
7 Property tax 6,802,280 6,802,273 7
8 Transport tax 32,139 32,130 9
  Local taxes and charges 0    
9 Tax on land 55,170 55,107 63
10 Other 6,205 6,205  
11 Extra-budgetary funds, total, including, 0    
12 Pension Fund of Russia 3,425,130 3,423,282 1,848
13 Social Insurance Fund 185,694 185,672 22
14 Federal Compulsory Medical Insurance Fund 894,204 893,898 306
15 Social Insurance Fund from Occupational Accidents 70,707 70,694 13
  TOTAL 26,163,772 26,062,068 101,705

Technological Connection

Federal Grid Company provides electricity transmission via backbone grids and renders services for technological connection to its grids. Electricity transmission through electric grids refers to the activities of a natural monopoly.

The Company’s projection on the decrease of physical volume of paid services published in the 2014 Annual Report proved true: in 2015 the volume of paid capacity was 87.9 GW, which is three times lower than that of the previous year (2014). The capacity reduction in 2015 is mostly caused not by demand decline but by the transfer to calculation of the volume of grid services based on the average capacity. The optimisation of consumption modes by consumers and their authorised use of distributed sources of generation also hinder the growth of Company’s network services.

Capacity paid for by Federal Grid’s customers in 2011–2015, GW

Further details are available in the section “Market Positions and the Company’s Contribution to the Development of UES” of the 2014 CSR Report, page 29.

Recent trends in physical volume of technological connection (both for consumers and generators) are not clear-cut. They mostly depend on investment decisions of consumers and electricity generators.

Physical volume of technological connection services1 in 2011–2015, MW

Number of Federal Grid’s Contracts for Electricity Transmission via UNEG, including the 2015–2020 Forecast2.

Given the estimates of electricity consumption, export and import and factors contributing to electricity demand reduction, first of all, thanks to energy conservation measures, the Company does not expect considerable growth of paid grid services. Russia’s UES services will grow due to its expansion into the integrated power systems (IPS) of South and East (integration with Western and Central Energy Districts of the Republic of Sakha).

Number of technological connection contracts completed in 2015

Number of contracts Maximum capacity increment, MW
245 8,185.29

Technological connection plan for 2016

Number of contracts Maximum capacity increment, MW
304 14,043.37

Customer Focus G4-PR5

Since 2009, Federal Grid Company has been conducting annual surveys of its customers’ satisfaction regarding their awareness of the stages of technological connection to Company’s electrical grids, opportunity to get connected to feeding centres (available transformer capacity for technological connection) as well as rules and regulations governing this activity, ability to calculate technological connection fees on their own and monitor the status of their requests. This survey helps to find and eliminate bottlenecks. G4-DMA

According to the above trends, the major difference in scoring “importance” and “satisfaction” was in the categories “Transparency of preliminary estimates” and “Information quality”.

Improvement of these areas is the key priority of 2016.

Further details on client and consumer engagement are available in section 3. Governance for Sustainable Development Stakeholders and Stakeholder Engagement.

Customer Satisfaction Trends in 2013–2015

1 maximum capacity under technological connection contracts.
2 The variance of data for some years from the 2014 CSR Report data is caused by contractual data updates and finalisation of the forecast for future periods.

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