Message from the Chairman of the Management Board — General Director

Dear shareholders, colleagues and partners,

The year of 2018 was another confident step forward for RusHydro as we registered record-high power generation and ensured financial growth, including through consistent cost optimization. In addition to bringing to completion several major investment projects, RusHydro drove home the need to build new and upgrade existing thermal power generation facilities in the Far East with guaranteed return on investment. We are also working towards establishing long-term tariff regulation in the Far Eastern Federal District that would take due account of energy companies’ economically justified expenses. Taken together, these initiatives represent a concerted effort on our part to boost the Company’s fundamental value for the benefit of all shareholders.

The Group’s power generation, including Boguchanskaya HPP, increased 2.8% y-o-y to reach an all-time peak of 144.3 bn kWh, while power output across Russia grew 1.6% y-o-y. Our strong operating performance was the result of effective management of hydropower operational regimes amid higher-than-usual water levels in rivers and the growing demand for electricity in the Far Eastern Federal District, which is almost entirely powered by RusHydro Group.

Shulginov

In 2018, RusHydro launched Vostochnaya CHPP in Vladivostok (the new capital of the Far Eastern Federal District) and the third hydropower unit at Ust-Srednekanskaya HPP in the Magadan Region. The Group also commissioned a unique wind power plant in the Arctic settlement of Tiksi in the Republic of Sakha (Yakutia) and completed the first stage of Anadyrskaya CHPP gasification in Chukotka.

As part of its HPP Comprehensive Modernization Program, RusHydro upgraded eight hydropower units with a total capacity of 659 MW at seven HPPs.

By the end of the year, the installed capacity at the Company’s plants reached 39.4 GW, putting RusHydro ahead of all its Russian peers.

RusHydro’s Board of Directors supported the Management Board’s initiative to start levelling the station node building at Zagorskaya PSP-2 using the compensation grouting technology to inject special solutions under the foundation. Once the project is completed, RusHydro will make further decisions on how to finish construction of this essential element in Russia’s unified energy system.

In 2018, the Company completed the construction of 110 kV and 35 kV approach lines to the 220 kV Maya substation. Thanks to this major infrastructure project in the Far Eastern Federal District, starting 2019, the frequencies of the Central and Western energy hubs of Yakutia were synchronized with the UES of East, thereby ensuring a more reliable power supply for the republic.

RusHydro continues to develop power retailing, having opened 17 unified accounting centers in the Krasnoyarsk and Khabarovsk territories and in the Sakhalin Region, with two more centres in the Primorye Territory set to follow in 2019. This aligns perfectly with the Russian President’s Order On National Goals and Strategic Objectives of the Russian Federation through to 2024, as such centers contribute to fostering a comfortable urban environment and promoting digital economy. Unified accounting centers help create synergies for RusHydro by consolidating the Group’s retail functions, improving payment discipline, slashing consumer debt, and diversifying the utilities business.

The Group’s investment program through to 2023 (as approved by the Board of Directors) sets out the scope of mid-term initiatives, providing for an estimated RUB 383 bn to be spent on commissioning around 1.4 GW and over 560 Gcal/h of power and heat capacities, respectively, as well as on building and refurbishing more than 130 km of heat and 7,600 km of electric power supply networks. During this period, the Group plans to launch Sakhalinskaya GRES-2, CHPP in Sovetskaya Gavan, Nizhne-Bureyskaya HPP, Zaramagskaya HPP-1, and 5 smaller HPPs in the North Caucasus, while also completing the construction of Ust-Srednekanskaya HPP as per the design parameters and building a 110 kV Pevek-Bilibino power line. The upgrade and modernization program is expected to yield 163.7 MW of additional capacity at the existing hydropower generation facilities.

Among other things, RusHydro focuses on implementing the Long-Term Program for Replacement of Retired Capacities and Power System Development in the Far East that was drafted by the Company’s management team and approved by the Board of Directors in 2018. Key projects under the Program include the construction of Khabarovskaya CHPP-4, Artemovskaya CHPP-2 and the second stage of Yakutskaya GRES-2, the upgrade of Vladivostokskaya CHPP-2. Following the inclusion of these projects in the state heat upgrade program, RusHydro will proceed with the construction and modernization of power plants with guaranteed return on investment.

RusHydro’s Value Growth Plan through 2021 includes a number of initiatives, but most importantly it promotes the principles of guaranteed return on investment in the Far East thermal generation, introduction of long-term tariff regulation in the Far Eastern Federal District, stronger efficiency and lower operating costs.

In 2017–2018, savings from initiatives aimed at cutting operating costs amounted to over RUB 12 bn, while total procurement savings across RusHydro Group came in at RUB 9.55 bn for 2018 alone. We intend to continue our cost reduction and efficiency improvement efforts to maximize savings.

The management’s work to optimize operating costs coupled with strong operational performance were the main drivers behind strong consolidated financials. RusHydro Group’s revenue grew by 5.1% to RUB 400.4 bn, EBITDA increased by 5.3% to a record RUB 109.7 bn, and net profit rose by 28.5% to RUB 31.8 bn.

RusHydro Group boasts a robust credit profile, which makes it highly attractive for investors. In 2018, the Company successfully completed three Eurobond offerings, including two ruble-denominated issues and a debut dim sum bond issue, with the books substantially oversubscribed by international investors. The year marked the first time all three major international rating agencies – S&P, Moody’s, and Fitch – upgraded the Company’s credit ratings to sovereign (investment grade). At the same time, ACRA confirmed RusHydro’s top credit rating on the national scale, noting the critical systemic importance of the Company for the Russian economy.

I would like to take this opportunity to express deep gratitude to the employees engaged in the generation, transmission, retail, design and other operations of our unique energy holding. At the end of the day, it was your hard work that made this year a success for RusHydro Group. We have no intention of slowing down. Instead, we will continue raising the bar to bring the best value to our shareholders, consumers, and the country’s economy.


Nikolay
Shulginov


Chairman of the Management Board –
General Director