Interviews with Management Board Members

D. Rizhinashvili

Member of the Management Board, First Deputy General Director

- How is the Plan to Increase the Value progressing?

- It should be noted that 2018 was actually the first full year the Plan to Increase RusHydro Group’s Value until 2021 was implemented. Nevertheless, even the interim results of the measures aimed at maximizing the fundamental value of the Company and its market capitalization show the commitment of the Company’s management to the result.

The key initiative under the Value Increase Plan pertains to changing tariff regulation in the Far Eastern Federal District. In the near future, the Government of the Russian Federation is expected to approve a decree, which will ensure the introduction of long-term tariff regulation in the non-price zone of the wholesale market of the Far Eastern Federal District, covering the economically justified costs of energy companies. In regards to new investment projects required to replace retired facilities in the Far Eastern Federal District, we are currently working on including them in the program of the Government of the Russian Federation to modernize thermal generation, which will ensure a guaranteed return on investment at a stated rate. Following the completion of the above measures, the management expects not only to increase the revenue component of the Company’s financial model, but also to change the negative attitude of investors to RusHydro Group’s having assets in the Far East.

Another key activities include measures to reduce operating expenses and improve the efficiency of investment activities, which allowed unleashing a significant amount of additional sources of funding for the Investment Program. In addition, in order to optimize the asset holding structure, in 2018 a stake in PJSC Inter RAO was sold for RUB 17.2 billion.

It should be underscored that a revised version of the Dividend Policy has already been adopted, ensuring a stable distributions to shareholders and the forecastability of the Company’s dividend flow, which, in turn, will help reduce the negative gap between the Company’s market capitalization and its fundamental value.

Taking into account the non-deliverable forward contract concluded with VTB Bank, the high market value of the Company as at the close of the forward period (2022) will not only ensure the absence of obligations under the contract, but also include substantial additional income to the Company’s asset list when selling shares.

- What interesting innovative projects did RusHydro carry out in 2018?

- As far as renewables are concerned, the most important project for the Company was the construction of a wind-diesel complex in the village of Tiksi, the Republic of Sakha (Yakutia).

As part of the project implemented jointly with Japanese partners as represented by the state organization NEDO, Komaihaltec, and others, in November 2018, three unique wind power plants were commissioned, for Arctic service in the difficult climatic conditions of the polar regions, with a total power of 900 kW. Over the past winter, the WPP has demonstrated high efficiency and reliability in a harsh Arctic climate. In 2019, we continue our efforts in the design and installation of three diesel generators with a total capacity of 3 MW and an energy storage system that will be operated by the automated control system in conjunction with the WPP, which will optimize operation modes and ensure the reliability of power supply to the isolated Tiksi village while reducing the dependence on imported fuel.

S. Kirov

Member of the Management Board, First Deputy General Director

— In 2018, key new construction projects were rescheduled. Do you plan to postpone these projects in 2019?

— According to the Investment Program of RusHydro Group approved by the Board of Directors, in 2019 it is planned to complete the construction of the Zaramagskaya HPP-1, the Nizhne-Bureyskaya HPP, the CHPP in Sovetskaya Gavan, the Sakhalinskaya GRES-2 and a number of small HPP projects in the North Caucasus. In 2021-2022, the Company also plans to complete the construction of the Ust-Srednekanskaya HPP within the design parameters with the achievement of the installed capacity — 570 MW and commission another two Krasnogorsk small HPPs.

The facilities to be commissioned in 2019 are nearing completion and all construction activities related to the technological responsibility of RusHydro Group will be completed on schedule. At the same time, since the grid company is not yet ready due to the unavailability of a power distribution scheme of the Verkhnebalkarskaya SHPP, there are risks of postponing the commissioning of the plant to 2020.

Also, because of the need to switch a large number of municipal consumers from Sovetskaya Gavan to centralized heat supply from the new CHPP, the expediency of shifting the commissioning period of CHPP in Sovetskaya Gavan for the time of peak loads of the autumn-winter period is under discussion.

— Also, because of the need to switch a large number of municipal consumers from Sovetskaya Gavan to centralized heat supply from the new CHPP, the expediency of shifting the commissioning period of CHPP in Sovetskaya Gavan for the time of peak loads of the autumn-winter period is under discussion.

— The Management Board of the Company decided to complete the construction of the Ust-Srednekanskaya HPP within the design parameters with the commissioning of hydraulic unit No. 4. The completion of the plant within the design parameters also involves the replacement of the impellers of hydraulic units Nos. 1 and 2 with permanent ones and is included in the consolidated Investment Program of RusHydro Group. The consolidated Investment Program of RusHydro Group is balanced out against sources of financing, and does not stipulate for additional federal budget funds to complete the construction of the facility.

B. Bogush

Member of the Management Board, First Deputy General Director - Chief Engineer

— In 2018, RusHydro Group adopted a new Environmental Policy. What challenges does RusHydro Group face in the area of environmental protection and management?

— Behind the integration of RusHydro and RAO ES East, the business profile of RusHydro Group changed, which in turn led to the development of the Environmental Policy for RusHydro Group, which accommodates not only current environmental challenges and trends but also the specifics of the hydropower and thermal assets of RusHydro Group.

The activities of RusHydro Group in the construction and operation of energy facilities require a correlation with the global problems of using natural resources and the state of the country’s environmental safety. In this context, the issues of mitigating possible negative impacts come into the Group’s sharp focus. The Environmental Policy defines the main principles, objectives, and priorities of RusHydro Group’s activities in the area of environmental protection and management the Company is guided by when making decisions and when forming the Environmental Policy Implementation Program.

First of all, based on the analysis of external and internal conditions, the key challenges were singled out, representing a set of environmental protection and environmental management issues, problems, and requirements RusHydro Group pays special attention to. The definition of challenges enables to clearly define the boundaries of responsibility for the planned and ongoing activities of RusHydro Group, to define the domains of activities and their specificity.

The challenges were evaluated in three aspects:
  1. Global challenges:
    • Global climate change and the need to adapt to the adverse effects of these changes;
    • The need to rationalize the consumption of natural resources;
    • The loss of biodiversity;
    • Increased amount of industrial and household waste.
  2. National challenges:
    • Lack of the best available technical and process solutions;
    • Intensive changes in the regulatory framework in the field of environmental protection and environmental management;
    • Intensive pollution and low quality of water in water bodies of the Russian Federation;
    • Intensive pollution and low quality of water in water bodies of the Russian Federation;
  3. Corporate challenges:
    • High degree of depreciation of fixed assets.
    • Various production facilities being a part of RusHydro Group make heterogeneous environmental impacts.

Given the identified challenges, RusHydro Group sets itself the following environmental protection and environmental management goal: enhancing the environmental safety of existing and emerging energy facilities by minimizing the negative environmental impact, enhancing the positive aspects of impacts, and ensuring the preservation of a favorable environment for current and future generations.

Achieving this goal involves balanced satisfaction of the entire set of identified challenges, which requires solving problems in the field of environmental protection and environmental management.

In this regard, the Environmental Policy includes the following objectives: low-carbon development of RusHydro Group, development of renewable energy, preservation of biological diversity, improvement of the environmental management system, improvement of industrial environmental control and environmental monitoring mechanisms, implementation of corporate standards, etc.

A. Kazachenkov

Member of the Management Board, First Deputy General Director

— How has the debt burden of RusHydro Group changed in the reporting year and does the Company plan to make new borrowings?

— Currently, the Group’s debt is optimally balanced, both in terms of interest rates and instruments. RusHydro’s Financial Policy assumes keeping the debt ratio (Net debt/EBITDA) at a maximal level of 2.0x. At the end of 2018, this figure was 1.2x (a year ago — 1.4x, and two years ago — 1.6x). In 2018, the average cost of borrowing in rubles was reduced by 1%, among other things, due to the Company’s active position in the capital markets.

The Company’s financial profile has grown stronger, which has recently been confirmed by all leading international rating agencies (S&P, Moody’s, and Fitch), which upgraded RusHydro’s rating to investment grade (BBB-/Baa3/BBB-). For the first time in the Company’s history, international agencies — S&P/Moody’s/Fitch — affirmed RusHydro’s credit ratings at a sovereign level in the investment category. On a national scale, the Company has an ACRA confirmed rating with the highest level of reliability (AAA (RU)). Today, RusHydro is a company with a qualitatively high financial level of sustainability.

Regarding plans, the budget and business plans of RusHydro Group’s companies for the coming years are updated against the progress on investment projects, the modernization of thermal generation in the Far Eastern Federal District, and the implementation of a new dividend policy. Based on the results, requirements for attracting new borrowings will be updated, both to refinance the current debt portfolio and to finance current and investment activities, in view of maintaining a strong financial position of the Group.

— What activities does RusHydro Group take to minimize financial risks?

— Since the Group’s revenues are mainly in rubles, RusHydro adheres to a policy of minimizing currency and interest rate risks. Open foreign-currency positions are either closed by early redemption, or hedged under conditions comparable to market ones. Currently, over 98% of financial liabilities are in rubles. As for interest risks, the share of borrowings at a fixed rate exceed 91%.

V. Khmarin

Member of the Management Board, Deputy General Director

— Tell us about the 2018 key measures to improve the quality of procurement management in RusHydro Group?

— In 2018, procurement legislation of the Russian Federation was significantly amended, which was reflected in the new Unified Regulation on the procurement of products for RusHydro Group’s needs.

In order to improve the approach to the generation of intra-group orders of RusHydro Group, a single intra-group services catalog with the relevant application procedure has been developed. Time frames for the approval of documents during the work of the Central Procurement Commission of the RusHydro Group were also optimized.

In 2018, the design and development of the primary functionality of the unified automated procurement information management system in RusHydro Group using domestic software was completed, and its trial operation began.

The third annual conference, “RusHydro Supplier Day”, aroused heightened interest of Russian business community: in 2018, over 700 participation applications were received from regular and potential partners of the Group.

As the main results of the procurement activities of RusHydro Group, it is necessary to note the amount of savings on the results of procurement in 2018 — RUB 9.56 billion, incl. VAT. The positive effect was achieved through competitive procedures, pre-contract negotiations, cost control, and optimization of the value of current contracts.

RusHydro’s efforts in building an effective procurement management system have many times received positive feedback from the expert community. In 2018, the Company was an award winner of the 2018 National Procurement Transparency Rating project: in the corporate segment, the Company was awarded a “guaranteed” level of transparency (fourth place among the 70 largest Russian companies).

Denis Toropov, Director of the Procurement, Marketing and Pricing Department of RusHydro, in 2018 entered the Top-5 of the first independent rating of effective corporate buyers, “The Best Procurement Director”, conducted by the Association of Procurement Directors and the RAEX rating agency.