Public Joint-Stock Company Federal Hydro-Generating Company RusHydro (RSHYY) CEO Andrey Kazachenkov on Q3 2020 Results - Earnings Call Transcript
Public Joint-Stock Company Federal Hydro-Generating Company RusHydro (OTCQX:RSHYY) Q3 2020 Earnings Conference Call November 26, 2020 8:00 AM ET
Company Participants
Dmitry Yakovlev - IR Manager
Andrey Kazachenkov - First Deputy CEO
Conference Call Participants
Sergey Garamita - Raiffeisen Bank
Sergey Beiden - Renaissance Capital
Fedor Kornachev - Sberbank CIB Investment Research
Roman Filkin - Prosperity Capital Management
Matvey Tayts - Sova Capital
Alexey Adonin - Veles Capital Investment Company
Igor Goncharov - Gazprombank
Anastasia Tikhonova - VTB Capital
Operator
Dear ladies and gentlemen, welcome to the conference call of RusHydro. At our customers' request, this conference will be recorded. [Operator Instructions].
May I now hand you over to Dmitry Yakovlev, who will lead you through this conference. Please go ahead.
Dmitry Yakovlev
Dear ladies and gentlemen, thank you for joining us on the call following the release of consolidated financial results of RusHydro Group for the third quarter and 9 months of 2020, most recent developments and outlook throughout the rest of the year.
Participating in the call today is First Deputy CEO, member of the management Board, Andrey Kazachenkov; as well as line managers from sales, business planning and operations. The report and the presentation are available on our website in the IR section as well as in the Bloomberg terminal.
Please note that some of the information announced during the call may contain projections or other forward-looking statements regarding future events or future financial performance of RusHydro Group. Please refer to the beginning of the presentation for a full disclaimer.
Now I will give the floor to our speaker, First Deputy CEO, member of the management Board, Andrey Kazachenkov.
Andrey Kazachenkov
Dear ladies and gentlemen, thank you for your participation in our conference call. Let us continue our tradition by starting on a positive note. Once again, RusHydro Group has managed to deliver record-high financial results following record electricity output commissioning both new capacities, increase in electricity consumption in the Far East and effective management.
I will now go through the main highlights of the third quarter. Please refer to Slide #4 for the complete list of highlights in 9 months of 2020. In terms of output, we have a remarkable first 9 months of the year with total production, including Boguchanskaya HPP reaching 113 terawatt hours, an increase of 14% over 9 months of 2019. I will talk more about operating results shortly.
In September, we have commissioned the power station in Sovetskaya Gavan, the last project with noncash impairments affecting financial year 2020 net profit. Just recently, we brought online Ust-Dzhegutinskaya small HPP with installed capacity of over 5 megawatts. This is DPM project for renewable. Annual contribution is about RUB0.75 billion per year in revenues.
Our record results would not have been possible without management's effort on improving operational efficiency. Our manageable operating costs in the third quarter and 9 months were 3.7% and 1.1% below year-on-year level.
Now let us move over to the results. Slides 5 and 6 of the presentation, please. Highest operational results in the company's history for the reporting period. Hydropower production increased by 17% to 80 gigawatt hours on the back of increased water inflows and low base effect of 2019. Despite strong month-over-month performance in fourth quarter of the year, October 2020 operational results in Siberia and the Far East were above October 2019 and in the Center of Russian Federation were slightly below year-on-year yet above the normal level. We do not expect any risks to production in the fourth quarter of the year nor do we see -- do we foresee significant volume risks going forward.
Market overview is presented on Slide 8. Spot market prices performance for the 9-month period came in mixed. Favorable hydropower production directly affected spot prices as prices in the first price zone spread decreased by 10.2% year-on-year and 7.7% as compared to 2019. However, as water inflows normalized in the third quarter of 2020, spot market prices rebounded by 9.2% and 8.5% in the second price zone as compared to 2019. Once again, our HPPs will produce electricity regardless of the market and economic volatility. As a result, the effect of prices is usually counterbalanced with production volumes.
Let us now continue to Slides 10 and 11 with our financial results. Projects on track 9-month performance, thanks to efficiency improvement aided by commissioning of new capacities and favorable hydrological conditions. Additional revenue and EBITDA contribution came from Zaramagaskaya hydropower plant and 1 recently Verkhnebalkarskaya small hydro power plant in the form of DPM for payment.
Consolidated revenue in the third quarter of the year and 9 months of the year increased by 6.5% and 8.2% to RUB93.2 billion and RUB311.2 billion, respectively. 73% of revenue came from electricity and capacity sales. Operational expenses increased due to inflation and at 2.4% year-on-year, yet manageable expenses decreased by 3.7% and 1.1% in the related period.
Please see Slide 11 for breakdown of operating expenses. Consequently, EBITDA increased in 9 months of the year by 28.6% to RUB90.5 billion, with margin of almost 30%. Our LTM EBITDA for the second quarter in a row reached an all-time historic record and stands at RUB117.7 billion. The hydropower segment EBITDA margins for the 9 months of the year remains at a solid 68.7%. The segment also contributed 80% to the consolidated EBITDA.
Nonetheless, the Far East segment's financial performance continues to perform well compared to last year with EBITDA margin reached 9%. Our consolidated EBITDA margin guidance for the year remains in the range -- in the announced range. Throughout the year, we have stood by our guidance and intend to do so going forward.
Slide 13, please. It gives a snapshot of the company's financial position. Effective ruble interest rate stands at 6.7% while almost 90% of the debt is fixed rate debt. Weighted average maturity is 2 years. Net financial debt-to-EBITDA is at a comfortable ratio of about 1.
Just a few days ago, Fitch Ratings raised long-term corporate credit ratings for RusHydro and the company's bonds to sovereign investment-grade rate BBB out of stable. Finally, let us look at Slide 15. We see a lot of positive factors that will drive our financial performance in 2020 and improve the long-term outlook for our business primarily in the Far East. First, we maintain solid operational outlook through the end of this year on the back of strong operation and financial results. For the first half and the 9 months along with new capacity commissioning, the Zaramagaskaya hydropower plant will contribute up to RUB10 billion to our revenues annually and RUB8 billion this year. Additional revenue in the form of DPM payments will come from the newly commissioned Verhknebalkarskaya and Ust-Dzhegutinskaya small hydro power plant.
Recently commissioned power plants in Sovetskaya Gavan, Nizhne-Bureyskaya hydropower plant and Sakhalinskaya GRES-2, will also contribute to electricity production growth and lower fuel consumption and push our total electricity production above the level of the previous year. We have 1 small hydropower plant to be commissioned in the Stavropol region under DPM for renewables in the fourth quarter of 2020.
2021 and 2022 will be impairment free and dividend growth, as expected, well above the 2019 level. However, all the decisions regarding dividends are subject to primarily government directives and approval of the Board of Directors.
Last but not least, I would like to give a quick update on the COVID-19 situation and its potential risk for RusHydro Group briefly. With very limited exposure on RusHydro's business, delay of payments mostly affect retail segment, it's about 1.6% in 9 months. The segment represents a small share of the group EBITDA, so it's not a problem overall. In the Far East, increase of accounts receivable will be partially mitigated by the tariff-smoothing mechanism.
So to sum up it all, our business model remains resilient through the economic challenges most companies in Russia currently face, maintaining the potential of successful implementation of new modernization program of thermal power plants and the capacity supply agreement and creation of shareholder value. Our leverage compared to other Russian state-owned companies remains low. And the low-rate environment provides us with the opportunity to improve further our debt profile. The ESG aspects are among our top priorities. Our environmental policy targets are on track. As the opportunity arises, we will divest -- we will optimize our all coal-fired facilities or convert them to natural gas. All projects under DPM-2 modernization program are natural gas powered.
Finally, solid financial and operational results along with ongoing improvements in operational efficiency presents a positive medium-term outlook with focus on growth, transparency and good corporate governance. We will keep you updated on this and other developments at our conference calls and meetings.
On this, I would like to thank you, conclude my presentation and move on to our -- to your questions. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question is coming in from Sergey Garamita from Raiffeisen Bank.
Sergey Garamita
Yes. Congratulations on great results. Actually, I have several questions. First, regarding your CapEx projection for this year, I know that you always say that the actual CapEx usually is way below the guidance. But still, for this year, the trend one was about RUB109 billion, including the RUB80 billion or RUB90 billion, excluding that. But clearly, the real CapEx should be lower than that. Could you update -- give us an update on the figures? And actually also, could you give us any indication of whether or not you've started spending some money on modernization yet or not? That's the first question.
The second question regarding -- regards your tariffs and pricing tariffs and modernization IRR approval. Could you give us a guidance whether these guaranteed returns are finally approved at 12% mark? And if not, when do you expect this approval? And on your pricing tariff approval, when is the date for this approval? So do we expect it in December? Or could be -- could the tariffs be put soon, so I mean in December? And if they are approved, let's say, in December, can we expect some effects on your impairments in 4Q?
And final third question. Usually, you -- well, at least for previous years in the presentation, we could see some line describing your unused -- overall unused credit lines or so-called equity cushion. Could you give us the same for now?
Andrey Kazachenkov
Okay. Thank you, Sergey, for your questions. I will try to answer them, maybe not in the original order, but by facts. So in terms of modernization, we are doing project works for this power stations in the Far East. So we do not invest. We are doing project works at the moment. So you know this information, nothing has changed yet.
About CapEx overall, I think it will be 25%, maybe more percent less than the original effect, but still we have to wait until the year-end to see the final volumes. But 20% to 25% less than planned, maybe more. So the trend is in place because of the reasons we usually discuss with you.
The returns for new projects in the Far East, they are not defined yet. So a couple of days ago, the legislation supporting this DPM-2 scheme in the Far East, moved from the government to the parliament of the Russian Federation. So before that, there was still a discussion on some issues, but the primary legislation is approved by the government. Our scheme of implementation and the tariff-smoothing mechanism as well, as you know, and they both moved to the parliament and they will be approved until the year-end. After that, consequent work will be done with developing the under legislative act following these primary legislative decisions. So in this course of action, we will define that return. So as of now, they are still not defined, but it's next step. So step-by-step, we're in the process. I think we will get more information in the first quarter of 2021.
Tariffs are still in progress. You know that the Chief of Federal Antimonopoly Service was changed and a couple of other changes on the government level related to the energy sector. So we are in contact with the Federal Antimonopoly Service, but at this point in time, we're -- it's still unclear what their decisions and when will be -- when they will be done. So hopefully, in December, we're still in the calculation, and we will do our best to promote them, but it's still an open question at this point in time.
What else? Liquidity. We have a strong liquidity position in terms of absolute liquidity. You see it in the financial statements. And in terms of undrawn credit lines, there are several hundred billion I think undrawn credit lines. The bank limits prospectuses for bonds, local and international. So the company has sufficient amount of liquidity in all forms. That is it.
Sergey Garamita
And on CapEx, then did I understand it correctly that most of it is just delayed? So it should be like compensated for in the 2021. So this 25% drop against the plan will be compensated in January?
Andrey Kazachenkov
Sergey, it's an annual discussion. So you can compare this trend during the last several years and you see the trend. You can take it into account for the future. So it does directly affect the next year's volume.
Operator
The next question is coming from Sergey Beiden from Renaissance Capital.
Sergey Beiden
Yes. I have actually one question related to that ice rain in the Far East. Do you currently have any estimates for potential damages you can have out of this? And the second aspect, if that damages potentially could be paid from emergency fund in the Far East or you're going to have it in your cost structure?
Andrey Kazachenkov
Okay. Yes. So from operational point of view, it's a serious problem that you asked about. So it's climatic -- direct climatic situation happened in the Far East in Primorye and Vladivostok. So during last several years from now, our people, our workers together with all the other parties are fully involved in the repair works. And these works are successful. So step-by-step, the electricity distribution in the region is in place again. So step-by-step, everything comes to the normal situation.
As of now, we don't have the estimate of the damages. We will calculate them later. But you should know that all our equipment is insured, including that is damaged in the Far East. So we will apply for insurance claims for this incident and for these consequences. So more or less, this situation will be normalized in operational respect and in financial respect. We don't expect any serious effects on the financial situation of RusHydro, and we will finally repair and restore all electricity distribution in the region.
Operator
The next question is coming from Mr. Kornachev.
Fedor Kornachev
Yes. I have a couple of questions. The first one is related to the discussed initiatives of the Finance Ministry to introduce payments for state-owned entities, dividend payments for state-owned entities from adjusted net income. So I wanted to ask you if you have any update on that front.
And the second question is -- sorry, but traditionally related to impairments. So basically, do you have any kind of update related to the volume of impairments related to Sovetskaya Gavan? So basically, are you satisfied with the tariff set for the company? And basically, how should we regard potential impairments related to this particular unit?
Andrey Kazachenkov
We have no official news on new dividend rules from the Ministry of Finance. So no directives are in place. No government decisions on this situation are in place as of now. We don't have any information about that. We have acting dividend policy as of now. So let's see what happens next year, but no official decision that I approved a 10-year government level as of now, at least this is our information in the company.
In terms of impairments, there are some -- as I said before, impairments for Sovetskaya Gavan should be around RUB20 billion. But there are some counter impairments that will probably reduce this number even less. So this is more or less what I can say now. But if you take our financial statements and take into account all these impairments overall, the projected numbers for the year-end will be strong, solid and provide significant results for the shareholders.
Operator
The next question is coming from Roman Filkin from Prosperity Capital Management.
Roman Filkin
Yes. This is Roman Filkin from Prosperity. I have actually three questions. One is a technical one. Could you please explain the mathematics of your forward contract review, especially for the Q3? Because as I see in accounts, the basic consumption didn't change much and the share price in the market was more or less the same, it's 75%, 76%. But you acknowledged like almost like RUB3 billion gain on the regulation of the option of this forward contract. This is the first technical question.
And the second one is about your CapEx. And you mentioned this potential 20% to 25% under investment versus initial plan. Could you please elaborate which particular part of your CapEx program are likely to be underspent or optimized or like not fulfilled? Is it related to general modernization or rehabilitation of your hydropower plants? Or it's about the Far East projects? So maybe you can give a little bit more details here.
And the third question is about this so-called East Polygon project, national project. And we saw some news that the government approved some kind of 4 projects, which suggests construction of 1.4 gigawatts of additional electric capacity in the Far East region. So could you please give us a bit more color if RusHydro is considering to take part in this national project as well? At least, as I understand, one of selected power plants is actually your power plant where additional equipment should be put into operation. And maybe you can also consider participation in the other 3 projects. So any update on this matter could be interesting.
Andrey Kazachenkov
Okay. Thank you, Roman, for your questions. The math behind forward contract evaluation. So we have an obligation towards VTB Bank, RUB55 million. We have related underlying assets covering part of this obligation. This is the stock trade and which is an underlying asset of the forward contract. So the higher the stock price, the less we have the delta, the differential obligation not covered towards VTB. So if the stock price goes up, we cover less. And on a periodic basis, its reward is on our financial statement. So I think some fluctuation of the stock price of RusHydro on the reporting date resulted in the revaluation you have mentioned. So these actions that are audited by IFRS standards. And so it's clear accounting audit financial math.
In terms of CapEx, what is underspent? I think generally, more or less different projects. So if it's important to you, let's connect after the call and discuss and analyze this. But there is no single part that is totally underspent or -- so it's part there, part here. So it's more or less average trend because we usually declare in the investment program the maximum amount that we potentially can spend, can invest and can materialize.
And the last question about Eastern Polygon. Yes, indeed, there is Reftinskaya GRES that is discussed in this program. And this is our station. So as of now, no final decisions are taken and approved. But indeed, Reftinskaya GRES is discussed for participation of RusHydro because this is our plant. And it's discussed for participation on the terms as our previous 4 DPM projects in the Far East, those 4 projects that are DPM-2. So we discussed Reftinskaya GRES additionally but on the terms of DPM-2 as well. So final decision about Eastern Polygon will be taken later. But this is the current status answering your question.
And about CapEx, maybe we did actually have some planned CapEx on 4 projects, DPM-2 this year. And as I said, we'll do on the project works. So this part of our CapEx is, of course, underspent this year.
Roman Filkin
Yes. So on East Polygon, am I right? So you are considering only this Reftinskaya as a part of this East Polygon because as I understand, there are three more greenfield constructions supported by the government, but you are not considering taking part in some other projects?
Andrey Kazachenkov
It's too early to conclude on the necessary number of power-generating units in the Far East regarding East Polygon development. It's still discussed. A lot of experts think that there are too much capacity declared for this program. So now this is the information of today, we discussed Reftinskaya GRES. Other power plants will be discussed in the Ministry of Energy and the government later. It's too early to make any judgments on the other power units. They have to be worked over with different experts, with the markets, with the Russian rail -- railways. And it's still in progress. So the colleagues work over the specifics, the details, the economic fundamentals of this project.
Operator
The next question is coming from Matvey Tayts from Sova Capital.
Matvey Tayts
I have one technical question. So if you look at the purchase power part of your operating expense, it's up 45% year-on-year in third quarter. Are there any like some specific factors that affected it? What -- if you can elaborate a little bit on this part of your operating expenses. And also, the question is, so now you have a new CEO. And my question is, what's his attitude towards the like market utilization of RusHydro? What's his approach to communicate with the investment society? If you have any like an understanding and feeling on that, it will be greatly appreciated.
Andrey Kazachenkov
Thank you for your question. So increase purchased electricity relates to debt purchases versus our Far Eastern sales company. So they sell electricity and buy electricity on the market. So it's their business to sell and buy. They don't produce. So given this year's specifics, they bought more, they sold more. The consumption in the Far East grows. It's a surprise for -- from certain point of view, but during this very difficult year for the economy, the consumption in the Fast Eastern region grew little by little and they sold more. This is the main reason.
About your second question. So Mr. Victor Khmarin has worked in RusHydro for over 5 years. So he is the person who contributed much to the very good results of RusHydro during last several years in different parts of our business. So he knows the company, the electricity business very good. He continues to effectively lead and manage the RusHydro Group in the future, this is our understanding and we believe in our new CEO.
Operator
The next question is coming in from Alexey Adonin.
Alexey Adonin
Yes. I have only three questions left. The first question regards Sakhalinenergo additional share issue, that is undergoing right now, yes? And the question is, how do you plan to recapitalize Sakhalinenergo? I mean do you plan to spend some cash from RusHydro side? Or like all the RUB16 billion will be paid with Sakhalinenergo itself? So it's the first question.
The second one is about tariff-leveling evolution in the future. I mean we had a piece of news that said that it looks like that from 2022, the situation will be evolving in a sense that tariffs, Far Eastern tariffs, electricity tariffs, they will be like growing and the amount of subsidy will be going down. So for now, we see that your EBITDA margin for Far East is like 9%. Do you have like back-of-the-envelope calculations if this margin will be the same or not looking forward, like 5 years forward? That's my second question. And finally, regarding impairments, I wanted to ask about financial impairments. Do you have some like projections for the year-end for 2020?
Andrey Kazachenkov
Thank you for your questions. So Sakhalinenergo additional share issue, we don't plan any significant cash expenditures into Sakhalinenergo shareholders' capital. So most of the portion of the action, they are overall cash neutral to RusHydro. So we don't spend significant money in this reorganization and this restructuring of the Sakhalin energy system assets. So we will put some assets into Sakhalinenergo in simplified group structure, maybe we will have some turnaround of the money. But the underlying question that you asked is, is there cash effect on RusHydro position? No. So this is more simplifying, more structuring without cash spending. This is the question number one.
On the tariffs and subsidy, I have already touched upon this issue. So this evolution of tariff system is still in progress. We hope it will provide better results for RusHydro. I cannot name or define the numbers for EBITDA margin. So we hope it would work. But it's a regulatory work. Sometimes it's not quick. Sometimes it takes time, especially during this difficult year with the changes in the management of Federal Antimonopoly Service and in pandemic situation in the country. So there are some delays and the work continues. So let's wait for some time and see the results. But you named 9% our EBITDA margin. Last year, it was 7%. So this is the one year performance for your question.
Matvey Tayts
Yes. Yes. Finally -- okay. Yes. Okay. Sure. And maybe you could just elaborate on financial impairments. Maybe we could see some impairments by the year-end.
Andrey Kazachenkov
Thank you, Matvey, for this question. We don't have any significant financial impairment that materially affects the performance of the group at the year-end. So some working things are possible, but nothing that will dramatically change the situation.
Operator
Next question is coming in from Igor Goncharov from Gazprom.
Igor Goncharov
Yes.
Operator
There was a little technical problem. We seemed to have skipped this in tariff. Please give me 1 second. Okay. Mr. Goncharov is now unmuted and can ask his question.
Igor Goncharov
Yes. Most of the questions have been already answered, just two relatively small follow-ups. One is on the new power plants in the Far East. As far as I understood from the previous discussion, the return is not officially set and the investments are not yet undergoing. With this relation, is the timing of commissioning already set firmly? Or is it still -- is it also kind of a moving variable at this point in time? And what is the planned timing of commission? Because based on the previous press releases, it was planned to be commissioned, this 3, by the end of 2025 or 2026. Is it still the plan? Or -- and what is the current plan for this -- timing of this power plant? That's number one.
I just want to follow up on the impairments for the fixed assets. Just wanted to confirm, do I understand correctly that you expect the impairment for fixed debt not to exceed RUB20 billion in the end of the year?
Andrey Kazachenkov
Approximately RUB20 billion, approximately. And the timing and the plans for the commissioning of these 4 plants is set. But due to the shift in regulatory unitary decisions, they will probably be reset after the final decisions on returns, CapEx and other regulatory details of the program.
Igor Goncharov
So I see that three of them are planned to be commissioned by the end of 2025, one by the end of '26. So you're saying that it can be shifted a bit later. Is that correct?
Andrey Kazachenkov
So when we get final decision, we analyze these terms. This year, some of the project will probably be commissioned on time. Some might be shifted to the right because the regulatory decision took time. So if we need to move them to the right, we will require for the shift in this commissioning date.
Operator
The next question is coming in from Ms. Anastasia Tikhonova.
Anastasia Tikhonova
Congratulations on great results. A few questions from my side. First of all, probably you could provide some comments in terms of expectations for production results for the next year, for the first quarter and the first half, depending on the water inflows. This is the first question.
The second question, what is the level of subsidies that you are expecting for this year? Because as we see for 9 months, those were elevated, especially taking into account the first half numbers.
The third question is regarding to your DPM-2 projects in the Far East in terms of CapEx. So everywhere where we can see now is the CapEx with the assumption that some of the units would be coal-fired. But taking into account that those would be gas-fired, probably you could provide some estimate of change of the CapEx.
And the fourth question, again, is related to PP&E write-offs. As we understand, each year, apart from the commissioning in the Far East that triggers actually the write offs, there are some revaluations of hydro assets driven by the modernization as well as some other deals that are made inside the group. So is it fair to assume that your PP&E write-offs for this year would be higher than RUB20 billion that are stated for Sovetskaya Gavan? That's it from my side.
Andrey Kazachenkov
Okay. So for next year, fourth quarter is stable. It's okay. Next year, it's really difficult to prognose and to forecast weather conditions and other factors in the future, but we positively look into 2021. So given last several years of our performance, we see that the volumes of waters are stable, grow step-by-step and support our performance. So we look positively into the next year. But I should make a disclaimer. You never know. But we look positively towards next year, and we plan positively in our next year business plan. So we'll see how the actual situation will progress in the future.
Then subsidies might -- call Dmitry, he will provide you with the number on the dual basis. So contact him, please, after the call. Yes, indeed, we started initially some of the projects in the coal-fired case. Now they will be gas-fired. So as I mentioned, we are doing project works for all these power station. After the project works are complete, we will announce and you will know the final CapEx because the initial CapEx was in the beginning -- some time ago, it was for coal-fired, but time goes. And in the beginning, before project works are complete, it's just an indication. Now it's project work stage. And when you have the projects complete, you have the real money, the real numbers that you will spend in the CapEx. So we need some time to complete project work.
In terms of revaluations, impairments and all that together, as I said, we expect overall impairment at the level of approximately RUB20 billion. It's not the year-end. We need some more time, but this is the feeling in the numbers as we understand them now.
Operator
This concludes the question-and-answer session. I expect the speakers for some concluding words.
Andrey Kazachenkov
Okay. Thank you very much for being with us. It's the year-end almost. We go forward altogether to finalize this very difficult year. Hope you are with us and hope everybody is safe in shelter. Thank you very much for your attention.
Operator
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.
