Review of Operating Results of Russian Utilities Systems
Top-Priority Areas of Activity
The core activity of Russian Utilities Systems includes water supply and sewerage services, heat supply, power supply and other utility services.
The Group operates municipal heat/water/power supply networks and renders utility services under leases (concession agreements) through the organizations within the control loop of Russian Utilities Systems in different regions of Russia.
Leases are usually concluded for 5–25 years with an option of further renewal. The maximum lease term is 49 years. The Group's existing concession agreements were concluded for the period until 2054.
|Company||Contract duration period||Expiry date|
|Amur Utilities Systems JSC||
|Kirovsk Utilities JSC||
|PKS – Heat Network JSC||
|PKS-Water and Sewer Enterprise JSC||
|Tambov Utilities JSC||
|Volzhskie Utilities LLC||
|Ulyanovsk Water and Sewer Enterprise LLC||
|Energocomfort Karelia LLC||
|Bereznikovskaya Water Supply Company LLC||
The Group operates and modernizes communal infrastructure facilities and render additional utility services.
The Group carries out its core operations in Blagoveshchensk, Petrozavodsk and other cities of the Republic of Karelia, Samara Region, Perm Krai, Kirov, Penza and Tambov.
The Group's enterprises have leading positions in the markets of their operation.
The Group's perimeter comprises 19 assets, including the subsidiaries doing business under leases/concession agreements, and other operating assets supporting the Group's core activity.
Subject to its lease agreements, the Group takes measures to improve (modernize) communal infrastructure facilities under its investment program approved by the concession provider (municipal authorities). After the lease term expiration, the Group will have no rights of ownership to any leased infrastructure facilities or inseparable improvements made by the Group. The compensation for any improvements made are recognized as an intangible asset: the Group is entitled to charge consumers of utility services.
Company's Regional Development*
*See further information about the Group's regional development in Section 3.1 (Development Prospects)
Two methods are used to identify any promising in accordance with the approved regional development strategy. The full coverage method implies the consideration of all water supply and sewerage enterprises in the country. The top-priority project method is based on ranking enterprises of the water utilization system using the 's internal methodology and focusing key efforts on the most promising projects. The Group's area of interest is water supply and sewerage facilities in different cities and towns. Small towns in the regions where the Group carries out its business are one of the top-priorities of its regional development efforts. The operations in other small towns are arranged according to the principle of commercial viability.
Strategic priorities of Russian Utilities Systems:
- new cities and towns with the population of over 250 thousand people;
- with the annual revenue from the water and sewer system exceeding 500 million rubles
- with the possibility to gain the status of the guaranteeing supplier.
The concession makes it possible to improve the power efficiency, to reduce water loss and power consumption, to make the quality of potable water compliant with the requirements, to ensure uninterrupted operations of water supply systems, to decrease the number and duration of water supply failures. In case of wastewater disposal, it helps to reduce the power utilization for sewage treatment, to improve the reliability of sewerage systems and the quality of sewage treatment.
The public and private partnership in water and sewage, attraction of investment in housing and public utilities and efficient use of the property owned by the state or municipal authorities, is regulated by two basic Federal Laws:
If a municipal water and sewage system or facility is over 5 years old, the operation and modernization of such system shall be performed by a private operator according to a concession agreement only.
In accordance with the Federal Law On Concession Agreements, there should be three parties to concession agreements related to centralized cold water supply and sewerage systems: a private operator, a municipal entity and the constituent of the Russian Federation where the property for which the concession is to be granted is located.
As a concession holder, the Group is entitled to bill utility charges. Utility tariffs are set by the municipal authorities through regional energy commissions.
The Russian Government sets the payment index for household consumers as a regional average. The regulators representing the constituents of the Russian Federation review the tariffs proposed by regulated organizations and set 'economically sound tariffs' within the limits of the maximum allowed growth of utility charges for household consumers, as established by the Russian Government.
Since 2016, all the companies within the control loop of Russian Utilities Systems have shifted to the regulatory period pursuant to the requirements of the Basic Principles of Pricing.
The indexing method is applied in reality. The calculation based on the indexing method is performed using long-term parameters to be recorded throughout the entire regulatory period (at least five years (and at least three years for the first regulatory period)). The long-term regulation parameters include the basic level of operating expenses, the operating expense efficiency index, the regulatory level of profit and energy saving and energy efficiency indicators (e.g. water loss level in the network). The required gross revenue of the organization is determined in several steps.
All costs are divided into five large groups: operating expenses, costs beyond control, energy purchase costs, depreciation and profit. The operating expenses include those cost items the reduction of which is within direct control of the organization, e.g. payroll or repairs.
The costs beyond control include those cost items that cannot be influenced by the organization's activity, e.g. taxes and regulators' services.
The third group includes the cost of purchasing electricity, thermal power and other power resources. By summing the operating expenses, the costs beyond control and the energy purchase costs, we get the current expenditure amount and after adding the standard and business profit (5% of the current expenditure) we can see the required gross revenue amount.
The expenses on investment needs and investment loan interests are recognized in the Standard Profit account that is determined on the basis of the investment program or its project.
The tariff is calculated by dividing the required gross revenue by the volume of services provided to consumers. The important point in regulating tariffs with long-term methods is their adjustment. The required gross revenue of the organization and, accordingly, its tariffs are adjusted annually taking into account the difference between the factual values of tariff regulation parameters and their target values.
Tariffs on water/heat supply and sewerage*
In 2017, average tariffs on the services for consumers of the enterprises of Russian Utilities Systems were as follows:
- water supply – 25.73 rubles / cubic meter; average tariff rise in 2017 – 2.23 rubles / cubic meter;
- sewerage – 20.91 rubles / cubic meter; average tariff rise in 2017 – 1.95 rubles / cubic meter;
- heat supply – 1946.15 rubles /Gcal; average tariff rise in 2017 – 178.55 rubles /Gcal;
*With due account for investment surcharges and VAT for household consumers and other categories of consumers with an equal status
Billing: Calculation and Collection of Utility Charges
The Group carries out a project to integrate a single system to settle accounts with household consumers with regard to consumed power resources. The system is based on the 1C ROS ZhKKh software that includes billing unit and ensures automated management of accounts receivable. This project will make it possible to unify the existing calculations algorithms applied at enterprises, to calculate and to collect payments from the population in accordance with the applicable laws, which, in its turn, will help to avoid any disagreement regarding the calculation procedure, to exclude the possibility of imposing penalties on the companies within the loop of control due to improper charging.
In addition, it reduces the organization's expenses on the maintenance of various software products.
RosZKH is a standardized unified configuration for automation of sales activities based on the 1C: Enterprise 8.3 platform, designed for use in all Enterprises of the Group and allowing to increase the debt recovery level and reduce receivables.
Results of Development in Top-Priority Activity Areas
Report of the Board of Directors of Russian Utilities Systems
In 2017, the Board of Directors of Russian Utilities Systems focused its efforts on implementing the strategic program based on the main working principles:
- to maintain the status of the largest private operator in the water supply sector in terms of revenue;
- to become the industry's leader in terms of customer satisfaction indicators;
- to enhance the employee involvement and their job satisfaction level;
- to improve the efficiency of the Company and to become the industry's leader in terms of performance.
In 2017, the Group went on working in line with the new technical policy, namely, by further concentrating its efforts and increasing competencies in the sphere of water supply and sewerage, improving efficiency, developing unregulated core activities, improving management systems and introducing new technologies for cost optimization. As part of the development strategy, detailed measures were developed for each organization within the Group's loop of control to ensure operational efficiency and to increase the Group's capitalization.
|Revenue from sales of water and sewage services||13,469,933||12,489,328|
|Revenue from electricity sales||8,774,008||8,066,860|
|Revenue from heat energy sales||6,770,296||6,943,422|
|Revenue from construction works under concession agreements||1,291,946||1,154,130|
|Revenue from network connection services||970,562||886,285|
|Revenue from sales of electric energy transportation services||595,572||604,269|
|Revenue from construction and repair works||604,437||340,111|
|Revenue from lease transactions||58,112||73,240|
|Revenue from consulting, information, management and other services||6,311||3,883|
The table demonstrates data based on the consolidated financial statements of Russian Utilities Systems for 2017, including data of Vladimir Utility Systems JSC.
|For the year ended December 31, 2017||Total revenue||EBITDA for reporting segments|
|Republic of Karelia||5,452,628||374,281|
|Adjustments and Exemptions||(2,709,446)||-39,126|
To increase the payment discipline and to ensure proper accounting of the utilities consumption, the Company went ahead in such important areas of its activity as the transition to direct energy supply contracts with final consumers (households) of its services in the regions of operation and the installation of communal meters in multi-family dwellings. In all regions of its operation, Russian Utilities Systems carried out a number of campaigns for consumers that allowed the Company to raise the collection of utility charges.
Russian Utilities Systems still places the priority on projects capable to improve its operating activities. These are projects aimed at the introduction of automation and process control systems, technological renovation of water supply and sewerage pumping stations, the closure of unprofitable steam plants with the transition to more efficient heat sources, the modernization of steam plant equipment and the reconstruction of power grids*.
* See further information in Section 2.5 (Investment Policy).
The Group's plans regarding its further development in 2017 set special tasks in the personnel training field: the Russian Utilities Systems Leaders project was successfully implemented and helped to form a pool of candidates for managing projects and positions from among the Company's best employees; the working conditions in the Group's companies were significantly improved; a series of measures were taken to increase the personnel involvement; the Group defined and presented its mission and values to make the vector of its short-run development more precise and clear**.
** See further information in Section 4.1 (Human Resources).
The Group's operating activity is aimed at increasing the efficiency of communal infrastructure facilities through the introduction and use of modern technologies that ensure reliable and economical operation of enterprises.
All communal infrastructure facilities of the Group functioned efficiently and reliably in 2017.
The core development areas for the Group's operating activity are outlined in the its Technical Policy and in the policy-based development strategies of its companies for the period up to 2020*.
In all regions of its operations, the Group pursues a unified policy aimed at comprehensive modernization of communal power grid facilities and carries out large-scale re-equipment and reconstruction of existing facilities in the housing and utilities sector and builds new ones. In addition, Russian Utilities Systems enjoys a number of advantages as a large Russian company, such as: the possibility to raise the needed financing, the huge experience in managing communal infrastructure facilities, and qualified personnel.
The operating programs of the enterprises included in the Group's loop of control are developed with due regard to the analysis of the state of the existing equipment and networks, accident statistics and service consumption forecast. We plan our work scope on a site-by-site basis and allocate the payroll to operational personnel on a monthly basis. By standardizing the processes of operating program planning and implementation, we not only get a broader picture of our operating activities, but also can share the experience and accomplishments of any one enterprise with other enterprises of the Group.
For example, the calculation of hydraulic regimes enables the transition from stagnation to optimization of technological processes in heat supply, water supply and sewerage systems. The program are tailored in line with the specific volumes of consumption and aligned with the long-term plans for the development of cities and communities. We renew the fleet of instruments and control devices for online monitoring of technological regimes, which ensures a significant energy saving due to a more flexible use of the equipment and enables us to provide services to consumers in accordance with the regulatory requirements.
* See further information in Section 1.6 (Strategy) and Section 2.6 (Technical Policy).
- Extraction of water from water sources – 475,171 thousand cubic meters
- Production of water – 448,645 thousand cubic meters
- Daily average production of potable water – 1,229 thousand cubic meters
In general, the production of potable water was about 98% of the plan and decreased by 3% compared to 2016 due to the measures taken to reduce the losses and consumption.
The quality of the natural water was stable and corresponded to the long-time average annual figures. The water sources had no oil and manure smells. No significant contamination of natural and human-caused character was recorded.
The quality of potable water corresponded to the government requirements, including the indicators of residual aluminum and chloroform for which the standards have become tougher within the recent 15 years.
The consumption of reagents was determined based on the quality of the natural water.
In general, the actual costs for reagents are 4.9 million rubles (2%) lower than as planned because the consumption was also lower than the plan.
The length of the water supply network is 7,277 km. It has increased by 121 km (2%) compared to 2016, since all the enterprises (and mostly in Novogor-Prikamye LLC and Tambov Utilities JSC) took on unattended networks.
According to the analysis of faults in the water supply networks, there were 8,112 incidents in 2017, which is 230 fewer than in 2016.
In 2017, the sewerage system maintained by the Group's enterprises rendered high-quality sewage disposal and treatment services.
452.8 million cubic meters of wastewater was discharged through the sewerage networks.
As of December 31, 2017, the total length of the sewerage networks was 5,556 km.
In 2017, there were 44,238 pipe clogging incidents in the sewerage networks of the Group's enterprises, which is 1,705 fewer than in 2016.
The clogging incidents in the sewerage networks are generally caused by the discharge of household and construction debris by consumers and fatbergs.
396 cases of damage were recorded in the sewerage networks in the reporting period. The number of faults per 100 km of the sewerage networks is 5% lower compared to 2016.
All wastewater received by the treatment plants had undergone the complete cycle of treatment before it was discharged into water bodies. The costs for chemicals decreased by 8.8 million rubles (12%) compared with the plan.
The concentrations of the key controlled indicators – suspended substances, BOD5, biogenic elements and man-caused elements in purified water in all releases from all treatment plants – did not exceed the limits set in the Discharge Permits (Water Bodies) approved by the regulatory authorities. The established level of the treatment quality was achieved thanks to timely and proper control of the hydraulic load and adherence to standard procedures for operating facilities and equipment.
The ultraviolet irradiation technology is applied to disinfect the treated sewage before discharging it to a water body. The disinfected water parameters are fully compliant with the standards set by SanPiN 126.96.36.1990-00 - Wastewater Disposal in Populated Areas, Sanitary Protection of Water Bodies. Hygienic Requirements for Surface Water Protection.
- Number of consumers – households: 917,500 personal accounts.
- Number of consumers – legal entities: 36,129.
- Sales activity in the constituents of the Russian Federation: Amur region, Samara Region, Kirov Region, Perm Krai, the Republic of Karelia, Tambov Region, Ulyanovsk Region.
- Large share of the market in the regions of operation.
- Unification of the Group's management system.
- Large client base that allows introducing new services.
- Customer focus – creation of a system to assess the satisfaction with the service quality.
- High level of charge collection in the retail market – over 98%.
- Wide range of optional services.
|Type of product||Payment conditions|
|Citizens (direct payments)||Citizens (managing companies)||State financing||Other|
|Electric energy||Before 10th day of the month next to the billing||Before 15th day of the month next to the billing||70% in the current month, 30% in the month next to the billing||30% in the current month, 70% in the month next to the billing|
|Heating energy||30% in the current month, 70% in the month next to the billing||85% in the current month, 15% in the month next to the billing|
|Water Supply and sewerage||50% in the current month, 50% in the month next to the billing|
The Group's enterprises carry out their operations applying an end-to-end approach that includes:
- activities ensuring maximum collection of current receivables, measures to prevent the transformation of current receivables into overdue receivables;
- overdue receivables management;
- stimulating measures to improve the payment discipline.
Activities ensuring maximum collection of current receivables and preventing the growth of overdue receivables
- The provisions about the advance payment (current for the month of the service rendering) were included in water supply and sewerage contracts with legal entities (industrial, commercial and budget-funded consumers).
- The bills are issued to household consumers before the end of the billing month so that they could make the payment before the payment becomes overdue.
- The consumers are constantly reminded that the liability (penalty) for late payments increases from the 31st day of delay up to 1/130 of the refinancing rate of the Bank of Russia for legal entities and from the 91st day for household consumers and Housing and Communal Services.
The client service development program were approved in all operating enterprises in May 2017. The following measures were implemented as part of such program:
- convenient business hours of the client service centers were established;
- the efficiency of the client service center geography and the demand for new locations were analyzed;
- convenient methods of utility charge payment were arranged and offered to the clients: in addition to cash payments, payments through ATMs, payments via bank cards, transfer to the client pages of the banking and on-line payment services are available;
- we have introduced and are constantly improving the service of sending billing documents to legal entities using digital signature (SBIS system, Tensor) and to email addresses of household consumers;
- applicable and coming changes connected with utility billing and payments are regularly explained and clarified in the media.
- Household consumers that pay to intermediaries (Housing and Communal Services) are being switched to direct contracts with the companies of the Group. The objective is to ensure direct control and collection of utility charges to the transactional account of the Group's enterprises without any delay and to prevent any unauthorized use of the money by intermediary companies managing residential properties.
As of December 31, 2017, there are 1,613 personal accounts of consumers in the regions where the Group's enterprises operate, and direct payments to transactional accounts of the Group's enterprises are made now from 1,035 thousand personal accounts (59% of the personal accounts within the loop of control). Other residential consumers pay for utilities through the residential property management companies. One of the strategic areas of the Group's activities is to go on concluding direct contracts with household consumers.
Overdue receivables management was systematized in line with the requirements of the corporate standard – the Receivables Management Regulation. The methods applied to manage overdue receivables are described for each responsible department – sales service, legal service, security service – with the indication of the order, time limits and expected results of the business processes being performed. Core business-processes to manage overdue receivables:
- Complying with the pre-trial dispute resolution procedure: sending the claim and documenting the fact of its receipt by the debtor in the claims log.
- Making an agreement on repayment by installments.
- Implementing the procedure of the limitation of the utility supply (if technically feasible).
- Preparing a set of documents for or taking legal action based on the established priorities: debt amount, debt onset date and subscriber categories.
- Filing statements of claim, legal support during court proceedings, conclusion of a settlement agreement.
- Obtaining the writ of execution, submitting it to banks and Court Bailiffs Service.
- Searching for the debtor's money and property, including encumbering the debtor's money held in any third parties' transactional accounts.
- Initiating controlled bankruptcy procedure, initiating criminal cases against deliberate non-payers.
Energy Saving and Improvement of Energy Efficiency of Russian Utilities Systems
Each enterprise of the Group has an energy saving and energy efficiency improvement program developed on the basis of energy audit findings in line with federal Law No. 261-FZ.
The Group makes efforts to reduce its electricity costs because electricity tariffs are rising faster than water/heat supply tariffs (4–6% vs. 3–4% respectively). Energy saving measures taken by the Company compensate the difference.
The Company uses energy-intensive equipment. For example, treatment plants employ air blowing equipment that consumes most of the electricity. The lighting systems are being replaced with modern light-emitting diodes that consume less power. The focus on energy saving is our reserve of funds that enables us to modernize our equipment.
|thousand cubic meters||43,181||44,234|
|Other material costs||1,035,164||929,462|
A unified Technical Policy is implemented by all enterprises of Russian Utilities Systems to address its top-priority objective – to become the largest private operator and the industry's leader. The Policy is a system of strategic measures aimed at improving the quality, reliability and competitiveness of the Group's operations in the field of water/heat supply and sewerage.
Our objective is to create model enterprises.
The Technical Policy is a unified structured document describing the tasks assigned, their implementation method, including the areas of responsibility and time limits, for each operating structure.
Technical Policy Goals
- To determine the principles and approaches to making decisions on costs of equipment repairs and replacement.
- To ensure business profitability by taking relevant technical measures.
- To define performance indicators for equipment operation, repair and replacement as well as target values of such indicators. To define the responsibility for achieving the targets.
- To create favorable technological environment for the Group's enterprises to operate efficiently in the face of economic and political risks. To develop a set of measures for the implementation of the principles of and approaches to the technological efficiency of operations.
The responsibility for ensuring the Technical Policy development is vested in the Operating Director and the Head of the Operation and Technical Department. The Technical Policy is developed by the Group's Technical Council.
The members of the Technical Council are representatives of the Group's operating and technical unit, sales unit, IT unit and organizations within the Group's loop of control, and it is recommended that specialists of leading R&D organizations in the relevant field are invited as experts to the final Technical Council's meetings.
Most of the Company's enterprises have implemented the standards – instrumental surveys and technical analysis of the state of power equipment, pumping facilities, lighting systems, heating systems, motor transport fleet, etc. Much attention was paid to such issues as: certification and inventory of linear water supply and sewerage facilities and wells; development of investment projects based on the estimation of equipment ownership costs. Attention was also paid to the introduction of energy and water metering devices to obtain the actual balance of water supply, sewerage and specific energy indicators as well as to reduce the excess water pressure in water supply networks. The Company developed programs for road transport, repair and reconstruction, parameter tables for power equipment. It also systematized the development of hydraulic simulations of water supply and sewerage networks and the options of network zoning that would reduce the loss of potable water as well as electricity and emergency response costs.
The accomplishment of the Technical Policy objectives have a positive impact on the environmental safety in the region, the availability of water supply and sewerage services and on the health of people.
Another tool to implement the Group's unified Technical Policy has become a basic version of the PromActiv system introduced in all the companies under its control.
Technological charts to fulfill operational tasks were developed. The PromActiv system enables taking into account all the nuances: how the information about the accident or repair appears in the system, how long it takes to fix the problem, how much work is being done, what and how much material is required, what equipment and resources are employed on the site – all these data are available, transparent and clear.
An open website is going to be launched to receive information from Russian Utilities Systems' enterprises. Residents will be able to monitor online where any particular operations are carried out and why the water supply is limited.
By implementing our Technical Policy, we translate theory into practice.
The Lean Production contest has been launched for the employees of the organization. The authors of the implemented propositions regarding the improvement of financial and operational performance will be awarded with bonuses. All employees of the company can apply for participation in the contest. If the proposition is implemented, the employee will receive an incentive in the amount of up to 15% of the money saved or gained by the enterprise. The participant whose proposition will produce the maximum economic effect will be awarded with a special prize – a motor boat.
Technical Policy Scope
The Technical Policy is focused on managing:
- the unit of equipment as a management and cost planning item;
- technological risks (including the operation capacity of water intake stations, water supply and distribution systems in the case of any severe system fault);
- reliability of the major and ancillary equipment;
- operational and environmental safety;
- technology cost effectiveness and equipment operation;
- information about the equipment for cost management and planning, information maintenance rules constituting an integral part of the Technical Policy;
- diagnostics of technical units, technological schemes and systems. The diagnostic procedure constitutes an integral part of the Technical Policy;
- projects for new construction (expansion), technical re-equipment, reconstruction of facilities and equipment modernization.
Principles and Approaches to Making Decisions for Achievement of Technical Policy Objectives
- The decision whether any investments in repairing, upgrading or replacing any equipment should be prioritized is made individually for each equipment unit.
- The priority of any equipment unit depends on the return on investment and on the importance of the equipment unit.
- The decision to invest in repairing, upgrading or replacing any equipment is made using the methodology for calculating the total cost of equipment (facility) ownership.
- The allocation of funds should unfailingly ensure the reduction in operating costs and facilitate the Company's successful marketing activity (including potable water sales and efficient treatment of wastewater, collection of charges for sewage treatment, the implementation of optional chargeable system services, production waste disposal).
Internal and External Factors
The Company's Technical Policy is developed with due account for a number of external and internal factors (limitations).
The significant internal factors are as follows:
- state of the equipment, buildings and facilities;
- quality and qualification of their operation;
- non-compliance of technological processes and equipment with the Russian and international best practices;
- level of computerization and automation, etc.
The external factors impacting the Technical Policy development include:
- predicted volumes of sales of potable water and collection of charges for sewage treatment;
- tariff regulation parameters and their correspondence to the factual values;
- anticipated electricity purchase prices;
- dynamics of labor costs and qualification of the existing staff;
- anticipated prices of chargeable services;
- anticipated prices of waste disposal (if business-to-business sales of waste are expected).
Measures to Implement the Technical Policy
- To develop and approve a procedure for planning and coordinating equipment repair and replacement program.
- To implement the procurement system program based on the lowest cost of ownership principle.
- To develop a resource-saving strategy based on advanced technical solutions and cutting-edge technologies.
- To ensure technical regulation through standardizing equipment- and warehouse-related processes.
- To computerize the assessment of the technical state of equipment, to update this information regularly and to arrange the certification of equipment groups.
- To estimate the mean time between failures and failure consequences.
- To manage technological risks (risk management).
- To manage scale factors (optimal use of the station capacity (water and treatment); to decommission individual stations and units.
- To deploy IT technologies and automated control systems.
- To manage human resources by modernizing, optimizing and computerizing technological processes.
Investment Policy of Russian Utilities Systems
Russian Utilities Systems is one of the largest private investors in the Russian utilities sector. The Group's investment program is focused on creation of a reliable and solid housing and utilities system, modernization and capital construction of various housing and utilities facilities in the regions of its operation.
The Group's investment projects are developed in accordance with the following criteria:
- scrupulous elaboration of both technical and technological issues;
- availability of signed long-term lease;
- correspondence between the sources of return on investment and financing volume;
- discounted project payback period up to 7 years.
The Group entered into a number of leases (concession agreements on utilities) with regional and municipal authorities under which it makes improvements (modernizes) to existing communal infrastructure facilities and builds new facilities.
To finance its projects, Russian Utilities Systems uses its own funds as well as loans and money provided by the company's owners.
The Company has been allocates the profits from its core business for investment purposes for a number of years.
Some investment projects implemented by the organizations within the Company's control loop are co-financed both by private investors and by budgets of various levels.
Research and Technology Council
The Group's Research and Technology Council was established by Russian Utilities Systems in cooperation with NAVI Capital Management Fund in 2012. It focuses its efforts on selecting innovative projects to modernize the water supply and sewerage infrastructure.
The key areas of Research and Technology Council's activity:
- technology of potable water disinfection based on membrane bipolar cells;
- alternative methods to transport water;
- technologies for the biological nitrogen and phosphorus removal;
- processes of sewage sludge processing and utilization;
- water treatment processes to remove contaminants and pathogenic substances, including nanoscale viruses, without using chemicals;
- photochemical oxidation of desiccants using UV irradiation in various spectrum ranges and without oxidizing agents;
- special purpose reagents and sorbent agents for targeted non-destructive extraction and pre-extraction of micro-elements of toxic agents of primary and secondary genesis.
When studying relevant topics and developing projects, the Research and Technology Council relies both on the national experience and on international researches and practices. Given the economic situation in the Russian water utilities sector, the impact of various technological initiatives on the cost of operating activities is considered to be a particular factor.
The consolidated viewpoint developed by the Research and Technology Council's experts is reflected in the program of Russian Utilities Systems for investing in the infrastructure modernization.
Investment Projects Implemented by Russian Utilities Systems in 2017
Investment projects being currently implemented by Russian Utilities Systems using its own and borrowed funds, including the projects under the terms of public-private partnership and co-financing with the state budget.
The total costs of investment program in 2017 amounted to 1324.4 million rubles.
In 2017, Kirov Utilities JSC completed the construction of two new sewerage pumping stations in Kirov. They were constructed in cooperation with a contracting organization. These new facilities increased the capacity of the pumping stations and made it possible to connect new residential buildings and industrial facilities in the southern, western and south-western parts of the city of Kirov to the networks. They support the operation of the sewerage system in the largest part of the city. The decision was made to build new stations with modern, energy-efficient pumping units in order to support old Sewerage Pumping Station 3 and Sewerage Pumping Station 5.
A unique technology was used to build these two facilities according to which they were gradually descending under the ground to the depth of 12 meters. 3 meter high reinforced-concrete rings with the diameter of 8 meters were molded on site. The stations are equipped with powerful while also energy efficient pumps. The stations operate noiselessly, with the control system being fully automated.
At the same time, the sewers were being laid from the new station in Lenin Street. The old pipeline had two major technological drawbacks: it was laid in residential blocks and consumed a lot of electricity since the sewage had to be lifted uphill along Uritsky Street. The energy-intense pumps worked around the clock to lift such sewage. It was decided to reroute the sewer and to bypass the mountain in order to reduce the pressure on the pumping units to the minimum. This made it possible to lower the electricity costs significantly. The sewer was assembled from steel pipes with cement-sand protection and anti-corrosion insulation. The guaranteed service life will be at least 100 years. In the course of the sewer construction, the main and reserve lines were laid, with the total length of the new network constituting 4.4 km of pipes.
The construction cost 553 million rubles.
The new pumping stations enable further construction and development in such large districts of the city as South-West District and Novovyatsky and in the following residential blocks: Lepse, OtsM, Fileika, Chistye Prudy, Solnechny Bereg and (partly) Urvantsevo.
Reconstruction of urban sewage treatment plants in Samara
The Group together with Samara Utilities LLC is carrying out the reconstruction of the urban sewage treatment facility, one of the main facilities that performs complete mechanical biological treatment and returns treated and disinfected wastewater to the Volga River.
At the first stage of the reconstruction operations, we replaced the air blowers, i.e. equipment that supplies compressed air to tanks (aerotanks) with wastewater where wastewater is mixed with activated sludge and its biological treatment takes place.
In addition, we are reconstructing aerotanks at the urban sewage treatment facility arranging zones for nitride-denitrification and phosphorus removal. At the same time, a mechanical sewage treatment facility is being modernized, including the construction of bar screen buildings and sand bunkers. The sludge pumping station is under construction.
The energy saving effect is expected to amount to 17.4 million kWh/year, the economic effect is supposed to reach 45.3 million rubles/year. In total, the Group will invest more than 2,376 million rubles in the reconstruction of the urban sewage treatment facility reconstruction that began in 2013.
A comprehensive reconstruction of sewage treatment plants in Petrozavodsk began in 2012. Russian Utilities Systems, the Government of the Republic of Karelia, the municipal government of Petrozavodsk, the Ministry of the Environment of Finland, the Nordic Environment Finance Corporation (NEFCO), the Nordic Investment Bank and the Northern Dimension Environmental Partnership Fund joined their efforts to implement that project.
The investment totaled 650 million rubles, of which 176 million rubles were raised through: - international credit facilities, 34 million rubles; - Group's own funds, 440 million rubles; - non-repayable grant from the Northern Dimension Environmental Partnership and the Ministry of Environment of Finland.
The project involves: reconstruction of aerotanks, including the modification of the biological treatment process; reconstruction of the main pumping station; construction of new aerated sand traps; replacement of 3 turbo-compressors; repair of 6 existing secondary sedimentation tanks and construction of 2 new ones, including the replacement of pipelines; installation of equipment for chemical sedimentation of phosphorus; replacement of the equipment of the sludge pumping chamber, including the replacement of pipelines.
The project is to be completed in 2017. The reconstruction will ensure reliable operations of the facilities in strict compliance with the Helsinki Commission's recommendations in terms of nitrogen and phosphorus exclusion: to reduce their content to 0.5 mg per liter of wastewater, which means the reduction in the phosphorus discharge by about 75 tons per year.
Reconstruction of biological sewage treatment plants in Perm
A project was undertaken under public-private partnership to reconstruct biological treatment plants (BTF) in Perm and increase their capacity.
The reconstruction of the BTF began in 2005. A large package of project work was completed in 4 years and made it possible to stop the emergency discharge of sewage in the Danilikha River (and then in the Kama River) that had taken place for almost 20 years. The second stage of the treatment plants reconstruction began in 2010. At that stage, the primary biological treatment plants were transferred to a single-stage treatment mode: primary sedimentation tanks - aerotanks - secondary sedimentation tanks - release. The second flow of sewage through aerotanks and tertiary sedimentation tanks is excluded from the process.
Since 2005, the inlet chamber, bar screen buildings, on-site utilities with switching chambers, sand traps, primary and secondary sedimentation tanks, aeration tanks with dedicated nitriding-denitrification zones (process for the removal of nitrogen and phosphorus from sewage) have been reconstructed. In 2015 we began the reconstruction of the plant for dehydration of sediments resulting from wastewater treatment (work was performed without stoppage in production) at the biological treatment plants and the modernization of sludge and technological pumping stations, where the technological equipment, stop valves and pipelines were replaced.
NOVOGOR-Prikamye LLC continued the reconstruction of the biological treatment plants in 2017. The total financing required for the reconstruction is about 1.795 billion rubles, over 65 million rubles were invested in 2017.
The sewage treatment plants in Sheltozero village were reconstructed under the 2011–2017 Targeted Program for Potable Water Supply to Household Consumers of the Republic of Karelia. The program implementation was financed by the federal, republican and municipal budgets and by the private investor Petrozavodsk Utilities OJSC. The total financing under the program will amount to 404 million rubles, including 60.6 million rubles invested by Petrozavodsk Utilities OJSC The program involved the reconstruction of the sewerage systems and the sewage treatment plants in urban-type community Pryazha and in the villages: Chalna, Meliorativny, Novaya Vilga, Zaozerye and Sheltozero. In addition, the sewage treatment plants were built from scratch in the village of Vedloozero (Pryazhinsky District).
One of the facilities included in the program was completed in Sheltozero village in August 2017. The sewerage pumping station was built, the new equipment was procured, the amenity spaces for workers and specialists were reconstructed and the territory was improved and fenced. The modern equipment allows three stage treatment and deep biological treatment of wastewater, including ultraviolet disinfection.
The Ministry of Construction, Housing and Utilities of the Republic of Karelia has approved the investment program of PKS – Heat Network OJSC (now PKS – Heat Network JSC) for the development of heat supply systems in Petrozavodsk in 2015–2019.
The program implementation will require about 272 million rubles raised from the own funds of PKS – Heat Network JSC. The program involves such activities as construction, reconstruction and modernization of heat supply facilities to connect new consumers; construction of new centralized heat supply facilities that are not related to the connection of new consumers; reconstruction or modernization of existing facilities in order to reduce the level of wear and tear of existing facilities and/or to ensure heat supply from different sources; and close-down, preparation for storage and demolition of centralized heat supply facilities.
NOVOGOR-Prikamye LLC is reconstructing the Yuzhnaya pumping station in Perm that distributes the water form Chusovskoy and Bolshekamsky water supply intakes. This station pumps over 50% of the potable water consumed by the city.
The total cost of the reconstruction of the key pumping station in Perm is expected to be over 718 million rubles. It was decided to modernize the Yuzhnaya pumping station step-by-step over several years.
The modernization project involves the construction of two tanks with the aggregate volume of 16 thousand cubic meters within the station territory. One of them was built in 2011. The tank built in 1970 was dismantled in 2017 to clear a space for the construction of a new one.
In 2017 the pumping station has 4 working tanks: one with the volume of 8 thousand cubic meters and three with the volume of 6 thousand cubic meters each.
The reconstruction of the Yuzhnaya pumping station will also involve the following operations: arranging the water collection and distribution to the tanks; ensuring the operation of the generator halls to their own feed areas and to the common collector; deploying an automatic control and telemetry system; replacing and laying new on-site networks.
The comprehensive modernization of the pumping station will make it possible to:
- meet long-term needs of the household and industries for water supply;
- create (and integrate into the system) the tanks that have required volumes and are in line with the standards;
- ensure water availability for firefighting and long-range housing development;
- stabilize the pumping station operation;
- carry out preventive activities, to repair or close down clean water tanks, incoming and tail race water conduits without any significant impact on the pumping station operation mode.
|Well-balanced loan portfolio||Investments|
|The management makes the decision to distribute dividends provided that the Group has positive free cash flow and the debt criteria have been met||
Financial Performance Indicators of Russian Utilities Systems under IFRS*
The financial performance indicators demonstrate the Group's increased efficiency in 2017. The revenue increased by 8% in 2017 thanks to the high results achieved in Samara Region segment.
|Operating profit||million RUB||1,936||1,475||2,783||89%|
|Net profit||million RUB||1,804||1,113||1,283||15%|
The revenue of Russian Utilities Systems for 2017 increased by 1,794 million rubles compared to 2016. The revenue increase resulted mostly from the increase in the sales of electricity (8.8%) and water supply and sewerage services (7.9%).
The operating expenses of Russian Utilities Systems increased by 2.5%. The increased costs of repairs and maintenance of infrastructure facilities (14%) became the main factor contributed to the operating expense dynamics. The costs of the provision for impairment of trade and other receivables decreased by more than 50% compared to 2016.
In addition, the operating expense ratio went down from 95% to 91% in the reporting year.
|Payroll expenses and payroll taxes||5,761||5,352||5,519||3%|
|Repairs and maintenance of infrastructure facilities||2,079||2,134||2,438||14%|
|Other external services||4,415||6,619||7,318||11%|
|Depreciation and impairment||904||881||1,016||15%|
|Provision for impairment of trade and other receivables and loans issued||980||1,091||484||-56%|
|Other operating expenses||1,772||2,019||1,764||-13%|
Cost structure of Russian Utilities Systems
- The Group's cost structure has no prevailing costs with the share of over 25%, which allows the Company to optimize its costs in different areas and mitigates the risk of dependence on a skyrocketing growth of any particular expenses.
- The Company's diversified cost structure creates opportunities for improving its business performance.
- All costs are in rubles, which excludes currency risks.
The net profit increased significantly in 2017 compared to the previous year, which is indicative of the increase in the Company's business activity.
Financial ratios illustrating the Company's financial policy efficiency
The return on equity increased by 21% in 2017 due to the increased net profit.
The rise in the EBITDA margin to 12% in 2017 is connected with the structure effect of the program for operation efficiency improvement and trade portfolio optimization.
The rise in the operating activity margin to 9% in the reporting period is connected with the reduction in other operating expenses and the decrease in the provision for impairment of trade and other receivables and loans issued if compared to the previous year.
The Net debt / EBITDA ratio is in line with the limitations established by the Group's Financial Policy (no greater than 3.5). The results of 2017 show that the indicator increased by 14% and is equal to 2.4. In 2018, the ratio is expected to be closer to the level demonstrated in the previous years, a bit lower than in 2017. However the indicator will remain much lower than the threshold values provided for by the Group's Financial Policy. The debt burden reduction is ensured by the measures aimed at the improvement of the net operating margin ratio by business type.
The Debt to equity ratio is at the level comfortable for the Group. According to the results of 2017, this indicator decreased by 23% compared to 2017.
|Operating profit||million RUB||1,936||1,475||2,783|
|Net profit||million RUB||1,886||637||1,907|
|Ratios and other indicators|
|Operating activity margin||%||7%||5%||9%|
|EBITDA margin, %*||%||13%||8%||12%|
|Net profit margin||%||7%||2%||6%|
|Return on assets||%||9%||3%||9%|
|Return on equity||%||29%||9%||21%|
|Debt to equity ratio||ratio||2||1.8||1.4|
|Current liquidity ratio||ratio||0.81||0.72||1.07|
|thousand rubles||2016||2017||2017/2016 Difference|
|Sales profit||- 73,994.00||- 92,122.00||-24%|
The net profit in 2017 increased by 250% compared to the previous year.
In 2017, the revenue decreased by 10,656 thousand rubles compared to 2017 due to the sales of some assets for lease.
|Indicators, thousand rubles||2016||2017||2017/2016 Difference|
|Revenue – asset lease services||31,665.00||21,009.00||-33%|
|Revenue – other activities (including the provision of security and transfer of the rights to software)||151,427.00||172,051.00||14%|
|Worker productivity, thousand RUB / person||3,390.59||3,113.87||-8%|
|Debt to equity ratio||0.09||0.00||-|
|Long-term debt / long-term debt and equity sum||0.00004||0.000||-|
|Debt coverage ratio||- 5.65||14.16||151%|
|Current arrears rate, %||0||0||0|
|Net working capital, thousand rubles||1,286,483.00||2,445,520.00||90%|
|Current liquidity ratio||3.87||150.71||3,794%|
|Quick asset ratio||3.86||150.62||3,802%|
|Net profit margin, %||97.30||417.17||429%|
|Asset turnover ratio, times||0.033||0.032||-3%|
|Return on assets, %||3.191||13.528||424%|
|Return on equity, %||3.470||13.565||391%|
|Uncovered loss as of the reporting date, thousand RUB||0.00||0.00||-|
|Uncovered loss as of the reporting date / book value of assets, %||0.00||0.00||-|
Debt Portfolio of Russian Utilities Systems as of January 1, 2018
The total debt is 3,878 million rubles, the average effective interest rate is 9.94%
The total amount of unused limits under applicable agreements is 3,208 million rubles.
Available loan limits
The total amount of loan limits available for the Group is 9,406 million rubles.