RUS

Review of Operating Results of Russian Utilities Systems

Top-Priority Areas of Activity

Periods of leases and concession agreements concluded
Company Contract duration period Expiry date
Amur Utilities Systems JSC

35 years

2050

Investresurs LLC

25 years

2036

Kirovsk Utilities JSC

15 years

2019

PKS – Heat Network JSC

20 years

2025

PKS-Water and Sewer Enterprise JSC

20 years

2025

Tambov Utilities JSC

25 years

2030

Volzhskie Utilities LLC

25 years

2035

Ulyanovsk Water and Sewer Enterprise LLC

49 years

2059

Energocomfort Karelia LLC

10 years

2025

Bereznikovskaya Water Supply Company LLC

30 years

2037

NOVOGOR-Prikamye LLC

30-49 years

2036-2054

Key business lines
Key principles of concession agreements with Russian Utilities Systems



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.

Tariff Policy

Billing for Optimization of Market Methods

Results of Development in Top-Priority Activity Areas

Report of the Board of Directors of Russian Utilities Systems

Revenue
2017 2016
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
Agent commission 42,183 31,076
Revenue from consulting, information, management and other services 6,311 3,883
Other revenue 109,839 64,269
32,693,199 30,656,873

The table demonstrates data based on the consolidated financial statements of Russian Utilities Systems for 2017, including data of Vladimir Utility Systems JSC.

Regions of operation
Segment Information, thousand rubles
For the year ended December 31, 2017 Total revenue EBITDA for reporting segments
Vladimir Region 10,102,840 576,643
Republic of Karelia 5,452,628 374,281
Amur Region 3,761,440 345,121
Samara Region 6176121 1,021,753
Kirov Region 1,546,207 407,287
Perm Krai 5,008,294 1,028,519
Other regions 3,355,117 84,394
Total regions 35,402,645 3,837,998
Adjustments and Exemptions (2,709,446) -39,126
Consolidated 32,693,199 3,798,872


Operating Activity

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.

Sustainable customer base
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

Energy Saving and Improvement of Energy Efficiency of Russian Utilities Systems

The consumption of energy
No. Indicator Unit 2016 2017
1

Electricity

thousand kW/hour 778,870 746,112
2 thousand rubles 2,464,473 2,607,796
3

Heat energy

Gcal 1,609,490 1,548,467
4 thousand rubles 1,340,987 1,369,414
5

Natural gas

thousand cubic meters 43,181 44,234
6 thousand rubles 208,323 217,253
7

Gasoline

thousand liters 17,053 18,112
8 thousand rubles 40,780 42,652
9

Diesel fuel

thousand liters 38,236 34,051
10 thousand rubles 101,920 97,995
Material costs, thousand rubles
2017 2016
Electric energy 6,143,389 5,943,368
Heat energy 3,100,069 3,086,084
Fuel 990,734 1,004,165
Water 102,745 122,470
Other material costs 1,035,164 929,462
11,372,101 11,085,549

Technical Policy


Technical Policy Goals

The Technical Policy of Russian Utilities Systems has the form of a pyramid
Production Asset Management System at PromActiv
Business Case NOVOGOR-Prikamye LLC

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.

Data Sharing of PromActiv System with Other Systems Chart

By implementing our Technical Policy, we translate theory into practice.

Oleg Markelov, Director for Operations, Russian Utilities Systems
Business Case. Russian Utilities Systems Petrozavodsk (Petrozavodsk Complex Payments Center LLC, PKS – Water and Sewer Enterprise JSC, Energocomfort Karelia LLC, PKS – Heat Network JSC)

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

Principles and Approaches to Making Decisions for Achievement of Technical Policy Objectives

RUS

Internal and External Factors

Measures to Implement the Technical Policy

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.

Available loan limits


Research and Technology Council

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Investment Projects Implemented by Russian Utilities Systems in 2017

Financial Results

Policy Focuses

Well-balanced loan portfolio Investments
  • Reasonable financial policy to create a reliable financial platform for future development.
  • Well-balanced loan portfolio of the Company (Debt/ EBITDA is no greater than 3.5)
  • Policy ensuring available reserve loan limits without additional fees
  • Loans are in Russian rubles
  • Investment activities were carried out pursuant to the approved investment program and loan agreements
  • The return on investment is ensured with the help of capital investment gains recognized in the long-term tariffs and the concession agreements
  • The maximum term to cover the costs of the activities is 3.5 years.
Dividend policy Liquidity
The management makes the decision to distribute dividends provided that the Group has positive free cash flow and the debt criteria have been met
  • Ensuring a sufficient amount of funds on transactional accounts
  • Ensuring available loan limits

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.

Key Financial Performance Indicators of Russian Utilities Systems under IFRS
Indicator Unit 2015 2016 2017 2017/2016 Difference
Revenue million RUB 20,571 21,203 22,997 8%
Operating profit million RUB 1,936 1,475 2,783 89%
Net profit million RUB 1,804 1,113 1,283 15%
EBITDA million RUB 2,102 2,426 2,934 21%
FFO million RUB 2,618 2,123 2,601 22%
DEBT/EBITDA ratio 2.1 1.9 2.2 16%
* The Holding’s reporting indicators under IFRS and the estimated indicators based on the reporting data under IFRS (without data on Vladimir Utility Systems JSC).

Revenue

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%).

Revenue mix

Operating expenses

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.

Operating expenses, million RUB
2015 2016 2017 2017/2016 Difference
Material costs 9,920 11,086 11,372 3%
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%
TOTAL 25,832 29,182 29,911 2.5%

Financial ratios illustrating the Company's financial policy efficiency

Summary of financial results under IFRS
Unit 2015 2016 2017
Financial indicators
Revenue million RUB 27,876 30,657 32,693
Operating profit million RUB 1,936 1,475 2,783
Net profit million RUB 1,886 637 1,907
EBITDA million RUB 3,728 2,379 3,799
FFO million RUB 2,972 1,883 3,475
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
DEBT/EBITDA ratio 1.62 2.47 1.64
Key Financial Performance Indicators under Russian Accounting Standards (RAS)
thousand rubles 2016 2017 2017/2016 Difference
Revenue 183,092.00 193,060.00 5%
Sales profit - 73,994.00 - 92,122.00 -24%
Net profit 178,150.00 805,384.00 350%

The net profit in 2017 increased by 250% compared to the previous year.

Revenue structure

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%
Performance indicators
Indicators 2016 2017 2017/2016 Difference
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
Financial soundness indicators
Indicators 2016 2017 2017/2016 Difference
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%
Business and financial performance indicators of the issuer
Indicators 2016 2017 2017/2016 Difference
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.