Integrated annual report | Samruk-Energy JSC

Strategy

Mission

To create value for shareholders, employees and society as Kazakhstan’s high-tech guarantor of energy supply and Eurasian’s supplier, guided by principles of care for environment and lean production

Vision

Effective operating power holding company of Eurasian importance – Kazakhstani market leader

Our values

Leadership

We strive for leadership in all areas of our activities. We are committed to achieving quality results and are committed to learning by avoiding damage to society and the environment.

Respect

We respect the external and internal environment in which we operate. We act in such a way as to earn the trust of those around us. Our success depends on the relationship, and we respect each other and our partners. We value the diversity of people and opinions.

Security

Preserving the life and health of our employees, ensuring occupational safety and taking care of the environment are our top priority. We provide the world with energy and we strive to do it by safe methods.

Efficiency

We recognize our duty and our responsibility to shareholders and partners, therefore profitability and efficiency of operations, achievement of results, both expected and exceeding expectations are an undisputable value for us.

We achieve our goals based on the competence of our employees, discipline and interaction, ensuring the necessary balance of interests of each employee and the Company as a whole.

We are one team

Each of us is a professional, but together we can achieve more. We set ourselves new ambitious tasks and achieve them by interacting, supporting and complementing each other.

Our goals

Ensuring energy security of Kazakhstan

Ensuring the reliability of electricity and coal supplies and maintaining the stability of UES

Increase shareholder value

  • Protection of shareholders’ interests and successful initial public offering (People’s IPO)
  • Ensuring financial stability of the holding
  • Optimizing the structure of the holding’s assets
  • Participation in commercially viable projects

Social responsibility

  • Ensuring social sustainability
  • Elimination of workplace injuries
  • Environment Protection

Target milestones

“Сonventional generation” – high-tech development, leadership in the Republic of Kazakhstan and effective monetization of excess capacity for export

  • Strengthening of sales function, commercial optimization and trading on the basis of the Trade House
  • Effective implementation of the investment program (optimal balance of generating facilities)
  • Ensuring the required level of performance of existing facilities
  • Enhancement of the function of interaction with the regulator
  • Development of new businesses and services, diversification into related businesses for increased sales and environmental progress
  • Development of additional sales channels in the domestic market
  • Development of additional sales channels in the external market
  • Development of innovation and clean coal technologies, carbon capture and storage

“RES” – active introduction and development of renewable energy technologies in the Republic of Kazakhstan

  • Ensuring leadership in the development of renewable energy in the Republic of Kazakhstan through effective implementation of planned projects and identification of new ones that provide an ambitious development of renewable energy sources
  • Development of energy storage technologies

“Сoal business “ – development of high-tech coal business, the implementation of new growth points

  • Development of raw coal business in the RK
  • Development of raw coal business in the RF
  • Improving the efficiency of coal business
  • Development of high-tech business lines for enrichment, development of coal seams
  • Innovation and R & D development

“Distribution and sale” – sale of assets as part of a comprehensive privatization plan for 2016–2020 across the Company group

“Company-wide development”

  • Transition to the principles of operational holding company management with partial centralization of functions in the head office
  • Implementation of the Company’s transformation program
  • Protection of shareholders’ interests and successful initial public offering
  • Fulfillment of obligations relating to social responsibility of business with application of the best practices
  • Innovative development
  • Improving the process of investment planning and project management


Market overview

Kazakhstan electricity market model

The power system of the Republic of Kazakhstan is conditionally divided into three zones: Northern, Southern and Western.

The northern zone is Akmola, Aktobe, East Kazakhstan, Karaganda, Kostanay, Pavlodar, North-Kazakhstan regions. 77% of electricity of the country’s total production is generated in the northern zone. Main coal deposits and water and energy resources are located in the northern zone. Excess electricity is transferred to the southern zone experiencing power shortages and is exported to the Russian Federation.

The southern zone – Almaty, Zhambyl, Kyzylorda, South-Kazakhstan regions and Almaty city. It is characterized by a shortage of electricity and a high level of electricity prices. The shortage is covered by supplies from the northern zone.

The western zone – Mangistau, Atyrau, Western Kazakhstan regions. A significant share of electricity consumption is made by oil and gas companies with their own generating sources. There are no electrical connections of the West with the North and South of Kazakhstan through the territory of the country.

Geographical division of the market

Electricity balance of the Republic of Kazakhstan, bln. kWh

Description

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

 

RK electricity consumption

76.4

80.6

78.0

83.8

88.1

91.4

89.6

91.7

90.8

92.3

97.9

 

Generation in the RK

76.4

80.1

78.4

82.3

86.2

90.2

92.0

93.9

90.8

94.1

102.4

 

Inter-republican flows

Total

0.075

0.545

-0.474

1.472

1.933

1.197

-2.332

-2.274

0.051

-1.765

-4.527

Russia

-1.141

-0.009

-1.573

-0.162

-0.206

0.270

-2.301

-1.504

0.471

-1.640

-4.528

Central Asia

1.215

0.554

1.099

1.634

2.139

926.4

-0.031

-0.771

-0.421

-124.7

0.001

Zone

Generation type

January-December

Δ, %

 

 

 

2016

2017

 

Kazakhstan

Total

94,076.5

10,2383.6

8,83

TPP

74,702.8

82,424.8

10,34

GTPP

7,407.6

8,372.6

13,03

HPP

11,605.9

11,157.9

-3,86

WPP

274.1

338.5

23,50

SPP

86.1

89.8

4,30

Northern

Total

70,968.4

78,714.0

10,91

TPP

59,861.2

67,992.2

13,58

GTPP

3,072.2

2,979.9

-3,00

HPP

7,879.0

7,571.5

-3,90

WPP

156.0

170.4

9,23

Southern

Total

11,731.4

11,347.2

-3,27

TPP

7,692.8

7,350.6

-4,45

GTPP

3,726.9

3,586.4

-3,77

HPP

107.5

152.3

41,67

WPP

118.1

168.1

42,34

SPP

86.1

89.8

4,30

Western

Total

11,376.7

12,322.4

8,31

TPP

7,148.8

7,082.0

-0,93

GTPP

4,227.9

5,240.4

23,95

Competitive environment in power market

The following energy producing organizations were the most powerful competitors in the wholesale electricity market in 2017

Competitive companies

Electricity generation volume in 2017

 

mln. kWh

% of generation in the RK

“Eurasian Group” LLP 

19,054.5

18.6

“Kazakhmys Energy” LLP

6,756.3

6.6

“Kazakhstan Utility Systems” LLP

6,464.4

6.3

"Central Asian Energy Corporation" JSC

7,299.9

7.1

Installed capacities by largest owners and operators of power plants

%

 

“Samruk-Energy” JSC

6,805 MW

31.4

“Eurasian Group” LLP

3,262 MW

15.0

“Kazakhmys Energy” LLP

960 MW

4.4

“Kazakhstan Utilities Systems” LLP

1,150 MW

5.3

“Central Asian Energy Corporation” LLP

1,204 MW

5.5

Others

8,305 MW

38.3

Total

21,682 MW

 

The volume of electricity production by energy producing organizations of “Samruk-Energy” JSC competitive organizations in 2017 amounted to 53.3 billion kWh, which is 2.1 billion kWh more compared to 2016 (51.2 billion kWh).

The volume of electricity production by energy-producing organizations of “Samruk-Energy” JSC in 2017 amounted to 28,661.6 million kWh or an increase of 27.5% as compared to the figures for 2016 (electricity production in 2016 was 22,485.1 million kWh).

The model of the market of electric energy and capacity, introduced from 01/01/2019

Kazakhstan plans to introduce the Single Purchaser model with the operation of capacity market from January 1, 2019, which aims to create favorable conditions for attracting investments in power industry, building new generating facilities in an amount sufficient to meet the demand for electricity, maintain the required level of energy supply reliability and develop export potential of the industry.

Tariffs of energy producing organizations will be divided into 2 components: the tariff for electricity and the tariff for maintaining the availability of capacity. Tariffs for electricity will include variable operating costs. Tariffs for maintaining the availability of capacity will include investment costs. Tariffs are planned to be adjusted annually, taking into account the need to ensure the investment attractiveness of the industry.

Establishment of the common electricity market of the Eurasian Economic Union

The common electricity market of the Eurasian Economic Union (EEU) will be established on July 1, 2019, which provides for mutually beneficial cooperation of power systems of five member countries with preservation of national electricity markets. The Agreement on the EEU provides for further structured convergence and harmonization of regulatory and legal provisions of member states. The Concept for establishment of the Common Electricity Market of the Eurasian Economic Union (CEM EEU) was approved on May 8, 2015 in Moscow city by the decision of Supreme Eurasian Economic Council (No. 12).

Currently the work on approval of the Agreement on CEM of the EEU by EEU member countries is underway.

The CEM EEU will open new opportunities for power industry of the Republic of Kazakhstan: there will be an additional market for electricity sales to the Russian Federation and the Republic of Belarus, and there will be an opportunity to supply electricity from Central Asian countries to the countries of the Eurasian Economic Area.

Coal market

Coal industry of Kazakhstan

Coal total, thous. tons

The coal industry is one of the most important resource industries in the Republic of Kazakhstan. Coal accounts for 66% of total consumption in the current structure of fuel generation. All major segments of the coal industry are represented in Kazakhstan, but the extraction and use of steam coal is particularly developed.

According to the BP Statistical Review of World Energy, as of 2017, Kazakhstan ranks eighth in the world in terms of proven coal reserves. (25.6 billion tons or 2.2% of the world total).

According to IHS CERA experts in KAZENERGY-2017 National Energy Report, the forecast of coal production and consumption in Kazakhstan for the period up to 2040 shows a number of important trends. The volume of coal production will gradually decrease to below 80 million tons in 2040. Apparent consumption will follow a similar trajectory, which will also gradually decrease from a level of more than 70 million tons in 2016 to a level of about 60 million tons in 2040. These trends conform to the prospects for a phased increase in efficiency of using energy resources in the economy, where the use of gas will gradually increase and, possibly, nuclear power plants will be put into operation after 2030.

The major share of produced steam coal goes to the needs of the Republic of Kazakhstan’s power industry and for export (51% and 31% respectively), the rest is for public utilities and industrial enterprises (13% and 5% respectively).

Steam coal market of total production

Export of steam coal

Export of steam coal to Russia account for main share of total exports from Kazakhstan (84% of the total 26.2 million tons). The Russian Federation power plants specifically designed for Kazakhstani coal ensure the basic demand. The volume of imports of Kazakh coal varies depending on the total consumption of coal in Russia, but the share of its use in Russian coal generation has been declining lately and is about 20%.

The list of coal mining companies in the Republic of Kazakhstan that supply coal to 12 power plants of the Russian Federation:

  1. “Bogatyr Komir” LLP (coal brand CCSM);
  2. “EEK” JSC (coal brand CCSM);
  3. “Angrensor-Energo” LLP (coal brand CCSM);
  4. “Maikuben-West” LLP (coal brand B3. D);
  5. “On-Olzha” LLP (coal brand B3).

Development of the Russian Federation power industry assumes a gradual transfer of Ural power plants’ consumption from Ekibastuz coal to Kuznetsk coal. The increase in export volumes of Ekibastuz coals in Russian direction is not expected.

Currently, the coal production capacity in the Republic of Kazakhstan is largely ahead of the domestic market for steam coal. The issues of transition of a number of coal-fired power plants of Kazakhstan from coal to gas are discussed. According to KAZENERGY forecasts, over time, the share of coal for power generation in Kazakhstan will gradually decrease due to its replacement with natural gas, as well as the reduction in energy intensity of economic growth.

In light of this, the priority direction of the coal industry development as a whole should be the strengthening of innovative activities aimed primarily at reducing extraction and processing. Costs, the introduction of mining technologies tailored to specific mining and geological conditions. In addition, the key areas to improve the competitiveness of coal fuel are a fundamental improvement in its quality and the introduction of deep processing technologies.

Regulatory environment of the industry

The Ministry of Energy of the Republic of Kazakhstan develops the draft lists of sites of subsurface resources that contain hydrocarbon raw materials, coal and uranium to be tendered, in accordance with the Regulation on the Ministry of Energy of the Republic of Kazakhstan dated September 19, 2014 No. 994, approved by the Government of the Republic of Kazakhstan.

In accordance with the order of the Acting Minister for Investment and Development of the Republic of Kazakhstan dated October 15. 2014 No. 67, the Committee for Geology and Subsoil Use of the Ministry of Investment and Development of the Republic of Kazakhstan performs the following functions in the coal industry:

  1. exercises state control over the study and use of subsoil;
  2. within the limits of its competence, monitors and controls over the performance of contract terms by subsoil users;
  3. carries out state monitoring of subsoil and exercises other powers set out in the legislation of the Republic of Kazakhstan.

SWOT-analysis

Strengths

Weaknesses

 The availability of large reserves of steam coal with a low production cost

 Effective energy facilities relative to the overall level of depreciation of facilities in the Republic of Kazakhstan

Support from the state and the Fund

1.    Low capacity factor

2.    High debt burden

3.    Low cost management opportunities

Opportunities

Threats

Increase in the market share through increased demand, ensuring competitiveness and changing the market model in the future

Development of export potential of the Republic of Kazakhstan, incl. through the status of National Operator

Optimization of capacity balance in accordance with market demand (TPP, CHP, HPP, RES)

Expansion of coal use directions incl, through coal preparation

1.   Preservation and expansion of combined generation

2.   Increase in the gap between the supply and demand of generating facilities

3.   Excessive tightening of environmental legislation

4.   Increased access to the Republic of Kazakhstan market due to development of the common electricity market of the EEU

ACHIEVEMENT OF “SAMRUK-ENERGY” JSC STRATEGIC KPI

Description

Actual 2016

Actual 2017

2018 (forecast)

2019 (forecast)

1

Economic value added. mln. tenge

-44,355

-47,131

-25,292  

-10,147  

 

EVA of controlled assets

-44,355

-47,131

-33,679  

-17,386   

 

EVA of JV and JSC

 

 

8,388

7,238

2

Debt/EBITDА (ratio)

5.41

4.64

3.28

2.02

3

Free cash for development and dividends, mln. tenge

24,201

36,742

66,191

78,119

4

Net asset value, mln. tenge

412,874

382,946

448,923

492,925

5

Transformation Program implementation, %

 

65

100

100

6

Corporate Governance Rating

 

B

ВВ

ВВВ

7

Electricity generation volume, mln. kWh

22,485

28,662

31,688

35,030

8

Share of electricity market in the Republic of Kazakhstan

23.9%

28.0%

30.2%

33.1%

9

Ensuring the sale of “Samruk-Energy” JSC assets as part of  implementation of the Integrated Privatization Plan

 

 

100

100

The Company’s strategic indicators have an upward tendency from 2016 to 2019. The main drivers of growth are an increase in the volume of electricity sales for export to Russia; growth in the domestic market; obtaining a temporary reduction factor to transportation costs connected with electricity exports; introducing the capacity market; decrease in the debt burden.