Integrated annual report | Samruk-Energy JSC

Financial and economic overview of the Company’s activities

To date, the Company is the largest diversified power holding company successfully integrated into the international energy mix, which forms a highly efficient energy supply system, and also ensures sustainable development of all sectors of Kazakhstan.

The Group is mainly engaged in production of electricity, heat and hot water based on coal, hydrocarbons and water resources and sales to the population and industrial enterprises, transportation of electricity and technical distribution of electricity in grids, construction of hydropower plants and thermal power plants, construction and operation of renewable energy sources, coal mining, as well as rental of property complexes of hydro power plants.

The Company’s assets include the largest power producing companies, including power plants of national importance, such as “Ekibastuz SDPP-1“ JSC and “Ekibastuz SDPP-2“ JSC, as well as the plant that produces electricity and heat that is of regional importance in the Almaty region; Irtysh Cascade of HPPs. There are main hydropower plants of the Republic that are included in the Irtysh cascade of HPPs. as well as hydropower plants in the southern regions of the country (Shardarinsk HPP and Moynak HPP). Also, the Company’s assets include regional distribution grids and a sales company in the Almaty region and the largest coal mining enterprise in Kazakhstan “Bogatyr Komir” LLP. The enterprise supplies coal to the generating facilities of the Group and third parties located both in Kazakhstan and in the Russian Federation.

On November 23, 2016, the Board of Directors of the Company approved the plan for privatization of a number of subsidiaries in accordance with the Government Decree on assets privatization. As of December 31, 2017, the assets “Aktobe CHP”, “East Kazakhstan Regional Energy Company” JSC, “Shygysenergotrade” LLP and “Mangistau Electricity Distribution Network Company” JSC were sold.

Macroeconomic factors

According to results of 2017, inflation was at the level of 7.1%, which is below the inflation rate of 2016 (8.5%) by 1.4%. The reduction in external inflationary pressures, the stabilization of the situation in the foreign exchange market and the trend towards strengthening the tenge in the fourth quarter against the backdrop of a positive trend in the world commodity markets, the stability of prices for major commodity positions in external agricultural markets contributed to a slowdown in inflationary processes. A further decline in inflation was hindered by the continuation of the price shock in the energy market, the impact of which was weakened only at the end of the quarter. Core inflation rates continued to show a steadier decline. (source NB RK)

Dynamics of currency exchange rates:

 

31.12.2016

31.12.2017

%

KZT/USD

333,29

332,33

100 %

KZT/EUR

352,42

398,23

113 %

KZT/RUB

5,43

5,77

106 %

KZT/USD

KZT/EUR

KZT/RU

Electricity production in the RK, mln. kWh

Consumption of electricity in the RK, mln. kWh

According to the System Operator, the power plants of the Republic of Kazakhstan generated 102,383.6 mln. kWh of electricity in 2017, which is 8.83% more than the same period in 2016. The Northern and Western Zone of the RK UES had an increase in generation, while in the Southern Zone there was a decrease in production volumes.

According to the System Operator, there is an increase in the dynamics of electricity consumption throughout the Republic of Kazakhstan in 2017 in comparison with figures of 2016. Thus, in the northern zone of the republic consumption increased by 5.0%, in the western zone by 7.8% and in the southern zone by 8.1%.

The production of nitrogen and phosphorus fertilizers, phosphorus and ferro silicomanganese increased in Zhambyl region. This influenced on the growth of electricity consumption in the region (19.2%).

Electricity consumption in Atyrau region increased by 17.5% due to an increase in crude oil production volumes.

The electricity consumption in Aktobe region increased by 11.9% in connection with an increase in the extraction of chrome ores and concentrates.

Electricity consumption in West-Kazakhstan region increased by 6.8% owing to production of gas condensate.

Electricity consumption in South-Kazakhstan region increased by 8.8%. The production of medicines, kerosene, gasoline, electric transformers and cotton has grown in the region.

Production figures

The Share of “Samruk-Energy” JSC in the overall electricity production across the RK for 2017

The share of “Samruk-Energy” JSC in total power generation in the Republic of Kazakhstan in 2017 was 28%, compared to 2016, the share increased by 4%.

Operational KPI (broken down by producers)

Name of a subsidiary and affiliate

2016

2017

2017 deviation against 2016

2018 (forecast)

2019 (forecast)

 

 

 

 

 

 

Electricity production volumes. mln. kWh

 

 

 

 

 

“APP” JSC

5,911.4

5,712.4

97%

5,205.1

5,204.3

“Aktobe CHP” JSC

905.7

901.2

100%

– 

“Ekibastuz SDPP-1” LLP

9,037.3

14,797.0

164%

19,912.1

22,547.7

Including export

133.2

4,705.5

 

6,100.0

6,100.0

 “Ekibastuz SDPP-2” Plant JSC

4,976.1

5,495.5

110%

5,109.7

5,800.6

“Shardarinsk HPP” JSC

334.0

359.4

108%

320.0

378.0

“Moynak HPP” JSC

1,165.5

1,226.5

105%

960.0

906.0

“Samruk-Green Energy” LLP

3.2

3.2

100%

8.7

21.7

“FWPP” LLP

151.8

166.4

110%

172.2

172.2

Total

22,485.1

28,661.5

127%

31,687.7

35 030.4

Electricity transmission volumes. mln. kWh

 

 

 

 

 

“AZhC” JSC

6,252.0

6,527.9

104%

6,696

“EK REC” JSC

3,375.2

3,399.6

101%

“MDPGC” JSC

2,490.4

2,098.5

84%

Total

12,117.6

12,026.1

99%

6,696

0.0

Electricity sales volumes. mln. kWh

 

 

 

 

 

“AES” LLP

5,766.8

5,767.5

100%

5,892.0

“ShET” LLP

2,670.7

2,618.7

98%

Total

8,437.6

8,386.1

99%

5,892.0

0,0

Heat production volumes. thous. Gcal

 

 

 

 

 

“APP” JSC

4,970.5

5,223.3

105%

5,140.0

5,140.0

“Aktobe CHP” JSC

1,763.5

1,731.4

98%

 “Ekibastuz SDPP-2 Plant” JSC

70.8

66.5

94%

76.0

76.0

“Ekibastuz SDPP-1” LLP

 

8.2

 

375.0

375.0

Total

6,804.8

7,029.3

103%

5,591.0

5,591.0

Coal sales volumes. mln. tons

35.1

40.9

116%

41.3

40.3

« – » the asset was sold/is planned to be sold

The volume of electricity production in 2017 amounted to 28,662 million kWh (an increase of 6,176.4 million kWh or 27% compared with 2016). The main increase in volumes was driven by “Ekibastuz SDPP-1” LLP export of electricity to Russia in the amount of 4,706 million kWh and an increase in the domestic market. an increase at “Ekibastuz SDPP-2 Plant” JSC was 519 million kWh owing to the sale of electricity at centralized bids. as well as an increase in the amount of output by 86 million kWh occurred at “Moynak HPP” JSC and “Shardarinsk HPP” JSC due to the growth of water inflow.

The increase in heat production volumes in 2017 by 5% (by 224.5 thousand Gcal) is due to an increase in the heating load due to a lower ambient air temperature compared to climatological temperatures in 2016.

Electricity production volumes (mln. kWh) at TPP, CHP

Electricity production volumes (mln. kWh) at HPP,WPP, SPP

Dynamics of change in heat production volumes, thous. Gcal

Electricity transmission volumes (mln. kWh) and grid losses (in %)

Electricity transmission volumes amounted to 12,026.1 mln. kWh, with a slight decrease in comparison with the level of 2016 volumes – 12,117.6 mln. tenge (a decrease of 91.5 mln. kWh).

Grid losses decreases owing to implementation of activities on retrofit of grids and Automatic system for commercial measurement of power consumption at “AZhC” JSC and “MDPGC” JSC by 0.46% and 1.99% respectively. In general, the level of losses across all Distribution power grid companies is below the standard established by the CRNP CP.

Total volume of electricity sales in power supply organizations during the reporting period amounted to 8,386 million kWh, which is lower than in 2016 by 0.6%.

Despite the increase in the number of consumers, the volume of consumption remains without significant changes:

Name

Actual 2016

Actual 2017

Deviation

%

AlmatyEnergoSbyt

 

 

 

 

Consumers number incl.

781,734

800,448

18,714

2%

Population

752,711

770,245

17,534

2%

Corporate entities

29,023

30,203

1,180

4%

Sales volume, mln. kWh

5,767

5,767

0.6

0%

Shygysenergotrade

 

 

 

 

Consumers number

498,271

506,258

7,987

2%

Population

477,677

485,013

7,336

2%

Corporate entities

20,594

21,245

651

3%

Sales volume, mln. kWh

2,671

2,619

-52

-2%

According to results of 2017, the volume of coal sales amounted to 40,858 thousand tons, which is 16% higher than the same period or 5,776 thousand tons.

The increase in coal sales volume in the domestic market by 4,845 thous. tons or 19% is mainly owing to “Ekibastuz SDPP-1” LLP by 3,293 thous. tons (increase in electricity generation). “Astana-Energy” JSC by 603 thous. tons, as well as an increase in coal sales volume by 467 thous. tons for public utility use.

The increase in sales of coal for export by 932 thousand tons or by 10% was mainly due to an increase in Reftinsk GRES by 1,599 thous. tons, with a decrease of 671 thous. tons at Serovsk GRES and Troitsk GRES.

Sale of Bogatyr Komir coal (thous. tons)

Forecast for the future period:

The volume of electricity production in the forecast for 2018 is projected with a gradual increase in relation to the actual figure of 2017. The increase in the volume of electricity production in 2018 by 3,026 million kWh is mainly driven by the growth in the volumes of sales of “Ekibastuz SDPP-1” LLP in the domestic and external (RF) markets.

In the forecast for 2019, electricity production volumes increase by 11%, which is due to the growth in volumes of “Ekibastuz SDPP-1” LLP and “Ekibastuz SDPP-2 Plant” JSC.

Heat production volumes in the plan for 2018 is expected to decrease by 20% against the actual figure of 2017 mainly due to the sale of an asset “Aktobe CHP” JSC in 2017.

The volume of transmission and distribution of electricity in 2018 is expected to decline due to the sale of assets “EK REC” JSC and “MDPGC” JSC.

The volume of electricity sales in the forecast for 2018 reduces by 30% from the level of 2017 actual figure due to the sale of “SHET” LLP in 2017. In the forecast for 2019, electricity sales volumes are not planned in connection with the sale of “AES” LLP at the end of 2018.

The volume of coal sales in the forecast for 2018 increases by 0.4 mln. tons or 1% against the actual of 2017.

In the forecast for 2019, the volume of coal sales reduces by 2% or 1.0 mln. tons by 2018. Volumes of coal production and sales for 2018–2019 are foreseen taking into account the forecasted volumes of electricity production in the RK and RF.

Key events during the reporting period

Date

Event

1 January

Upon the recommendations of the Ministry of Energy ceiling tariffs were reduced to 8.42 KZT / kWh for energy producing organizations of the 1st group (“Ekibastuz ESDPP-2 Plant” JSC)

1 January

For natural monopoly entities (NME) changes in the legislation with regard to the abolition of restrictions on the performance of other activities (previously income from other activities should not exceed 5% of income from core business) were made in January 2017 thus the entities have the opportunity to receive additional revenues for undertaking expenditures not provided for in the tariffs approved by the regulator – CRNM and PC

1 January

For energy supplying organizations two main issues have been positively and legislatively resolved:

tariffs for the zones of the day- «night» tariffs are set at the level of the purchase tariff, which will eliminate ESO running at a loss because of differentiation of tariffs by the zones of a day;

the inclusion of banks’ interest because of obtaining credit funds into ESO tariffs in order to eliminate the cash gap, previously the interest was not included in the tariffs and was related to the losses of ESO

15 February

The rating agency Fitch Ratings has affirmed the long-term default rating of the Company in foreign and local currency at the level of “BB +”

12 April

Reduction of the Company’s credit rating by one notch from the rating agency S&P

20 June

The payment of coupon interest on Eurobonds of “Samruk-Energy” JSC for the amount of 9,375,000 USD

3 July

Registration of the first bond program of “Samruk-Energy” JSC for the amount of KZT 100 bln.

3 July

The first and the second bond issue within the bond program in the amount of KZT 20 billion and KZT 28 billion

13 July

Signing of a loan agreement worth 40 bln. KZT with “Halyk Bank of Kazakhstan” JSC

20 September

“Samruk-Energy” JSC partially repaid international coupon bonds in the amount of USD 80 million

28 November

For energy producing organizations the Ministry of Energy decree approved the Methodology for determining the fixed profit that is taken into account when approving the ceiling tariffs for electricity (fixed profit of 12%), as well as the fixed profit for balancing which is taken into account when approving the ceiling tariffs for balancing electricity (fixed profit in the amount of 24%)

28 November

For energy-producing organizations, the order of the Ministry of Energy approved the ceiling tariffs for the service for maintaining the availability of capacity from 2019 to 2025 in the amount of 700 thousand 
KZT/(MW * months)

20 December 

“Samruk-Energy” JSC redeemed international coupon Eurobonds for the amount of 420 million dollars

21 December

The rating agency Standard and Poor's revised the outlook on the ratings of Samruk-Energy from stable to positive and affirmed the ratings at B +/B

22 December

A temporary reducing rate has been approved for the tariff for the regulated service on electricity transmission through “KEGOC” JSC grids for “SDPP-1” LLP in the amount of 0.71 with the entry into force from January 1, 2018

The Business Plan for 2018–2022 includes the following key development initiatives, in order to ensure the implementation of targets of strategic KPI:

1)  Export of electricity towards CASA-1000 direction from 2022

The CASA-1000 project is the first step towards the creation of a regional electricity market in Central and South Asia, using the significant energy resources of Central Asia to help reduce the energy shortage in South Asia on a mutually beneficial basis. From 2022, the export of electricity in the direction of CASA-1000 is expected in the volume of not less than 1 billion kWh.

2)  Coal preparation

Ekibastuz coal has a technical and economic capability for increasing the heating value and reducing ash content. It is planned that in 2018 work on the project will commence in order to ensure the commissioning of all entire coal preparation facilities in 2021.

3)  Reducing the specific consumption of fuel, water for process needs

Reduction of fuel costs will be achieved owing to a reduction in the specific consumption of fuel equivalent (SCFE) for electricity supply at “Ekibastuz SDPP-1” LLP from 
372.4 g/kWh in 2017 to 366 g/kWh in 2020. The main reasons for reduction of SCFE by way of the cost-effective maintenance of operating modes i.e. work with switched on HPS, the operation of FPT from the IV turbine extraction and the increase in capacity factor from 54% in 2018 to 65% in 2020. Reduction of water costs for process needs in the amount of 504 mln. tenge was achieved due to optimization of make-up volume of a water reservoir, as well as reduction of water consumption for process needs.

4)  Minimization of costs for fuel and energy resources conservation

Reducing the expenditure for fuel and energy resources saving will be achieved through re-equipment, modernization, reconstruction, improvement of energy resources metering, repair and maintenance services.

5)  Optimization of expenses for routine repairs

Reducing the cost of ongoing repairs is expected by optimizing expenditures for repairs based on real condition of main equipment of plants, i.e. carrying out repairs according to equipment operation time.

6)  Optimization of capital expenditures for maintaining business assets in working condition

The initiative on reducing of capitalized costs for maintaining business assets in working order is planned for 2018–2022. The reduction in capitalized costs is represented at the expense of reduction in expenses for repair of plant equipment.

7)  Sale of assets

The Development Plan includes a list of assets to be sold, “Tegis Munay” LLP, “AlmatyEnergoSbyt” LLP, “AZhC” JSC for 2018, “APP” JSC for 2019.

8)  Improving financial stability

Impact of the initiative on meeting the requirements of DMP on strategic KPI. According to the requirements of DMP, the target and threshold value of financial stability ratio Debt / EBITDA is as follows:

Company

Target

Threshold

K1 Debt/EBITDA

K1 Debt/EBITDA

Not less than

Not more than

“Samruk-Energy” JSC

3.50

4.50

This ratio of financial stability is also one of the Company’s strategic goals.

The company seeks to achieve the target in respect of Debt / EBITDA through the following main activities:

  1. Repayment of the external debt by using funds that are expected to be received from assets privatization and repayment of inter-group loan 2018–2019;
  2. Decrease in the consolidated debt level owing to deconsolidation and elimination of debts of privatized companies;
  3. Increase in volumes of electricity sales and, accordingly, EBITDA;
  4. Scheduled debt repayment according to repayment schedules;
  5. Using of temporarily available cash to reduce debt.

Principles of accounting policy

The Company’s operations power and coal sectors were carried out in accordance with the approved plans.

For the purposes of a single approach to preparing a report on business and financial performance, “Samruk-Energy” JSC group of companies uses the equity method in consolidation. In addition, in accordance with existing accounting policies, fixed assets and intangible assets are reported at initial cost, that is, without taking into account revaluation. Subsidiaries are included in the consolidated financial statements using the acquisition method. Acquired identifiable assets, as well as liabilities and contingent liabilities received at a business combination are stated at fair value at the date of acquisition, irrespective of the amount of the non-controlling interest.

Based on the foregoing, when using the equity method in the consolidated balance sheet, turnovers of such large companies as “Ekibastuzs SDPP-2 Plant” JSC, coal assets company Forum Muider B.V. 50% of interest of which belong to “Samruk-Energy” JSC were excluded. In addition, the financial performance of associated company “BTPP” JSC in the share of ownership of 50% -1 share is recognized in the share of profit and investment impairment.

When forming the consolidated financial result of “Samruk-Energy” JSC, the share of profit on these companies is presented in the item “share of profit / loss of organizations accounted for using the equity method and impairment of investments”.

On November 23, 2016, the Board of Directors of the Company approved a plan for the privatization of a number of subsidiaries in accordance with the Government Decree on privatization of assets. As of December 31, 2017, the assets “Aktobe CHP” JSC, “EK REC” JSC, “Shygysenergotrade” LLP and “MDPGC” JSC were sold.

Financial and economic indicators

No.

Indicator, mln.tenge

2016 actual

2017 actual

2018 forecast

2019 forecast

 

 

 

 

 

 

1

Income from sales of goods and services delivered

181,310

219,892

220,125

193 070

1.1.

Electricity production

124,085

151,861

194,407

189,381

1.2.

Sale of electricity by energy supplying organizations

90,284

94,458

0

0

1.3.

Heat production

13,991

17,370

20,440

191

1.4.

Transmission and distribution of electricity

33,448

38,058

0

0

1.5.

Sale of chemically purified water

1,662

1,672

1,699

0

1.6.

Lease

3,504

3,289

3,417

3,417

1.7.

other

778

1,701

1,203

1,073

2

Cost of goods sold

136,127

159,611

146,676

100,693

2.1.

Cost of electricity production

91,658

107,795

125,383

100,102

2.2.

Cost of electricity sales by energy supplying organizations

88,644

91,817

0

0

2.3.

Cost of heat production

13,699

17,122

19,036

0

2.4.

Cost of electricity transmission

26,506

28,337

0

0

2.5.

Cost of sale of chemically purified water

1,614

1,644

1,686

0

2.6.

Cost of other types of core business

215

443

719

724

 

Amortization of fixed and intangible assets

41,053

43,824

41,067

37,497

3

Gross profit

45,184

60,281

73,449

92,378

4

Financing income1

3,396

2,805

1,033

434

5

Other income 

6,061

3,224

426

558

6

Expenses for sale of products and services

3,017

15,145

16,277

21,052

7

General administrative expenses

12,826

12,709

12,658

9,997

8

Finance costs2

19,218

29,182

31,752

23,937

10

Other expenses from non-core operations3

2,056

5,959

492

586

11

Share of profit / loss of organizations accounted for using the equity method and impairment of investments

4,895

(26,636)

9,825

8,436

12

Profit (loss) from discontinued operations

2,494

1,670

13,934

10,576

13

Corporate income tax expenses

6,521

5 553

10 135

12 532

14

Minority interest

632

681

276

276

15

Total profit attributable to the Group's Shareholders

17,759

(27,884)

27,076

44,002

1 in the audited FS balance from the exchange difference of 2016 is reported in the section “financial income”

2 in the audited FS balance from the exchange rate difference of 2017 is reported in the section “financial expenses”

3 in the audited FS of 2017 the gain from the “restoration of an impairment loss” and the impairment loss  (NET) are reported in the item “finance costs”

Note: Incomes and cost by types of activity are indicated without taking into account elimination

Revenues from sales of products and services provided across “Samruk-Energy” JSC Group of Companies in 2017 amounted to 219,892 mln. tenge:

The growth of consolidated revenue mainly occurred in the segment of electricity generation due to the growth in electricity sales volumes. However, in 2017, there is a decrease in the average weighted tariff for Group 1 EPO, which is associated with an increase in the share of electricity sales at centralized bids at market prices, as well as with providing of discounts for strategic market participants to support in times of crisis. Thus, “Ekibastuz SDPP-1” LLP provided preferential tariffs in 2017 for 4 entities for a total of KZT 6.85 billion.

As for distribution and sales segments, revenue growth is driven by an increase in volumes and tariffs.

Forecast for the future period: in the forecast for 2018, revenue from sales is planned at 220,125 mln. tenge at the level of actual figure of 2017, which is due to the increase in revenues of “Ekibastuz SDPP-1” LLP with the growth in electricity sales volumes and at the same time because of excluding “AZhC” JSC and “AES” LLP from turnovers in connection with the planned sale. In the forecast for 2019 there is a decrease in revenue against the forecast of 2018 which is due to the planned sale of “APP” JSC, at an increase in revenues on “Ekibastuz SDPP‑1” LLP with an increase in electricity production.

Сonsolidated revenues, mln. KZT

Structure of 2017 income by main types of activity

Revenues from sales of products and services rendered detailed per producer

Indicator, mln. tenge

2016

2017

2018 (forecast)

2019 (forecast)

 

 

 

 

 

Revenues from sales of products and services rendered

181,310

219,892

220,125

193,070

“Samruk-Energy” JSC

8,417

20,765

63,475

66,649

“Green Energy” LLP

113

131

180

285

“Bukhtarminsk HPP” JSC

3,503

3,288

3,417

3,417

“Shardarinsk HPP” JSC

3,157

3,405

2,989

7,305

“Moynak HPP” JSC

9,919

10,889

8,868

10,095

“AlmatyEnergoSbyt” LLP

90,284

94,458

0

0

“AZhC” JSC

33,848

38,658

0

0

“APP” JSC

60,761

62,349

65,489

0

“ESDPP-1” LLP

62,729

90,177

134,414

166,904

“FWPP” LLP

3,435

4,388

4,757

4,995

Energy Solution center

334

666

1,052

1,061

Intercompany  turnover (elimination)

-95,190

-109,282

-64,515

-67,641

The major share in the Company’s operating income comes from “Ekibastuz SDPP -1” LLP, “APP” JSC, “AZhC” JSC, “AES” LLP. At the same time, at consolidation of revenues, intercompany turnover mainly in respect of energy producing and distribution companies is excluded from total amount.

Cost of goods sold and services delivered

Indicator, mln. tenge

2016

2017

2018 (forecast)

2019 (forecast)

 

 

 

 

 

Fuel

31,626

43,364

53,050

35,592

Remuneration of labor and related expenses

22,316

24,035

15,160

5,174

Cost of purchased electricity 

4,679

7,256

5,143

4,043

Depreciation of fixed assets and amortization of intangible assets

41,053

43,824

41,067

37,497

Maintenance

6,416

6 517

6,212

4,533

Services for electricity transmission and other services

7,444

8,506

2,994

44

Materials

1,880

1,762

1,986

1,224

Water supply

3,835

4,455

5,030

2,589

Grid losses

198

205

0

0

Taxes other than income tax

5,955

7,627

8,803

7,427

Third party organizations services

7,528

7,394

5,264

1,829

Others

3,198

4,665

1,968

739

TOTAL

136,127

159,611

146,676

100,693

According to results of 2017 cost of goods sold amounted to 159,611 mln. tenge, which is 17% higher than the actual figure of 2016. In general, the increase occurred in variable costs due to the growth in production and sales volumes, as well as due to the increase in prices for goods and services.

The structure of cost of goods sold by main types of activity

Forecast for the future period:

in the forecast for 2018, the cost of goods sold and services rendered reduces, this is because of reclassification of “AZhC” JSC and “AES” LLP assets from main to discontinued operations at increasing the cost of goods sold in respect of “Ekibastuz SDPP-1” LLP by way of an increase in production volumes. In the forecast for 2019, expenses for cost of goods sold also reduce due to the reclassification of “APP” JSC from main to discontinued operations, at increasing the cost of goods sold in respect of “Ekibastuz SDPP-1” LLP by way of an increase in production volumes.

According to results of 2017, sales costs  have significantly increased, this deviation is driven by expenses for transportation of electricity through “KEGOC” JSC grids associated with supply of “Ekibastuz SDPP-1” LLP electricity to Russia from February 1, as well as the growth of “KEGOC” JSC tariffs.

In the forecast for 2018, the increase in sales costs compared to the actual of 2017 is 7%. The increase occurred because of the growth in the volume of electricity exports to the Russian Federation, in the meantime there we get temporary reducing ratio to expenses for transportation through “KEGOC” JSC grids for “ESDPP-1” JSC in the amount of 0.71 with the entry into force from January 1, 2018.

In the forecast for 2019, the increase in expenses is due to the increase in “KEGOC” JSC tariffs.

In connection with the cost optimization activities conducted by the Company, the administrative expenses for 2017 totaled 12,709 mln. tenge, which is below the level of the actual figure of 2016.

Sales costs, mln. tenge

Administrative expenses, mln. tenge

Finance costs, mln. tenge

Forecast for the future period:

in the forecast for 2018, administrative expenses are lower than the level of 2017 and amount to 12,658 million tenge. In the forecast for 2019, administrative expenses reduce compared to the forecast for 2018 and amount to 9,997 mln. tenge due to the reclassification of assets from main to discontinued operations.

Finance costs for the end of 2017 amounted to 29,182 million tenge, which is higher than the actual value for 2016. The increase in finance costs mainly in “Ekibastuz SDPP-1” LLP is due to the transfer of previously capitalized interest and in the Head Office in connection with the refinancing of Eurobonds at a higher rate (at the same time, the currency risk reduces owing to refinancing in tenge), and reporting the discount on payments in installments for assets sale.

Forecast for the future period:

in the forecast for 2018, finance costs amount to 31,752 mln. tenge, an increase against the actual figure of 2017 is due to refinancing of Eurobonds in 2017 at a higher interest rate. In the forecast for 2019, the decrease in expenses is due to the repayment of loans of the Head Office.

Share of profits of joint ventures and associates and impairment of investments

Indicator. mln. tenge

2016

2017

2018

2019

actual

actual

plan

plan

Share of profits of joint ventures and associates

4,895

(26,636)

9,825

8,436

Share income and impairment of investments for 2017 amounted to (26,635) mln. tenge, having decreased by 31,530 mln. tenge compared to the same period.

“Ekibastuz SDPP-2 Plant” JSC – a decrease by 10,334 mln. tenge in comparison with the previous year is due to the following factors:

reporting of losses from depreciation of FA in the amount of 5,844 mln. tenge and an increase in finance costs by 5,233 mln. tenge, in the meantime there was a, decrease in foreign exchange losses of 780 mln. tenge;

Forum Muider – an increase by 4,461 mln. tenge was mainly due to an increase in coal sales volumes in “Bogatyr Komir” LLP in the domestic and foreign markets by 5,777 thous. tons (16.5%) and an increase in the export price by 16.1%.

Dynamics of change in share income and investment impairment, mln. tenge

“BTPP” JSC – a decrease of 25,658 mln. tenge compared to 2016 mainly due to the recognition of impairment of investments in the amount of 27,571 mln. tenge.

In the plan for 2018, the share of profit is 9,825 mln. tenge, in 2019 8,436 mln. tenge.

Profit (loss) from discontinued operations

Indicator, mln. tenge

2016

2017

2018 (forecast)

2019 (forecast)

 

 

 

 

 

Profit from discontinued operations

2,494

1,670

13,934

10,576

According to results of 2017, the profit from discontinued operations amounted to 1,670 mln. tenge, which includes financial results of the following subsidiaries and affiliates: EK REC, SHET, MDPGC, “Tegis Munay” LLP and “Mangyshlak-Munay” LLP.

The assets “AZhC” JSC, “AES” LLP were referred to discontinued operations in the forecast of 2018, “APP” JSC is classified as discontinued operations in 2019.

Tariff policy

The laws of the Republic of Kazakhstan “On Electricity”. “On Natural Monopolies and Regulated Markets” and “On Competition” govern the operations of the Group’s subsidiaries and joint ventures, which are natural monopoly and regulated markets entities and entities with a dominant position in a competitive market. Tariff regulation, depending on the type of energy companies, falls within the competence of the Committee on Regulation of Natural Monopolies and Protection of Competition of the Ministry of National Economy of Kazakhstan (hereinafter – the Committee) or industry-specific ministry – the Ministry of Energy (hereinafter – ME).

Electricity tariffs for energy producing organizations approved by the Decree of the Minister of Energy No.160 “On approval of ceiling tariffs for electricity for the group of energy-producing organizations” dated February 27, 2015 for 2016–2018. Tariffs for the supply of electricity produced by facilities that use renewable energy sources are fixed and approved by the Resolution of the Government of the Republic of Kazakhstan, depending on RES technology (separately for wind, solar and other sources) and are subject to annual indexation. At this, the financial and settlement center acts as a buyer, and power generation company act as a seller. The Committee regulates tariffs for transmission and distribution of electricity for power transmission companies, for production of heat and power supply (ESO). The Committee regulates and controls the mentioned activities in strict accordance with the legislative and regulatory acts.

Social and political issues significantly influence tariff decisions. Economic, social and other policies of the Government of the Republic of Kazakhstan may have a significant impact on the Group’s operations.

Tariff state regulation of the company’s activities

The following tariffs were in effect during the reporting period:
For energy producing organizations (EPOs), after expiration of the term of ceiling tariffs established for 2009–2015, tariffs for power plants for 2016 to 2018 are maintained at the level of 2015 tariffs. Moreover, with the ceiling tariff of 8.80 tenge/kWh set for the first group of EPOs (“Ekibastuz SDPP‑1” LLP and “Ekibastuz SDPP-2 Plant” JSC), from February 2015 to December 2016 the Company sold electricity at a reduced tariff of 8.65 tenge / kWh. Taking into account the instruction of the Government of the Republic of Kazakhstan on supporting the national economy, the plants sell electricity at tariffs not exceeding 8.42 KZT / kWh during 2017 and up to the present time.

The average weighted tariff of “Ekibastuz SDPP-1” LLP for 2017 was 6.39 KZT / kWh, which is lower than the level of 2016 (7.33 KZT / kWh) by 0.94 KZT / kWh. The weighted average tariff was reduced because of electricity sales at centralized bidding at market prices, as well as discounts provided for export-oriented industrial enterprises.

The average weighted tariff of “Ekibastuz SDPP-2” JSC for 2017 was 6.60 tenge/kWh, which is lower than the level of 2016 (6.68 tenge/kWh) by 0.08 tenge/kWh. The weighted average tariff was reduced as a result of electricity sales at centralized bidding.

The individual and estimated tariffs in the amount of 
9.50 KZT/kWh were approved for “Moynak HPP” JSC and “Shardarinsk HPP” JSC taking into account the implementation of large-scale investment programs, however the actual tariffs of “Moynak HPP” JSC for 2016 and 2017 were below approved, due to the sale of part of the electricity through centralized bidding.

For renewable energy sources (RES), approved fixed tariffs are subject to annual indexation taking into account inflation.

The capacity market for EPO will be introduced in 2019. Order of the Minister of Energy of the Republic of Kazakhstan No. 465 dated 03.07.2015 (with changes introduced by the order No. 414 of the RK ME dated 28.11.2017). The ceiling tariff for the service for maintaining the availability of capacity was approved for all groups of EPO for the period from 2019 to 2025 in the amount of 700 thousand KZT/(MW*months). The “Methodology for determining the fixed profit taken into account when approving ceiling tariffs for electricity (fixed profit of 12%) and fixed profit for balancing taken into account when approving the ceiling tariffs for balancing electricity (fixed profit of 24%) was adopted for EPO. However, to introduce the capacity market, it is necessary to re-approve tariffs for electricity by EPO groups, as previously approved in 2015 tariffs do not correspond to the above Methodology.

Weighted average tariffs for electricity generation

Name

Measurement unit

 2016 actual

2017 actual

 2018 Plan

2019 Plan

“Ekibastuz SDPP-1” LLP 

tenge/kWh

 

 

 

 

Tariff for electricity, tenge/kWh

 

7.33

6.39

7.11

5.87

Tariff for capacity, thous. tenge/MW*month

 

 

 

 

700

“Ekibastuz SDPP-2” JSC

tenge/kWh

 

 

 

 

Tariff for electricity, tenge/kWh

 

6.68

6.60

7.48

5.77

Tariff for capacity, thous. tenge/MW*month

 

 

 

 

3,000

 “APP” JSC

tenge/kWh

 

 

 

 

Tariff for electricity, tenge/kWh

 

8.60

8.60

9.56

8.89

Tariff for capacity, thous. tenge/MW*month

 

 

 

 

1,543

“Aktobe CHP” JSC 

tenge/kWh

7.30

7.30

 “Shardarinsk HPP” JSC

tenge/kWh

 

 

 

 

Tariff for electricity, tenge/kWh

 

9.50   

9.50

9.50

2.28

Tariff for capacity, thous. tenge/MW*month

 

 

 

 

8,529

“Moynak HPP” JSC

tenge/kWh

 

 

 

 

Tariff for electricity, tenge/kWh

 

8.25   

8.65

9.50

3.97

Tariff for capacity, thous. tenge/MW*month

 

 

 

 

5,344

"Samruk-Green Energy" LLP

tenge/kWh

36.13

42.12

45.11

46.88

“First Wind Power Plant” LLP

tenge/kWh

 22.68   

26.11

28.31

29.43

« – » the asset was sold/is planned to be sold

For production of heat by “APP” JSC, in order to meet the requirements of legislation, the long-term tariffs for 2017–2021 were approved with the inclusion of investment component in tariffs. The sale of heat in the form of steam and hot water to consumers has commenced from October 2017 at Ekibastus SDPP-1 (tariffs for services were approved by DCRNM and PC of the Pavlodar region in accordance with the established procedure).

Tariffs for heat production

Name

Measurement unit

 2016 actual

 2017 actual

2018 Plan

2019 Plan

“APP” JSC

tenge/Gcal

2,872

3,363

3,951

4,070

“Aktobe CHP” JSC

tenge/Gcal

1,532

1,839

-

-

“Ekibastuz SDPP-2 Plant” JSC

tenge/Gcal

683

740

809

831

“Ekibastuz SDPP-1” LLP

tenge/Gcal

 

352

511

511

« – » the asset was sold/is planned to be sold

In a similar way, long-term ceiling tariffs for 2016–2020 were approved for regional power transmission companies (RPTC) based on submitted tariff estimates. Tariffs include investment programs for grid companies.

Tariffs for electricity transmission services

Name

Measurement unit

2016 actual

 2017 actual

2018 Plan

2019 Plan

“AZhC” JSC

tenge/kWh 

5.35

5.83

6.04

“EK REC” JSC

tenge/kWh 

3.76

3.83

“MDPGC” JSC

tenge/kWh

4.16

4.44

« – » the asset was sold/is planned to be sold

CRNM and PC approved tariffs for energy supplying organizations (ESO) in the reporting period.

Tariffs for selling electricity by ESO

Name

Measurement unit

2016 actual

 2017 actual

2018 Plan

2019 Plan

 “AlmatyEnergoSbyt” LLP

tenge/kWh 

15.66

16.38

17.64

 “Shygysenergotrade” LLP

tenge/kWh 

10.48

10.99

« – » the asset was sold/is planned to be sold

Taking into account the changes in legislation, differentiated tariffs for the zones of the day were abolished in ESO. The differentiation according to consumption norms has been preserved for individuals; electricity is supplied at average selling tariffs for corporate bodies.

Analysis of capital expenditures

SA

2016

2017

2018

2019

actual

actual

plan

plan

 

TOTAL

79,061

72,418

71,461

74,105

1

Investment projects, incl.

41,810

25,177

32,159

48,614

1.1

Rehabilitation of Power unit#1 with installation of new ESP

5,296

3,962

2,471

 

1.2

Rehabilitation of Power unit#2 with installation of new ESP

 

 

 

 

1.3

Retrofit of 500 kV OS

9,805

 

 

 

1.4

Expansion and reconstruction of Ekibastuz SDPP-2 with installation of power unit No. 2 (50%)

4,008

-36

 

 

1.5

Transition to cyclical-and-continuous method of mining, transportation, blending and loading of coal at the "Bogatyr" open-pit coal mine (50%)

30

30

10,121

9,806

1.6

Development of power grids in Karasai district with construction of "Shamalgan" (Ushkonyr) and substation "Station Shamalgan" with transfer of loads from nearby 35 / 10kV substations

58

 

 

 

1.7

Transfer of load of SS-220/110/10kV # 131A "Gorny Gigant" to 220-kV 110 / 10kV Substation # 160A "Yermensay" via 110kV grids followed by dismantling of SS-131A

340

5,079

 

 

1.8

Reconstruction and expansion of Almaty CHP-2. III stage. Boiler unit of plant No.8

183

 

 

 

1.9

Reconstruction of combined ash and slag removal system of CHP-2

 

 

100

 

1.10

Reconstruction and expansion of Almaty CHP-2. III stage. Boiler unit of plant No.8

2

 

 

 

1.11

Construction of Moynak HPP

79

2

 

 

1.12

Upgrading of Shardarinsk HPP

8,988

11,263

2,183

10,371

1.13

Construction of 45 MW Ereymentau WPP (1st stage)

 

 

 

 

1.14

Construction of 50 MW Ereymentau WPP (2nd stage)

145

100

 

 

1.15

Construction of a gas turbine power plant based on Pridorozhnoe gas field

426

140

1,488

 

1.16

Other projects

12,450

4,637

15,796

28,437

2

Keeping production facilities in running order

35,731

46,042

36,686

23,495

2.1

“Bogatyr Komir” LLP (50%)

1,439

3,508

4,881

3,190

2.2

“ESDPP-2 Plant” JSC (50%)

17

224

644

 

2.3

“ESDPP-1” LLP

16,787

17,919

11,402

16,459

2.4

“Alatau Zharyk Company” JSC

9,312

13,580

13,206

 

2.5

“Almaty Power Plants” JSC

1,681

4,848

6,021

3,825

2.6

“Aktobe CHP” JSC

392

374

 

 

2.7

“Moynak HPP” JSC

1,084

304

367

 

2.8

“Shardarinsk HPP” JSC

124

120

6

11

2.9

“Mangistau REC” JSC

2,027

2,251

 

 

2.10

“AlmatyEnergoSbyt” LLP

68

35

91

 

2.11

“Samruk-Green Energy» LLP

3

 

15

8

2.12

“First Wind Power Plant” LLP

24

3

54

1

2.13

“EK REC” JSC

2,740

2,861

 

 

2.14

“Shygysenergotrade” LLP

33

16

 

 

3

Maintenance of administrative assets in running order

1,411

1,145

785

173

4

others

109

54

1,831

1,823

Projects implemented in 2016

The implementation of the project “Reconstruction and Retrofit of Aktobe CHP” was completed in May 2016. The project is aimed at increasing the installed capacity to cover the electricity shortage in Aktobe region by installing a 30 MW turbine No. 3.

The reconstruction of the boiler unit of plant № 8 of Almaty CHP-2 was completed in September 2016. The project is aimed to cover the expected increase in heat demand, providing the facilities of “Universiade-2017“ with heat, and increasing the installed thermal capacity up to 1414 Gcal/h and Almaty CHP-2 power generation by 450 mln. KWh.

The modernization of 500 kV outdoor switchgear of Ekibastuz SDPP-1 was completed in November 2016 in order to replace obsolete equipment (switches, transformers, disconnectors) and extend equipment service life.

Projects implemented in 2017

The project of construction of 110/10 kV Substation “Turksib” was completed in December 2017, in order to ensure reliable and uninterrupted power supply for increasing load in the northern part of Almaty city with a transformer capacity of 80 MVA.

Projects planned to be completed in 2018

The works on the project “Transfer of load of 220 kV substation “Gorny Gigant” to 220 kV “Ermensay” substation through grids of 110 kV substation followed by the dismantling of “Gorny Gigant” SS are scheduled to be completed until the end of the first half of 2018. The project is implemented to improve the reliability of electricity supply to consumers.

Projects planned to be completed in 2020

The project on modernization of Shardarinsk HPP will be completed. The project will enable to increase the installed capacity of the plant from 100 MW to 126 MW.

Also, in 2020, it is planned to complete the project of gasification of Almaty energy complex. Expansion of CHP-1 of “APP” JSC with installation of the new energy source based on gas turbine technologies. The main goal of the project is to reduce the adverse impact on Almaty city and Almaty region’s environment from the energy sources of “APP” JSC.

Liquidity and financial sustainability indicators

Fulfillment of external lenders covenants:

Covenant

Established standard

2017 actual

deviation

Note

Debt/EBITDA (EBRD. HBK)

Not more than 4.5

4.64

0.14

The covenant is met the letter of consent (waiver) from the EBRD dated  22.11.2017 was received and the letter of consent (waiver) from HBK d/d 27.12.2017 was received

EBITDA/interest 
(ЕBRD)

Not less than 3

2.83

-0.17

The covenant is met the letter of consent (waiver) d/d 22.11.2017 was received

EBITDA/interest 
(HBK)

Not less than 3.5

2.83

-0.67

The covenant is met the letter of consent d/d 21.12.2017 was received

Debt/Equity 
(EADB and KDB)

Not less than 2

0.75

-0.29

The covenant is met

Name

2016

2017

2018 (forecast)

2019 (forecast)

Debt/EBITDA

5.41

4.64

3.28

2.02

Debt/equity

0.75

0.75

0.71

0.49

Current liquidity

0.66

1.36

0.68

1.22

The financial stability of the company from 2016 is improved due to increased production volumes and tariffs, reduction in debt load and sale of assets.

Measures taken by “Samruk-Energy” JSC group of companies to improve financial sustainability

  • Reduction of currency risk by way of full repayment of the Company’s Eurobonds by using own and borrowed funds in December 2017;
  • Return of intercompany loans of the Company from “AZhC” JSC and “APP” JSC – 3-4 quarter of 2017;
  • Reducing pressure on current liquidity by extending loan terms;
  • Early repayment of loans in the amount of 15 bln. tenge in the 4th quarter of 2017;
  • Withdrawal of the debt of assets sold as part of assets privatization (“EK REC” JSC, “SHET” LLP, “MDPGC” JSC) – 3-4 quarter of 2017;
  • Obtaining a letter of consent (waiver) from the European Bank for Reconstruction and Development (EBRD) for the covenant Debt / EBITDA. EBITDA / Interest of the Company on November 22, 2017;

Obtaining a waiver from Halyk Bank of Kazakhstan (HBK) for the covenant Debt / EBITDA on December 27. 2017. for the covenant of EBITDA / Interest of the Company on December 21, 2017.

In addition, according to the requirements of the Debt and Financial Sustainability Management Policy of “Samruk-Kazyna” JSC, the Company developed an Action Plan for the Company’s entry into the green risk zone (hereinafter – the Action Plan). This Action Plan provides for the implementation of specific activities during 2017–2022 aimed at improving EBITDA, optimizing costs and reducing debt burden.

These activities will ensure the implementation of financial covenants and financial stability of the company as a whole.

Contingent and contractual liabilities and operating risks

Political and economic situation in the RK

In general, the economy of the Republic of Kazakhstan continues to display characteristics of an emerging market. Its economy is particularly sensitive to prices on oil and gas prices and other commodities, which constitute major part of the country’s export. These characteristics include, but are not limited to, the existence of national currency that is not freely convertible outside of the country and a low level of liquidity of debt and equity securities in the markets.

Low prices on oil and other commodities, volatility of exchange rate have caused and may continue to cause negative impact on the economy of the Republic of Kazakhstan, including decrease in liquidity and creation of difficulties in attracting of international financing.

On August 20, 2015, the National Bank and the Government of the Republic of Kazakhstan made a decision on stopping supporting the exchange rate of tenge and implementing a new monetary policy based on the inflation targeting regime, abolishing the currency corridor and moving to a freely floating exchange rate. As a result, during August–December 2015, the exchange rate of tenge ranged from 187 to 350 tenge per US dollar. Thus, there is uncertainty about the exchange rate of tenge, as well as the impact of this factor on the economy of the Republic of Kazakhstan.

On September 8, 2017 S & P Global Ratings revised the outlook on the ratings of the Republic of Kazakhstan from “Negative” to “Stable”. The agency also confirmed the long-term and short-term sovereign credit ratings at the level of 
“BBB- / A-3” and the rating of the country on the national scale at the level of “kzAA”. According to S & P Global Ratings, the pressure on the balance of payments of the RK Government remains moderate, and the influence of factors limiting the flexibility of monetary policy has decreased against a backdrop of a reduction in deposit dollarization. As a result, S & P Global Ratings has reviewed the outlook for ratings of the Republic of Kazakhstan from Negative to Stable and confirms long-term and short-term credit ratings at 
‘BBB- / A-3’. The stable outlook demonstrates the expectations that S & P Global Ratings in its analysis fully took into account the budget expenditures related to the government’s plans for recapitalizing the banking sector, and the country’s economic performance will remain strong until 2020  (source: http://kase.kz/ files / mix / sp_kazakhstan_rating_080917.pdf)

Financial markets continue to be volatile and are characterised by frequent significant price movements and increased trading spreads. This operating environment has a significant impact on the Company’s operations and financial position. Management is taking necessary measures to ensure sustainability of the Company’s operations. However, the future effects of the current economic situation are difficult to predict and management’s current expectations and estimates could differ from actual results.

Additionally, the electricity sector in the Republic of Kazakhstan is still impacted by political, legislative, fiscal and regulatory developments. The prospects for future economic stability in the Republic of Kazakhstan are largely dependent upon the effectiveness of economic measures undertaken by the Government, together with legal, controlling and political developments, which are beyond the Company’s control.

The Company has the strategic importance for the Republic of Kazakhstan, since it combines the entities of electricity and energy complex providing the population and industrial entities with the electricity. The Government of the Republic of Kazakhstan has adopted the long-term energy sector development program envisaging the construction of new and reconstruction of the current power stations. The management expects that the Government of the Republic of Kazakhstan will support the Company, since the electricity energy sector is the strategically important part of the country’s economy.

Management believes it is taking all the necessary measures to support the sustainability and development of the Company’s business in current circumstances.

Tax legislation

The tax conditions in the Republic of Kazakhstan are subject to change and inconsistent application, and interpretation. Discrepancies in the interpretation of Kazakh laws and regulations by the Group and Kazakhstan’s authorized bodies may result in the imposition of additional taxes, fines and penalties. This applies to the contracts of the Transportation Group concluded with non-residents.

Kazakhstani tax legislation and practice are in a state of continuous development and therefore are subject to varying interpretations and frequent changes, which may be retroactive. In some cases, in order to determine the taxable base, the tax law refers to IFRS provisions, however, the interpretation of relevant provisions of IFRS by Kazakh tax authorities may differ from accounting policies, judgments and estimates applied by management at preparation of these financial statements, which may lead to additional tax liabilities of the Group. The tax authorities can conduct a retroactive inspection within five years after the end of the tax year.

The Company’s management is sure of accuracy of its interpretation of the norms of legislation and justification of the Company’s positions in the issues of the tax, currency and customs legislation. In management’s estimate, the Company will not incur significant losses on current and potential tax claims in excess of provisions made in these financial statements.

Legal proceedings

Legal proceedings with “Maikuben-West” LLP

“ESDPP-1” LLP was involved in litigation with “Maikuben-West Holding” JSC during the reporting period. The subject of legal proceedings on the part of “Maikuben-West Holding” was a legal claim on recognition of a number of related deals invalid submitted to the Specialized Inter-District Economic Court (hereinafter – “SIDEC”) of Almaty city. On December 26, 2016, SIDEC of Almaty city made a decision, according to which the claims of “Maikuben West Holding” JSC were denied. On November 20, 2017 decision of the Chamber of Civil Cases of the Supreme Court RK refused “Maikuben West Holding” LLP revision of the decision of Almaty city SIDEC.

“ESDPP-1” LLP filed a claim on recovery of debt in the amount of 333 million tenge, as well as a state duty of 10 mln. tenge from “Maikuben West” LLP to the Specialized Inter-District Economic Court of Pavlodar region The statement of claim was satisfied in full by the decision of Pavlodar region SIDEC dated June 10, 2016.

“ESDPP-1” LLP filed a claim on recovery of debt in the amount of 1,100,000 thous. Tenge, as well as a state duty in the amount of 33,000,000 tenge from “Maikuben West” LLP to the Specialized Inter-District Economic Court of Pavlodar region. SIDED of Pavlodar region made a decision on November 25, 2016, which states that ESDPP-1 claims were satisfied in full. On August 21, 2017, Appellate Judicial Division of Pavlodar regional court made a decision on reversal of Pavlodar region SIDEC decision dated November 25, 2016, termination of the proceeding and return a state duty of 33 million tenge to Ekibastuz SDPP-1.

“Samruk-Energy” JSC group of companies is involved in certain other legal proceedings arising in the ordinary course of business. Management is of the opinion, at present there are no current other legal proceedings or other outstanding claims the results of which could have a significant adverse effect on future financial standing of “Samruk-Energy” JSC group of companies.

Insurance

The insurance market in Kazakhstan is at an early stage of development, and many types of insurance, which are widespread in other countries, are not available in Kazakhstan. The Group does not have full insurance coverage for its production facilities, winding-up losses, losses resulted in liabilities to third parties for damage to property, or the environment resulted in accidents or operations of the Group. Until the Group has full insurance, there is a risk that the loss or damage of certain assets could have a material adverse effect on the operations and financial position of the Group.

Environmental issues

Legislation on environmental protection in the Republic of Kazakhstan is at the stage of formation, and the position of the Republic of Kazakhstan state agencies on ensuring its observance is constantly changing. The Group regularly assesses its obligations related to environmental impacts. As obligations are revealed, they are immediately reported in the accounting. Potential liabilities that may arise because of amendments to existing regulations, based on the results of a civil claim or within the framework of legislation, cannot be assessed, but may be significant. However, according to the current interpretation of current legislation, management believes that the Group has no material liabilities in addition to amounts that have already been accrued and are reported in these consolidated financial statements that would have a material adverse effect on the operating results or the financial position of the Group.

РProvision for disposal of ash dumps

In accordance with environmental legislation, the Group has a legal obligation to liquidate the site of ash dumps, which represent the area for disposal of wastes resulted in the Group’s operations. As of December 31, 2017, the book value of the provision for the disposal of ash dumps was 2,404,270 thous. tenge (December 31, 2016: 1,637,097 thous. tenge).

Assessment of existing provision for disposal of ash dumps is based on the Group’s interpretation of the RK existing environmental legislation supported by a feasibility study and engineering studies in accordance with current standards and methods of restoration and remediation works. This assessment may change with the completion of subsequent environmental research and review of existing remediation and rehabilitation programs.

apital commitments

As of December 31, 2017, the Group had long-term contractual obligations on purchase of property, plant and equipment totaling 125,739,732 thousand tenge (December 31, 2016: 125,661,235 thous. tenge).

Covenants on loans

The Group has certain covenants on loans and bonds. Failure to comply with these covenants may result in negative consequences for the Group, including the growth of borrowing costs and the announcement of a default. As of December 31, 2017 and December 31, 2016, the Group complied with its covenants.

Comparative analysis (benchmarking)

Benchmarking aims to compare operating and financial pefromance with foreign companies – peers to determine the strengths and weaknesses of “Samruk-Energy” JSC. The following indicators were used for benchmarking:

  • EBITDA margin
  • Return on invested capital (ROIC)
  • Ratio of the share of borrowed funds (Debt / Equity)
  • Debt /EBITDA

Benchmarking results:

Financial stability indicators

Samruk-Energy JSC

Inter RAO UES PJSC

ČEZ České Energetické Závody AS

Tauron Polska Energia SA

Debt/EBITDA

4,64

0,21

2,58

2,92

Debt/Капитал

0,71

0,03

0,37

0,36

EBITDA margin for 2017

Return on Invested Capital (ROIC) for 2017

Tariffs for electricity in 2016, US cents

At present, in comparison with foreign peer companies. “Samruk-Energy” is inferior in some respects.

At the same time, according to EBITDA margin, Samruk-Energy outcompetes its peers. This indicator demonstrates a high profitability of sales. In terms of ROIC (long-term invested capital return), Samruk-Energy is inferior to its peers, which indicates the need to increase the efficiency (return on investment) of investments.

Financial stability indicators shows that “Samruk-Energy” JSC fully uses available financial leverage.

At the same time, it should be noted that, unlike the public peer companies. “Samruk-Energy” JSC belongs to the Government of the Republic of Kazakhstan, therefore, the Company is an agent of the state policy in power sector. In this connection, as well as with a high degree of depreciation of energy sector, socially significant investment projects (aimed at reliability and continuity of the energy system of the Republic of Kazakhstan) have been implemented since 2009, which led to a significant increase in invested capital while maintaining the company’s profitability level.

An additional factor that influences on the return on investment indicators is the low level of the electricity tariff in the Republic of Kazakhstan in comparison with the countries of peer companies.

Procurments and inventory management

Procurement procedures in the Company are conducted in line with the Rules for Procurement of goods, works and services by “SWF “Samruk-Kazyna” JSC and organizations, fifty or more percent of voting stock (equity stake) of which are directly or indirectly belong to “Samruk-Kazyna” JSC on the right of ownership or trust management, approved by the Decision of the Board of Directors of “Samruk-Kazyna” JSC No. 126 dated January 28, 2016.

According to the Fund’s Procurement Rules, procurement procedures are conducted in the Electronic Procurement Information System hosted on the website http://tender.sk.kz. A supplier is selected on the basis of results of a tender conducted, the request for quotations and from a single source.

As part of ongoing work aimed at improvement of procurement portal and approach to the selection of a supplier, an information system for electronic procurement of ISEZ-2.0 was introduced on the website http://www.zakup.sk.kz in December 2017. This portal provides placement of procurement plans of the Company’s group and is integrated with the Electronic Procurement Information System http://tender.sk.kz, in the future it will be integrated with the Electronic Procurement Plan and the Automated Reporting System.

 “Samruk-Energy” JSC conducted the study of suppliers’ market and commodity prices for 2017 (hereinafter – the Price catalog) for its group of companies which enabled achieving the following results:

  1. Determination of fair market value of goods purchased by the Samruk-Energy group of companies;
  2. Optimization of planned expenditures;
  3. Identification and standardization of USIC GWS codes, according to the format of “Samruk-Kazyna» JSC;
  4. The database of suppliers was formed;
  5. A list of goods imported for the entire group of “Samruk-Energy” JSC was formed (to reduce the timing of price adjustments at fluctuation of exchange rates).

This project gave an independent assessment of cost ranges for goods purchased by the Company’s group. The structured grouping of goods purchased enabled to analyze the cost of similar goods and their interchangeability. The territorial association allowed getting reduction in cost of batch of goods. As a result, the project made it possible to achieve an economic effect in the form of cost reduction or provision of market conditions for the entire Company group’s goods purchased.

The share of local content in the procurement of goods, works and services is monitored on the portal of the Fund’s authorized body in charge of procurement matters – “Map of Kazakhstani content monitoring in procurement” on the website http://www.kmks.kz.

Information on the share of local content in 2015–2017 procurements in mln. tenge*

 

actual 2015

actual 2016

actual 2017

 

 

 

The total amount of actually supplied GWS

% LC

The total amount of actually supplied GWS

% LC

The total amount of actually supplied GWS

% LC

goods

134,371.84

84%

118,986.63

92%

122,783.06

75%

Works/Services

191,754.09

67%

183,028.05

70%

149,580.49

80%

* Note: “Samruk-Kazyna Contract” LLP data

Decrease in good’s indicators has been driven by the fact that electricity from “ZHGRES” JSC was delivered to “Almaty-EnergoSbyt” LLP without the ST-KZ certificate, due to the change in the tariff for transportation of commercial gas from Uzbekistan to “APP” JSC in 2017, the service for transportation of gas was included in the cost of goods “Commercial gas”.

Information on the number of concluded long-term contracts with domestic companies over 2015–2017

years

2015

2016

2017

The number of long-term contracts

112

184

63

The share of local content in long-term contracts

 

 

 

By goods

By works

services

92 %

96 %

86 %

70 %

80 %

70 %

64 %

79 %

64 %

Total amount

343.4 bln. tenge

70.6 bln. tenge

28.6 bln. tenge

Thus, 346 concluded long-term contracts worth 439.2 billion tenge are in force as of December 31, 2016.

Information on the number of contracts concluded with domestic commodity producers over 2015–2017

years

2015

2016

2017

Number of contracts by goods

For the amount of

3,083

115 bln. tenge

3,137

92.6 bln. tenge

2,900

92.8 bln. tenge

Among them LCP

For the amount of

541

96.45 bln. tenge

379

 67.8 bln. tenge

473

67.2 bln. tenge

 

 

 

 

Main suppliers:

“ASIA AVTO” JSC, “ArcelorMittal Temirtau” JSC, “KazAzot” JSC, “Kazenergokabel” JSC, “Kentau Transformer Plant” JSC, “Orica-Kazakhstan” JSC, “High Industrial Lubricants & Liquids Corporation” (HILL), “Kaz-metiz” LLP, “Kazcentrelectroprovod” LLP, “ZHERSU POWER” LLP, “Asia Prom Invest” LLP, “ALTYNZHULDYZ TEXTILE” LLP, “KazProfSecurity” LLP, “Kainar-AKB” LLP, “Kapital-Casting” LLP, “Mamai-Astana” LLP, “Prommashkomplekt” LLP, “Semey May” LLP, “TPG Kazkomplekt LTD” LLP, “AVICS GROUP” LLP

 

 

 

Moreover, Samruk-Energy enterprises pay attention to social responsibility.

In 2015, the Company concluded agreements for the amount of 119.6 million tenge with disabled people organizations. 

In 2016, the Company concluded agreements for the amount of 114.8 million tenge with disabled people organizations. 

In 2017, the Company concluded agreements for the amount of KZT 383.3 million with disabled people organizations, including the Public Association “Association of disabled people Vostok”, “Mamai-Astana” LLP, “Hermes 21 Century” LLP, “Megapolis-ASTANA” IE, “Koktem-2016” LLP, “Delta inc” LLP, “Ahmanova D.H.” IE,”BAYAZIT Life” LLP, ”ar-Rohim association of disabled people” Public Association, “Taraz Educational and Production Enterprise” of Kazakh Society of the Deaf”, “GrandCorp” LLP. ABENOV IE, “Kolganat-Karaganda” LLP for purchase of special clothing, logbooks, letterheads, printing services.

Investment activity

The investment program of “Samruk-Energy” JSC is aimed at modernization, reconstruction and construction of generating facilities, as well as ensuring reliable energy supply and meeting the needs for electricity and heat.

According to results of 2017, the actual utilization of capital investments amounted to 72,418 million tenge. 25,177 million tenge was allocated for investment projects, 47,187 million tenge for maintaining generating and administrative assets in working order, 54 million tenge was provided for other investments.

The company uses various tools, such as external loans and bonds. to finance the Investment Program, and also obtains frund from State budget for financing socially important projects.

Description

Measurement unit

Reporting period with cumulative total

 

 

 

Plan for the period

actual

 % ratio to development plan

in % as compared with 2016

General expenses for development (investments)

thous. tenge

83,934,159

71,777,276

86%

91%

Of which:

 

 

 

 

 

Borrowed funds

thous. tenge

31,697,628

8,195,691

26%

 

State budget funds 

thous. tenge

2,498,300

6,600,625

264%

 

Own

thous. tenge

49,738,232

56,980,961

115%

 

In accordance with “Samruk-Energy” JSC mission, in order to ensure reliable and competitive energy supplies in the territory of the Republic of Kazakhstan, increase the shareholder value and ensure social responsibility of “Samruk-Energy” JSC business, the following investment projects were implemented during 2017–2018:

No.

Project title

Project cost, mln. tenge

1

Construction of Moynak HPP on Charyn river

54,128.7

2

Reconstruction and capacity increase of ESDPP-1 (restoration of power unit # 8)

26,294

3

Reconstruction and capacity increase of ESDPP-2 (restoration of power unit # 2)

68,716

4

Construction of 4 substations to supply “Asian games” facilities with power (SS Ermensay, Medeu, KazGU, Shymbulak)

18,357

5

Construciton and reconstruction of 5 substations to supply Subway and FEZ PIT with power (SS Otrar, Novaya # 16, Alatau, Kensai (Besagash), Toplivnaya)

38,253

6

Construction of 3 substations to supply Almaty city housing and public utilities with power (SS Novaya 3 A. Mamyr, Altai)

7,488

7

Reconstruction and expansion of Almaty CHP-2, III stage. Boiler house

13,212

8

Reconstruction of combined ash and slag removal system of Almaty CHP-2

7,593

9

Construction of 2 MW SPP in Kapshagay city

1,684

10

Construction of 45 MW WPP in Ereymentau city including the possible increase in capacity up to 300 MW

19 495

11

Reconstruction and expansion of Almaty CHP-2, III stage. Boiler unit No. 8

25,699

12

Modernization of 500 kV OS of Ekibastuz SDPP-1

18,132

The project “Transition to cyclical-and-continous method (CCM) for extraction, transportation, blending and loading of coal at “Bogatyr” open-pit coal mine of Ekibastuz coal field”

CCM project assumes a step-by-step transition of the “Bogatyr” mine to the cyclical-continous technology of coal mining and delivery by conveyor transport to the blending warehouses with subsequent loading on the surface loading units. The need to implement the project is related to the achievement of the depth of mine works, at which the use of rail transport becomes less effective.

The implementation of the project will allow increasing the production capacity of “Bogatyr” open-pit coal mine from 32 to 40 mln. tons of coal per year, improving labor productivity, reducing cost of coal mining and upgrading premises and equipment relating to transportation and unloading of coal.

The project “Development of the gas field “Pridorozhnoe”

The project provides for the construction of infrastructure for the production of natural gas for sale to domestic and foreign markets. The project also plans to build a high-pressure gas pipeline from Pridorozhnoye field to the Beineu – Bozoy – Shymkent gas pipeline.

The aim of the project is to cover the deficit of gas demand in the South Kazakhstan region of the Republic of Kazakhstan, with the maximum annual gas production amounting to about 290 million m3.

Project “Modernization of Shardarinsk HPP”

The project involves the replacement of obsolete and worn-out equipment to improve performance and operational safety of the plant, which will increase the installed capacity to 126 MW and produce an additional 57 million kWh of electricity per year.

Project “Construction of Balkhash TPP”

The construction of the first unit of a coal-fired thermal power plant with a capacity of 1,320 MW will produce more than 10 billion kWh of electricity per year, which contributes to meeting the growing electricity demand for the South Zone of Kazakhstan.

The project “Increase of installed capacity of a 2 MW solar power plant in Kapshagai city to 416 kW”

The project envisages an increase in the installed capacity of the existing 2 MW solar power plant in Kapshagai city to 416 kW. The implementation of the project will produce an additional 0.5 million kWh of electricity per year.

The goal of the project is to generate electricity using renewable energy sources to provide power-hungry southern region with electricity.

The project for rendering gratuitous assistance to the Government of the Republic of Kazakhstan by the Government of the People’s Republic of China as part of signed Agreement between the Government of the Republic of Kazakhstan and the Government of the People’s Republic of China

The project provides for construction of a 1 MW solar power plant on the territory of FEZ “PIT Alatau” in Almaty and construction of a 5 MW wind farm in Shelek rural area, Almaty region. At this, the Chinese side supplies, builds, installs and commissiones these facilities free of charge.

The goal of the project is to generate electricity using renewable energy sources to provide energy-deficient southern region with electricity.

The project “Expansion and reconstruction of Ekibastuz GRES-2 with the installation of power unit No. 3”

The project provides for construction of power unit No. 3 with an increase in the installed capacity of the plant by 636 MW and the production of an additional 4.8 billion kWh of electricity per year.

Reconstruction and expansion of the capacity of Ekibastuz GRES-1 (Restoration of power unit No. 1).

The project envisages the restoration of 500 MW power unit No. 1 at Ekibastuz SDPP-1 to meet the growing demand for electricity in Kazakhstan and Russia.

Construction of 110/10 kV Substation “Turksib”

The project provides for construction of the new “Turksib” substation with a transformer capacity of 80 MVA (2х40) in Turksib district of Almaty city instead of the existing 110/6 kV substation “Zavod 20 let Oktyabrya” in order to improve the reliability of electricity supply to consumers.

The development of power grids in Karasai district with construction of “Shamalgan” substation (Ushkonyr) with the transfer of loads from nearby 35 / 10kV substations

The project involves the construction of a 110/10 kV “Shamalgan” substation with a transformer capacity of 50 MVA (2x25) in Ushkonyr village, Karasai district, Almaty region; the project’s goal is to improve the reliability of electricity supply to consumers.

Transfer of the load of 220 kV Substation “Gorny Gigant” to 220 kV Ermensai SS through 110 kV grids with subsequent dismantling of “Gorny Gigant”substation

The project provides for the transfer of 220 kV Gorny Gigant substation to the 220 kV Yermensay substation through 110 kV grids, followed by dismantling of Gorny Gigant substation with the aim of eliminating the emergency situation at the Gorny Gigant substation, which resulted from landslides and the destruction of substation grounds.

The project “Construction of 50 MW wind power plant near Ereymentau city”

The project provides for construction of 50 MW wind power plant near Ereymentau city with the prospect of expanding up to 300 MW. The implementation of the Project will additionally produce 180 million kWh of electricity per year.

The project aims to use renewable energy sources to reduce the level of use of hydrocarbon energy carriers in production of electricity.