THE FAR EAST:
the power of energy growth
Attracting investors to the region of Far East is contingent on the development of power industry infrastructure. At present, this industry toils in the conditions of an undeveloped market, with deficient machinery and outmoded electrical grids. By 2025 “RusHydro” and “RAO ES Vostok” plan to put into operation about 4GWtt of new capacity from power stations, primarily to substitute the outmoded ones.
And this is just the start.
Infrastructure
Older, more expensive and more dangerous
Totally outdated infrastructure remains the primary problem of RAO ES of the EAST.
Some equipment has already exceeded its operational lifespan by two or three times; technicians have to prolong the maintenance of facilities that should have been replaced long ago.
This leads to excessive costs of repair, lower output capacity opportunities and transmission from excessive nodes to the deficit ones.
It also prejudices the credibility of power and heat supply that eventually turns the work of energy experts into a constant survival race.
Tariffs
Without investment return
RAO ES of the East
The reform of RAO EES Russia influenced the energy industry of the whole country. However, the Far East remained “a state within a state”. It is noteworthy that the holding of RAO ES of the EAST owns all types of energy enterprises – in the rest of Russia power production, distribution and sales were divided between different owners. It is of prime importance that today the whole Far East region – a vast territory with isolated energy regions – remains out of the national pricing schemes and is still working according to regulatory tariffs schemes. There is a lack of customers in this area, with local population and communal sector being the prime customers.
“The population of the Far East is not to be blamed for the fact that there are only few electric power transmission grids and few power generation objects, and that the electric power transmission tariff is high because of long distances”, - acknowledges Yuri Trutnev, Presidential Plenipotentiary and Deputy Prime Minister of Russia. Meanwhile, local social issues are of prime importance and the state sets minimal prices for power for local customers.
This results in an absence of investment return mechanisms in the energy sector of the Far East. The tariff revenue, which is the traditional source of financing of energy companies in market price areas, barely covers the maintenance costs of "RAO EES of the East’ nets and power production units in the Far East region. At the same time the holding has created a costly development program, which envisages the launching of more than 4GWtt of new power capacities by 2025, with 2.5 of them earmarked to substitute the outdated facilities. As pointed out by the company’s CEO Sergey Tolstoguzov, the cost of the program is about 630 bln rubles with 290 bln assigned to expenditure before 2020.
52% of this sum will be assigned to the reconstruction of electric and heat grids, as well as for the modernization of existing facilities. It is unlikely that the head company of “RusHydro” will participate in the implementation of the investment program of the Far East holding. The state-owned holding implements its own large-scale complex program of modernization of functioning HPSs and its own investment program with objects planned to be launched in 2016-2018.
Tariffs should change
“Present-day tariffs do not allow us to implement this program, - acknowledges Tolstoguzov. – Part of the funds are derived from amortization costs and from tariffs that we plan to use to finance the program. Even so, we are most dependent on credits, although banks are reluctant to provide them without clear mechanisms of returning them”. The company counts on state support and state guarantees, as well as on national budgetary funds to be invested in the Far East energy sector. “It is vital to obtain national budgetary funds as these shall be funds which need not be repaid, and come without interest payments, nor are they influenced by tariffs , The proportions of final distribution of these sources of funds depend on the opportunities for increasing these tariffs. The lower the tariffs increase,, the fewer credit opportunities the company obtains and thus the more subsidies we need. For instance, if the annual tariff increase rate remains at the 6.6% rate, we shall be able to cover only one-third of the funds needed for the program from our own revenues. In this case we count on state investment of about 39%”, - says Tolstoguzov.
Thus the approaches towards tariff regulations in the energy sector of the Far East economy are bound to be reviewed in the coming years. “We believe that the development of the Far East should not be subsidized fully and constantly, because otherwise we shall simply create a system that is not oriented towards saving any costs”, - says Yuri Trutnev.
Customer debts
Multibillion nonpayment
Alexander Petrov/TASS
Companies of the “RAO ES of the East” group are heavily indebted because of customers’ nonpayment: overall debts for power supply payments in the Far East region account for about 23 bln rubles. The most heavily indebted region remains the Kamchatka region with more than 5.5-5.6 bln rubles of debt. Major debtors are the intermediary agents – the managing companies of households. Although it is worth noting that in this region tariffs are traditionally three times higher than the country’s average while local household incomes are significantly below the average.
The most grievous situation is seen in the unified energy system of the East. By July 1st of 2015 the cumulative debt of the population and legal entities of the Amur district and Yevreyskaya autonomous region, Khabarovsky and Primorsky districts, as well as the southern subregions of Yakutia for providing hot water and central heating by the “the Far East power producing company” (part of RAO ES of the East) exceeded 6 bln rubles. 74% of this sum is attributed to the local population debts, primarily in Khabarovsky (2.8 bln rubles) and Primorsky (1.2 bln rubles) districts. There are several companies that suspend their payments, including problematic ones – “REU” joint stock company, the “Khabarovsky Broiler” and the “Slavyanka” joint stock company. There are also municipal budget-sponsored debtors. Heavy debt burden hinders the whole process of preparation for the winter period in Blagoveschensk, as the local debt of “Amur Communal Systems” joint stock company (a dealer in heating power) accounted for 886 mln rubles, as for July 1st , 2015. The most indebted company remains the “Oboronenergosbit” joint stock company, which owes about 1.5 bln rubles to power sales companies for energy supplies.
Based on results of 2014, RAO “Energy systems of the East” compiled a list of the most problematic non-payers ,who entirely fail to make payments for power and heat. This list included more than 70 companies and organizations from 8 regions of the Far East (except Chukotka). In total, the company has 98.25 thousand contracts for providing power and heart supplies, concluded with legal entities. On the date of access the total amount of debts was estimated at 15.8 bln rubles. “If we were to receive all our debts back at once, we could build a new powerful energy producing facility on some power station”, - notes Sergey Tolstoguzov.
Energy security threat
Given the fact that in 2015 RAO ES of the East is to spend 10.85 bln rubles on repairs and preparation of all power generating facilities for the winter period (with more than 6 bln rubles earmarked to subsidize the Far East power-generating company), customer debts that account for twice this sum present not merely local challenge, but a threat to national energy security. “Funds that we do not receive from customers for previously supplied energy have to be compensated by credits at high interest rates. These credits serve to cover the costs of our ongoing repair campaign - which cannot be suspended as quality repairs are the essential prerequisites for constant heat transmission during our long winter period”, - says sDeputy Sales CEO of the Far East Power-Generating company Dmitrij Bogdanovsky. At the same time, RAO EES of the East reminds that the holding needs funds for the modernization of energy-generating facilities and for the prospects of development, which are now financed only from credit sources. “RusHydro” also has to carry this heavy debt burden, since it refinances the debts of its subsidiary or acts in capacity of a credit guarantor. In 2014 alone, the holding has been accredited with 4.8 bln rubles under the guarantees provided by “RusHydro”.
The official website of the company tells the stories of company dealing with its debtors. In April 2015 in Khabarovsk malicious defaulters were caught on parking lots: for example, a man who accumulated 17 000 rubles in debt for heating, was caught by the court bailiffs carrying a new computer monitor right from the shop. The item was sequestered on the spot to cover his heating debts. But there is a more common practice that is applied towards both population and enterprises – companies limit or stop energy and heating transmission right away. A so-called “pliers” operation has been invented by local bailiffs: groups of electrical engineers come to customers’ apartments and simply cut off their cables that act as heat and light transmitters. Sometimes these debts are seized from customers’ bank accounts.
“We fight malicious defaulters with all means available – from drafting deferred-payment agreements to cover debts and legal court procedures to the most unpopular means. For physical entities this means distraint of cars and properties and even eviction of people living in non-privatized apartments. For legal entities it means limiting and\or cutting off heat and counting of penalty sanctions”, - tells Dmitry Bogdanovsky. So, for the first period of 2015 the company has issued more than 40,600 lawsuits for up to 2.2 bln rubles of main debt (as well as up to 55,5 mln rubles of penalties). More than 805 mln rubles was derived during court hearings and more than 265 mln rubles were collected by court bailiffs.
Under investigative agencies’ scrutiny
Permanent struggle with malicious defaulters even with high level of return of debts is a closed circle, thus, energy experts try other means. The most effective proven method is transferring customers to a scheme of direct payment to the resource suppliers.
Sometimes sales companies that belong to the regional monopoly have to buy guaranteeing suppliers because of chronic debts. For example, in July 2014 “Far East Energy Company” bought the stock company “Energocomfort. Amur” , the guaranteed supplier of power in Blagoveschensk, and soon afterwards more than 75 000 local citizens and 2,4 000 legal entities were transferred to a direct payment scheme.Kamchatskenergo” drafted a treaty with the largest managing company of Petropavlovsk-Kamchatsky, which controls 80% of households of the city. “We aim at full-scale transfer of all customers to direct payment schemes, as the main debt is accumulated by intermediaries and not people themselves. Our end goal is to introduce changes to legal procedures of sales that would establish obligatory pre-payment for heat and power supplies”, - underlines Sergey Tolstoguzov.
Malicious managing companies are often scrutinized by the investigative agencies. For example, the economic security of “Kamchatskenergo” conducted five criminal cases against heads of 10 managing companies, who illegally used customers’ debts. Last year, there were more than 20 such cases! “Toughening of legal procedures in the communal sphere, and introduction of a pre-condition of obligatory licensing of managing companies can in our opinion, assist in the struggle against malicious communal companies. As a result, it will be possible to resolve the issue of energy supply debt growth”, - tells RAO ES of the East expert.
Credit obligations
Debt legacy
Another problem for RAO ES of the East is the high credit debt of the holding. As estimated by July 1st 2015, the total credit and loan debts of the holding’s company amounted to 87.92 bln rubles. A significant part of the sum was accumulated by the RAO EES Russia company, before RAO ES of the East company was created in July 2008.
The reasons for the debts doubling are simple: the growing deficit of financing of the investment program and circulating assets with unprofitability of the main activities of the holding in the background. In essence, this is the cost of working under conditions of total tariff regulation in the Far East. According to the company’s data, the holding paid 16,15 bln rubles to cover the budget deficit as a result of new tariff and balance decisions. In addition, 11.37 bln rubles were raised to cover the circulating assets, including covering of the debt growth. The projects that did not prerequisite investment return that were implemented according to state orders (including gas-conversion of power generating objects and preparation of energy infrastructure for the APEC-2012 summit in Vladivostok) required an additional 20.5 bln rubles of credit investment.
According to the reports of the International Accounting Standards, the chief creditors of RAO ES of the East company on long-term obligations are its head holding of “RusHydro” (23.3 bln rubles) and state-owned banks – Sberbank (14.5 bln rubles) and VTB (4.5 bln rubles). Although the company’s management estimate overall debt as normal, main efforts of the company’s finance policy are aimed at substituting short-term obligations by the so called “long credits” (usually accounted for 5 year periods). Still, the finance situation of the Far East distributive networked company remains difficult, since because of the termination of the “last mile” contracts (a mechanism of collection of additional payments from customers to cover the costs of the distribution) in 2011-2013 it lost more than 9 bln rubles. Interestingly, the companies of the holding had to ask for credits with the assistance of “RusHydro” in order to pay salaries, provide energy supply and continue preparation for the heating season. Starting 2014 in the Amurskaya district and the Yevrejskaya autonomous region the regime of the “last mile” was prolonged till 2029, which allowed for more maneuvering. However, the issue with the lost revenues is still not resolved.
“RusHydro” believes it possible to terminate the issue of debt burden of its Far East subsidiary with the help of additional issue of company’ shares for the benefit of the VTB bank (less than 20% in capital). A preliminary agreement has been drafted in July 2015; it envisages an opportunity of bank participation in additional issues of company’s shares accounting for up to 85 bln rubles with simultaneous signing of a forward contract for a 5 year term. The funds thus raised will be used to optimize the capital structure of the Far East subsidiaries, including the refinancing of the debts. During the period of validity of the forward agreement VTB will be able to sell its package to a strategic investor (the Russian Government plans to partially privatize “RusHydro” while keeping a state share at the level of at least 50% plus one share).