Kazakhstan Electricity Grid Operating Company JSC
The management's comments on
the financial performance
For six months ended 30 June 2015
TABLE OF CONTENTS
Macroeconomic indicators of the Republic of Kazakhstan / 3Overview / 4
Characteristics of NPG Facilities / 4
Our operating segments / 6
Operating structure of KEGOC / 6
Information on subsidiaries / 7
Interrelation with the Government and major shareholder / 8
Business Transformation Programme / 9
Tariff Policy / 11
Operating Results / 14
Description of the Key Items of Historic and Consolidated Income Statements / 14
17
Revenues / 18
Cost of sales / 21
General and Administrative Expenses / 23
Selling Expenses / 24
Exchange difference, net / 25
Income Tax Expenses / 25
Cash Flows / 25
Liquidity / 26
Key performance indicators (KPIs) / 30
Current Loan Agreements / 27
Capital Expenditures / 34
Contractual Obligations / 35
The main factors and risks
that affected the financial position and operating results of KEGOC / 36
Off-Balance Sheet Arrangements / 37
The set forth explanations and comments on the financial results disclosed in the consolidated financial statements of KEGOC as of 30 June 2015 and for six months till the above date shall be read in conjunction with the unaudited interim consolidated financial statements of KEGOC and notes thereto for that period. In addition, this review includes forecast statements. These forecast statements are subject to risks, uncertainties and other factors outlined in the investment memorandum, which can cause the significant deviation of our actual results from the results indicated in these statements or arising from them. Our actual results may differ from those provided in these forecast statements.
The unaudited financial statements were prepared in accordance with IAS 34 'Interim Financial Reporting'.
Macroeconomic indicators of the Republic of Kazakhstan
The growth in gross domestic product during 2011-2014 was an annual average of 5.7% per year, while the volume of industrial production grew by an average of 2.3% annually. In the first half of 2015, the real GDP growth was 1.7%, while the volume index was 100.6% in the industry. Furthermore, Kazakhstan had a low level of public debt and inflation rate (for the period from 2012 to 2014 of 5.9% on average).
The inflation rate in the Republic of Kazakhstan remained below 10%, except for the increase to 17% at the peak of the global economic downturn in 2008 (data of CIA World Factbook). According to the Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan, the inflation rate for six months ended 30 June 2015 and 2014 was 3.9% and 4.8%, respectively.
The table below contains the information on electricity consumption and generation volumes in Kazakhstan in the period from 2011 to 2014 and for the first half of 2014 and 2015:
For the year ended31 December / For six months ended
30 June
Year / 2011 / 2012 / 2013 / 2014 / 2014 / 2015
The amount of electricity consumption in Kazakhstan
(million kWh) / 88,136 / 91,444 / 89,641 / 91,632 / 45,427 / 45,735
The amount of electricity generation in Kazakhstan
(million kWh) / 86,203 / 90,248 / 91,973 / 93,919 / 46,662 / 45,933
Overview
Kazakhstan Electricity Grid Operating Company KEGOC (hereinafter - the Company or KEGOC) is a company established in Kazakhstan, rendering the services of electricity transmission, technical dispatching of electricity supply to the grid and electricity consumption, and electricity generation/consumption balancing in Kazakhstan.
The company was established in 1997 under the initiative of the Government to restructure the management of the power system of the Republic of Kazakhstan. The Sovereign Wealth Fund Samruk-Kazyna JSC (hereinafter - the Fund) owns 234,000,001 (90% plus one share) ordinary shares of KEGOC.
KEGOC's authorized capital was KZT 126,799,554 thousand as of 30 June 2015.
KEGOC's equity was KZT 357,335,029 thousand as of 30 June 2015.
As a state assigned System Operator, the Company operates the Unified Power System of Kazakhstan (UPS). As of 30 June 2015, UPS consists of (a) the National Power Grid (NPG); (b) 105 power plants (including 8 power plants of national importance); (c) 29 power distribution organizations; and (d) 135 wholesale customers. KEGOC owns and manages NPG assets, consisting of 35-1150 kV high-voltage transmission lines, 224,893.53 km long, and 77 substations, and provides maintenance and repair of these assets as well.
Characteristics of NPG Facilities
As of 30 June 2015 MES branches own 77 electric substations of 35-1150 kV, with the installed transformer capacity of 36,244.55 MVA, including:
1150 kV - 3 pcs of 9 384.1 MVA;
500 kV - 17 pcs of 15 446 MVA;
220 kV - 54 pcs of 11 386.25 MVA;
110 kV - 1 pc of 5 MVA;
35 kV - 2 pcs of 23.2 MVA.
The total length of 35-1150 kV overhead transmission lines is 24,893.53 circuit km, including by voltage classes:
1150 kV OHTL - 1421.225 km;
500 kV OHTL - 6,804.744 km;
330 kV OHTL - 1759.482 km;
220 kV OHTL - 14511.108 km;
110 kV OHTL - 352.841 km;
35 kV OHTL - 44.13 km.
KEGOC provides the electricity transmission via interstate and interregional transmission lines, communication of power stations with the regional power grid companies and large consumers. The remaining assets of UPS belong to the third parties. KEGOC does not own shares or equity interests in power plants generating electricity or in the companies engaged in the operation of distribution networks. In general, KEGOC is responsible for the transmission of electricity from power plants to distribution companies and large consumers. KEGOC does not transmit electricity to the population.
The mission of the Company is to ensure the reliable operation and effective development of Kazakhstan UPS in accordance with the state-of-the-art technical, economic, environmental and occupational health-and-safety requirements.
The main strategic goal is to create a competitive company in the global economy.
The main strategic goal is achieved through the fulfilment of top-level goals:
1. Ensure the reliable operation of the Kazakhstan National Power Grid (NPG) in accordance with the state needs;
2. Develop NPG for the benefit of the Company's business and in accordance with the economic needs of Kazakhstan;
3. Enhance the efficiency of the Company's operations;
4. Increase the shareholder value of the Company;
5. Improve and enhance the efficiency of the electricity market in Kazakhstan;
6. Develop corporate governance practice and maintain sustainable development;
7. Achieve stable partner relationships with the utility companies of neighbouring countries.
The primary sources of revenue of KEGOC are revenues gained by the Company from electricity transmission services, technical dispatching services for electricity supply to the grid and electricity consumption, and electricity generation and consumption balancing services. For six months ended 30 June 2015 the Company had received operating revenues in the amount of KZT 53,455,714 thousand including: KZT 36,448,092 thousand from the Company operations relating to electricity transmission via the Company's networks, KZT 7,593,259 thousand from the dispatching of electricity supply to the grid and electricity consumption and KZT 6,559,194 thousand from the electricity generation and consumption balancing. The rest of the operating revenues was gained from:
- sale of electricity to compensate for the deviation of actual hourly volumes of interstate net power flows from the scheduled one;
- sale of the purchased electricity to compensate for unscheduled flows;
- sale of services for capacity reserve;
- sale of electric power and etc. control;
- sale of other services.
Our operating segments
The company specified only one business segment, which represents electricity transmission; technical dispatching of supply to the grid and electricity consumption; electricity generation/consumption balancing defined as a reporting segment.
Operating structure of KEGOC
Information on subsidiaries
KEGOC is a parent company of subsidiaries: EnergoInform JSC and Financial Settlement Centre for Support to Renewable Energy Sources LLP.
EnergoInform JSC
EnergoInform was established in 2002 as a non-profit organization and a legal entity for support in servicing of KEGOC information and telecommunication complex. In November 2010, EnergoInform was reorganized into a joint stock company. KEGOC owns 100% of the voting shares of EnergoInform. EnergoInform's authorized capital was KZT 2,179,700 thousand as of 30 June 2015.
Mission: to ensure the reliable operation and effective development of the information and telecommunication system of UPS RK using the world’s best practices and innovative technologies.
Strategic goals of EnergoInform:
Ensure the secure operation of the information and telecommunication system (hereinafter - ITS) of KEGOC and parties of the Kazakhstan UPS;
Introduce smart solutions to the controls of the energy market of Kazakhstan;
Develop infrastructure facilities of Kazakhstan energy market entities;
Diversify sources of growth in of the Company’s value.
The main consumer of EnergoInform services is the System Operator of the Unified Power System of Kazakhstan - KEGOC.
The total income of EnergoInform for the first half of 2015 amounted to KZT 1,674,600 thousand. Expenses amounted to KZT1,531,134 thousand. The financial performance for the first half of 2015 amounted to KZT 143,466 thousand.
The Financial Settlement Centre for Support to Renewable Energy Sources
On 27 August 2013 KEGOC established the Financial Settlement Centre for Support to Renewable Energy Sources LLP ('The Centre for Support to Renewable Energy Sources'). The Centre objective is to encourage investments in energy production using renewable energy sources and increase the share of renewable energy sources in Kazakhstan due to the centralized purchase of electricity produced from renewable energy sources of all types, at a fixed rate.
The main activity of the Centre for Support of Renewable Energy Sources is the centralized purchase and sale of electricity produced from renewable energy sources.
The authorized capital of Financial Settlement Centre for Support to Renewable Energy Sources was KZT 100,000 thousand as of 30 June 2015.
The total income of the Financial Settlement Centre for Support to Renewable Energy Sources for the first half of 2015 was KZT 765,641 thousand. Expenses amounted to KZT699,976 thousand. The profit for the period ended 30 June 2015 amounted to KZT 65,665 thousand.
Interrelation with the Government and major shareholder
KEGOC was established by the decision of the Government of the Republic of Kazakhstan in accordance with Resolution No. 1188 dated 28 September 1996 'On Certain Measures to Restructure Kazakhstan Power System Management'.
Until 2006, 100% of KEGOC shares had been owned by the Government. The sole shareholder of KEGOC is the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan.
In accordance with Resolution of the Government of Kazakhstan No. 117 dated 23 February 2008 'On measures to implement Decree of the President of Kazakhstan No. 50 dated 28 January 2006', the Government's shares in the Company (100%) was transferred as payment for shares of Kazakhstan holding company for management of public assets Samruk JSC.
The Sovereign Wealth Fund Samruk-Kazyna, a legal successor of Kazakhstan Holding Company on Management of the State Assets Samruk JSC, was established through a merger of Sustainable Development Fund Kazyna and Kazakhstan Holding Company on Management of the State Assets Samruk in accordance with Decree No. 669 dated 13 October 2008 of the President of the Republic of Kazakhstan 'On certain measures to ensure competitiveness and sustainability of the national economy' and Resolution No. 962 dated 17 October 2008 of the Government of the Republic of Kazakhstan 'On measures to implement Decree No. 669 dated 13 October 2008 of the President of the Republic of Kazakhstan.
In accordance with Resolution of the Government of the Republic of Kazakhstan No.1027 dated 8 September 2011 (People's IPO Programme), KEGOC was defined as the company subject to the public offering on the Kazakhstan stock market.
The Resolution of the Government of the Republic of Kazakhstan dated 30 October 2014 approved the decision of the Board of Directors of Samruk-Kazyna on the price, quantity and structure of KEGOC shares to be offered on the Kazakhstan Stock Exchange under the People's IPO Programme.
According to the approved decision of the Board of Directors of Samruk-Kazyna 25,999,999 ordinary shares of KEGOC were offered (10% minus 1 share of the total number of authorized ordinary shares of the company) at the price of KZT 505 per ordinary share.
Thus, 90% plus one ordinary share of KEGOC are currently owned by Samruk-Kazyna Sovereign Wealth Fund controlled by the Government of the Republic of Kazakhstan.
The participation and influence of the Government of Kazakhstan on the Company's operations is high, as KEGOC is a system operator of the national power grid. In accordance with the Law of the Republic of Kazakhstan 'On Electric Power Industry' the government works out the main areas of the state policy in the power industry sector.
Business Transformation Programme
The President of the Republic of Kazakhstan in his address titled 'Kazakhstan 2050 Strategy: new political course of the matured nation' set the national goal to join the top thirty most competitive countries in the world by 2050.
To achieve the set goal, the government shall substantially increase the investment in the economy and enhance labour, capital and resource productivity.
Samruk-Kazyna owns a number of largest assets in Kazakhstan and plays a crucial role in providing necessary conditions for achieving the Strategy goals.
Performance indicators of investments and operations of Samruk-Kazyna and its portfolio companies are not sufficient for achieving the goals of the national Strategy.
To improve investments and operations efficiency, Samruk-Kazyna has developed a programme of large-scale transformation in Samruk-Kazyna and controlled portfolio companies.
KEGOC Business Transformation Programme
KEGOC dominates grid companies in many criteria. As a rule our company applies all innovative solutions appearing on the world market. Still the company has opportunities for further gains in economic, technological, and managerial areas. Therefore, the company's management supported the Fund's decision to start the Business Transformation Programme.
The Business Transformation Programme is a set of projects associated with KEGOC's operations designed and implemented to improve efficiency of the operations, create the common information area and integrated management system, and put in place a corporate culture of continuous improvement.