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Edited Transcript of HYDR.MZ earnings conference call or presentation 4-Jun-20 1:00pm GMT

Q1 2020 Federal Hydro-Generating Company RusHydro PAO Earnings Call (IFRS)

Jul 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Federal Hydro-Generating Company RusHydro PAO earnings conference call or presentation Thursday, June 4, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dmitriy Gennadyevich Denisov

Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Member of Strategy Committee

* Kazachenkov Andrey Valentinovich

Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board

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Conference Call Participants

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* Alexey Adonin

Veles Capital Investment Company, LLC, Research Division - Analyst

* Anastasia Tikhonova

VTB Capital, Research Division - Equities Analyst

* Fedor Kornachev

Sberbank CIB Investment Research - Research Analyst

* Igor Goncharov

Gazprombank (Joint Stock Company), Research Division - Senior Analyst

* Matvey Tayts

Sova Capital Limited, Research Division - Research Analyst

* Sergey Beiden

Renaissance Capital, Research Division - Research Analyst

* Sergey Garamita

Raiffeisen CENTROBANK AG, Research Division - Analyst

* Vladimir Sklyar

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of RusHydro. At our customers' request, this conference will be recorded. (Operator Instructions) Now we now hand you over to Dmitriy Denisov, who will lead you through this conference. Please go ahead.

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Dmitriy Gennadyevich Denisov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Member of Strategy Committee [2]

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Dear, ladies and gentlemen. Thank you for joining us on this call following the release of consolidated financial results of RusHydro Group for the first quarter of 2020, most recent developments and outlook through the rest of the year. Participating in the call today is First Deputy CEO, member of the management Board; Andrey Kazachenkov, as well as line managers from sales, business planning and operations. The report and the presentation are available on our website in the IR section as well as in the Bloomberg terminal.

Please note that some of the information announced during the call may contain projections or other forward-looking statements regarding future events or future financial performance of RusHydro Group. Please refer to the beginning of the presentation for a full disclaimer.

I will now give the floor to our speaker, who is Deputy CEO, member of the management Board, Andrey Kazachenkov.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [3]

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Hello, ladies and gentlemen, thank you for your participation in our conference call. Before I go over the results, I would like to give you a quick update on the COVID-19 situation and its effects on RusHydro's operations. I'm sure many of you are anticipating this information. To begin with all our production facilities are operating on schedule, our investment projects are on track without significant delays or cancellations as well. The majority of personnel is working remotely, and our operating personnel is working on rotating shifts. Emergency response teams are constantly monitoring the epidemic status at RusHydro facilities, subsidiaries and the affiliated companies through ongoing preparation with local sanitary epidemiological authorities.

Today, there has been a limited number of COVID-19 positive cases in RusHydro Group. And overall, we do not see any risks of loss of control. I will now cover the main highlights of the first quarter. In terms of output, we had a very favorable first quarter with total production, including Boguchanskaya hydropower plant, reaching 39 terawatt hours, an increase of 19.2% over first quarter of 2019. I will talk more about operating results shortly.

In February, we have commissioned Zaramagskaya hydropower plant 1 in North Ossetia with installed capacity of 346 megawatts. It's built under capacity supply agreement with expected annual contribution to the group's revenue at about RUB 10 billion. The Board of Directors approved new investment program for the period of 2020 and 2025. The program is for 6-year term and includes 4 new DPM-2 projects in the Far East with guaranteed return on investment.

We have only 1 project, the plant in Sovetskaya Gavan West for commissioning this year with noncash impairments affecting first -- final year results for 2020 net profit. 2021 and 2022 will be impairment free in our opinion. We have no major project scheduled for commissioning during the period.

I would like to highlight that the program is balanced in terms of financing sources. Management's ongoing focus on improving operational efficiency have played out. This quarter, our manageable operating costs increased at near 1.8%, well below inflation.

Starting July 1, this year, long-term tariff regulation will be in asset in the Far East, contributing to the segment's self-sustainability. The mechanism will be in effect for the next 5 years, and average tariff growth will not exceed 9.9%.

Finally, we have divested our stake in Joint-Stock Company MEK, a company operating in Armenia. Following the transaction, the group's financial debt has been reduced by $56 million. We no longer have any unhedged foreign currency denominated debt exposure.

Now let's move over to the results. Slide 5 and 6 of the presentation, please. From production standpoint, the first quarter of the year was very favorable. Total electricity production, including Boguchanskaya hydropower plant increased 19%. Hydropower plant production increased by about 30% on the back of increased water inflows and low bay effect. Water inflows to reservoirs of the hydropower plant on the Volga-Kama cascade were 1.5 to 6.4x the normal level. Inflows to region's Verkhnevolzhskiye and Kamskaya hydropower plants were at all-time high historic record.

At the same time, as you see in the slide, electricity production from the less marginal RAO ES East thermal power plant decreased following the rise in hydropower plant production.

Favorable production carried over to the month of April as total hydropower plant production was 32% above the April of 2019. Overall, we expect stable production in the second quarter of the year as well with inflows to the majority of reserve versus the normal level.

In our view, climate change is among the factors behind stronger-than-expected water inflows. Most importantly, we do not foresee significant volume risks going forward.

Market overview is presented on Slide 8. First quarter spot market price performance came in as expected, favorable hydropower production directly affected spot prices, as prices in the first and second price zones decreased 9.4% and 11.2%, respectively, year-on-year. Nonetheless, quarter-on-quarter performance has rebounded with prices increasing 4.8% and 12.4% in the first and second price zones, respectively.

Once again, I would like to remind that RusHydro is a price taker, well as dependent on power consumption dynamics and spot prices and most power generation companies due geographic diversification of our fleet and the role of hydrating the power system.

The hydropower plant will produce electricity regardless of the market and economic volatility. As a result, the effect of prices is usually counterbalanced with production volumes.

Slide 9 is self-explanatory. As you can see, our tariffs rise in line with inflation or higher providing stability to our regulated business in the Far Eastern Federal district. As we have communicated earlier, regulated tariff outlook will change with introduction of long-term regulation in the Far East starting July 1. This mechanism will be in effect for 5 years contributed to -- contributing to self sustainability of our Far East business. Moreover, thanks to long-term tariff mechanism. Noncash impairments on our remaining legacy assets should be lower as well.

Let's now continue to slides 11 and 12 with our financial results. We had a very favorable first quarter following stronger-than-expected operating results, aided by stable pricing and low base effect. Moreover, in the first quarter of the year, electricity production and capacity supply began as the Zaramagskaya hydropower plant contributing additional revenue and EBITDA in the form of DPM payments. Consolidated revenue in first quarter 2020 increased by almost 7.5% on high electricity and capacity sales. 70% of revenue came from electricity and capacity sales. The majority of the remaining 30% includes heat and hot water sales and government subsidies in the Far East segment.

Overall, cost dynamics remained moderate as operating expenses increased below inflation and at 2.3% year-on-year. Moreover, thanks to effective cost management, our manageable expenses increased even less at 1.8%.

Breakdown of operating expenses is presented on Slide 12. Taking into account all of the above mentioned, our first quarter EBITDA increased by 23.8% year-on-year and reached RUB 36.6 billion with a healthy margin of 31.1%, up 4.1 basis points from the first quarter of 2019.

Our Hydro Power segment's EBITDA margin stands at a remarkable almost 70% level. Given the nature of the business hydro's role in the power system, the segment has significantly lower production costs as compared to fossil fuel electricity production companies. The segment contributed 66.4% of the consolidated EBITDA of the group. Nonetheless, the Far East segment financial performance in the first quarter of 2020 has improved significantly. The segment's EBITDA increased 23% year-on-year to RUB 10.1 billion, while its EBITDA margin reached 15%.

We have indicated earlier that our consolidated EBITDA margin for the year is expected to be in the range 25% to 30%. As you can see, we are still -- we are well on track to deliver fast results, and we will do our best to improve them.

Now let's go to Slide 14 and look at RusHydro's financial position. Effective ruble interest rate stands at 7.3%, while 90% of debt has fixed rate. Total debt is 100% ruble-denominated following successful divestment of Armenian subsidiary.

Weighted average maturity is 2.4 years, and our net debt-to-EBITDA is at a comfortable ratio of less than 1.2%. Central Bank's latest strength of lowering the key rate has played an important role as well by reducing the cost of funding and consequently, the weighted average cost of capital.

Finally, let us look at Slide 15. We see a lot of positive factors that will drive our financial performance in 2020 and improve the long-term outlook for our business, primarily in Far East. First, we maintained solid operation outlook through 2020 on the back of strong operational results of the first quarter in new capacity commissioning.

Zaramagskaya Hydropower plant 1, a DPM project will contribute to RUB 10 billion to our revenue annually and about RUB 8 billion in 2020. Recently commissioned Nizhne-Bureyskaya hydropower plant and Sakhalinskaya GRES-2 will also contribute to electricity production growth and lower fuel consumption and push our total electricity production above 2019 level.

Despite the economic downturn in Russia, we expect stable financial performance in 2020 with revenue growth and healthy EBITDA margin in the range 25% to 30%.

In 2020, we aim to increase installed capacity by 162 megawatts for commissioning of thermal power plant in Sovetskaya Gavan. We will commission 3 small hydropower plants in the North Caucasus with combined capacity of 21 megawatts and additional 15 megawatts through modernization. We have passed our peak impairment year in 2020, we'll -- and we'll see significant reductions in impairments as we have only 1 project left to be commissioned in the year.

The company is committed to paying guaranteed dividend level of not less than 3-year average in accordance with the new dividend policy. 2021 and 2022 are expected to be impairment free, and dividend growth is expected above the plant level. However, all the decisions regarding dividends are subject to primarily government directives and approval of the Board of Directors.

Last but not least, I would like to talk about some latest COVID-19 pandemic risks. Briefly, we have very limited exposure on RusHydro business. Delay of payments affects only the retail segment and partially RAO ES of East segment, both businesses represent a small share of the group's EBITDA.

As of the end of April, delays of payments from operations on wholesale electricity and capacity market increased by RUB 835 million or 1.37% of total accounts receivable. Normal level is about 1%.

In our electricity sales, retail, RusHydro's subgroup, total accounts receivable increased in certain areas by a 9% maximum as compared to business plan with delay of payment's effect of 5.5%. Situation remains mixed in our Far East business. For example, in Magadan region, electricity consumption increased following increase of gold production. In other regions of the Far East, increase of accounts receivable will be partially mitigated by the very smooth in (inaudible).

So the situation is under control. And we hope, given the pandemic situation is stabilizing, we will move to the second half of the year with more optimistic results.

So to sum up, it's all. Our business remains well diversified, sustainable and well equipped to withstand any temporary economic challenges, including COVID-19. We expect earning potential of our business starting to unfold as of this year, which should spillover into better returns for shareholders and stronger balance sheet.

Our leverage compared to other Russian state-owned companies remains low. And the lower rate environment provides us with opportunity to improve further our debt portfolio and weighted average cost of capital.

Solid first quarter results, ongoing improvements in operational efficiency and completion of projects in the Far East presents a positive medium-term outlook with focus on shareholder value, transparency and good corporate governance. We will keep you updated on this and other developments at our conference calls and meetings.

On this, I would like to conclude my presentation and move to your questions. Please, you're welcome.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Sergey Beiden from Reliance..

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Sergey Beiden, Renaissance Capital, Research Division - Research Analyst [2]

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I have basically 2 questions. The first one, if I look at your slide #6, it's written as a title that you expect a stable production in the second quarter this year. On the other hand, if I look at the statistics of the system operator, I do see a continued significant rise in hydro production close to 21%, both in April and May. So what's your expectation in terms of hydro production for the second quarter this year? So that's the first question. And the second question is do you expect any possible delays for the introduction of a new tariff regulation in the Far East, given the current situation we are currently in? And given that -- it looks like that there are some discussions in terms of the possible tariff regulation changes in the government. And on top of that, you said in the presentation that you expect as subsidies for fuel subsidies in the Far East at the same level as in 2019, but we do -- I see quite different dynamics in fuel costs in the Far East this year. So why don't you expect any changes in the subsidies?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [3]

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So let's start one by one. About hydropower production in the second quarter and this year overall. I referred to the results of April. So it's a fact. So April 1 month of the second quarter is well above the plan. It's in trend with the first quarter. On the Slide #6, you see the historical trends. As we see what's going on with water, right now, we are pretty much comfortable that we're going to the second half of the year with filled reservoirs, and we will be able to continue to produce significant volumes of the hydro energy. So we see second quarter is strong and stable. Of course, water and weather are probably only under the God's control. So different things might happen. But we started analyzing more and more global warming trends. And now we see that probably these changes contribute to more water inflows in different forms into rivers and other water reservoirs. So of course, we still need much more time to do the research on that. But given last year and given this year results, we have good perspectives in terms of the hydro production.

Your second question about the delay in tariff regulation changes in the Far East. So final negotiations take place with the Federal Antimonopoly Service. So as far as we know now, we think that we'll get some results starting from the 1st of July, subject to the final decision of the government. So as of now, we are not aware of the delays, but this process is underway, it's under the control of government. So we'll see how it will be ended in July, and we'll see the results -- the final results.

And subsidies, we expect them at a stable level. They can be a little bit lower due to the reason you mentioned. But as you know, some subsidies come to compensate for the previous losses for the previous fewer costs. They can be from previous years. So here, the situation is mixed. But as a good guideline, we plan them at the current level, some fluctuations are possible, but I don't think that it will make a difference on our final bottom line of the year.

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Operator [4]

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Next question is from Fedor Kornachev from Goldman Sachs.

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Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [5]

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Not Goldman Sachs but Sberbank as well actually but -- yes. So actually...

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [6]

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Fedor, sorry to interrupt you. I also noticed that you were introduced as a Goldman Sachs. So we suggested maybe Sberbank bought Goldman Sachs. But you said, no, it's okay. So we hope you will do it maybe in the coming years.

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Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [7]

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Let's see, let's see. The -- well, remote work changes things. So we'll see what's going to happen. Okay. So several questions from my side. So first of all, you presented this widely-discussed tariff initiatives for the Far East, and you indicated that the tariff growth is to be -- well, let's say, at maximum, it should be 9.9%. If I understood it correctly, it's 9.9% per year. And what I wanted to understand is whether this -- well, let's say, tariff growth target envisages the compensation of prior period losses. And what is the, well, let's say, the period during which you plan to receive the compensation for prior period losses? This is the first question.

The second question refers to your Far East and modernization projects. So actually, you incorporated the CapEx related to those projects into your investment plan. Do you now have a final clarity of the rate of return you will be allowed to earn on these projects? Because actually, this is the second most important point for us. I guess that -- that's it from my side.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [8]

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Okay, Fedor. So 9% level of tariff increase is expected. Not more than 9% level of tariff increase is expected starting from July 1 this year. The tariff will be established for 5 years. There are some other compensation amounts of economic value during these 5 years. So before final decisions are disclosed, I wouldn't just guarantee that this will come, as it's mentioned. We have to wait for the final decision of the Federal Antimonopoly Service. But I was feeling that this decision will improve our financial spending in the Far East. Of course, it will not solve all the problems and will not make the Far East as profitable as the European part or as the Siberian part or as regular thermal plants in this price zones. But given the current situation, it can be a good step forward to support our Far Eastern segment. And because it's 5 year and as you know now every year, we have a new tariff, and it will be a 5-year tariff. So if we get some economies, we will be able to keep them. We are entering this period.

We are probably entering this period with good fuel costs at the start so there will be some compensation for fuel cost historically. This is very important, some rebalancing between heat and electricity, between electricity and capacity. So there are some difficult calculations inside this process. But let's wait and see how it will result in the final end. We anticipate some progress here.

Again, I don't want to mislead you and say, it will be just another universe of business, probably not, but it will be easier. It will be better and combined with our core business, the situation will improve.

Your second question is about rate of return. So we all know the numbers discussed in the beginning of the regulation process about this project. As of now, it's not finalized. Again, let's wait until the decisions are approved. And we'll see the final rates of returns. As of now, we don't know the final rates of returns for this project. Before we get the full documentation on the DPM-2 mechanisms, we will not start these projects. We have to get full documentations of laws and all decrees approved. So when we have the proper legislation, we will be able to start. Now, we have only projecting of this CapEx projects, and we will not go ahead with the CapEx before we understand it's projects with guaranteed return on investment.

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Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [9]

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Okay. Understood. And just 1 final question from my side, if I may. I wanted to clarify the current status of Zagorskaya plant storage 2. And well, some details. So actually, we've seen that you plan to, once again, analyze the possibility of, well, let's say, relaunching the power plant. And I'm just curious what would be the timing and when the final decision is to be made?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [10]

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Okay. Thank you for your question. So according to the decision of the Board of Directors, we have started to uplift the broken part -- the broken unit of the Zagorskaya power plant 2. Before the start of this works, we did research with international consultants. And we did a lot of testing uplifts on the testing unit. So the technology we are using, proof that it will be able to uplift the broken unit. So now we have started this procedure. The CapEx for this is between RUB 3 billion and RUB 4 billion. The result of this will be in 2021 and about 2022. We have to be 100% sure that the problematic unit will be in the projected condition and the testing mask guarantee that it's stable in the long term. It will not be -- it will not go down again when the station is in operation phase, and there are some hydro processes inside. So only when we have 100% guarantee that the unit is stable in the long term and the problem is solved, then we will apply to the Board of Directors to start construction works to finalize the whole CapEx project, the whole Zagorskaya power plant 2 project. So what does it mean? Now we have at risk a newer amount of investment, RUB 3.4 billion. But after that, we have a -- whether we have a guarantee that we have to go ahead, or we still have risks. At that point, we will make a decision. And we will need some more years to complete the Zagorskaya power plant 2. As you know, Zagorskaya power plant 2 is in the DPM mechanism. So if the favorable line of events follow, we will recover all the costs, including all the construction and reconstruction costs. And we will get the healthy return on investments on the overall project. But to go ahead with this scenario, we have to achieve the guarantee that the Phase 1 of the construction work is complete successfully, and we have a guarantee that no further downgrades or shifts of the unit might follow. So this situation will be reassessed in 2021, 2022. And finally, we will find the way to follow this CapEx project.

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Operator [11]

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Moving to the next question from Igor Goncharov from Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [12]

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Just to follow-up on the regulation in the Far East. I'm just -- I'm not sure I quite fully understand the idea of the regulation. I mean you're saying that tariff growth will not exceed effectively 10%, 9.9%, which is clearly much higher than the inflation. At the same time, I try to understand the idea of the current subsidies mechanism. It's target -- it is targeting to have tariffs in Paris, not higher than the average tariffs in Russia. So if we have this tariff growth of 10% per year in the Far East, it will pretty soon exceed the average levels in Russia because they grow at a slower pace. Could you please explain how these 2 things correlate? So on one hand, I understand you want to keep tariffs lower -- the same level as country wide. At the other hand, the targeted growth is higher than the country-wide growth and how -- and also within this mechanism, how the subsidies mechanism will fit -- the existing subsidies mechanism will fit into this indexation scheme? That's it.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [13]

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I would like to clarify that this expected not more than 9.9% tariff growth will be -- will start from July 1 of 2019, and that doesn't mean that we will have, each year, 10% growth. So this is not what I wanted to convey in this discussion. This number refers to the first point of the long-term period.

During the next years, the indexation will take place, but I'm not saying it will be 10% each year. So the mechanics of the tariff regulation is difficult in a sense. So we have some meetings, discussions with our tariff people. So if you want the specific discussion on tariffs, we should organize a separate meeting probably. But the mechanics is really difficult. So I tried to make it more simple, like the rebalancing between electricity, capacity, heat and electricity, the reconsideration of fuel costs, of repair costs. So -- but the movement of numbers and mechanics inside is very difficult for those who are not in tariff regulation for the life. But -- so to present it to you and in a more simple manner, I'm trying to convey the concept, the trend. The details are more difficult to understand. So about subsidies. So given that your questions resource that you probably suppose that we got like 50% tariff growth in the Far East for next 5 years, that would mean that the tariff growth in the Far East goes up, and we have to smooth it through the surcharge mechanism. So we will now have to smooth like 50% tariff growth. The amount of tariff growth will be lower and the tariffs smoothing mechanism will work as now. So there are not exceptional increase in tariffs during this period to smooth it in a different manner.

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Operator [14]

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Next question is from Sergey Garamita from Raiffeisen CENTROBANK.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Analyst [15]

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Yes. Can you hear me?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [16]

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Yes.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Analyst [17]

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Yes. Once again, congratulations on great results. Actually, I have just a very small question on the strong performance of retail business, EBITDA wise. So why is that? So what's the rationale behind it? And do you expect this throughout the year 2020? And it's probably a second small one on the exchange of Far Eastern assets. When do you expect it to be over if you have an expectation?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [18]

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Okay. So the results of that retail business show that we do our best to improve the efficiency of this business. So there is a good team of management at our retail business unit. So they started their efforts a couple of years ago, and nowadays, the results come into an effect. So this is first quarter, the results are good. Given the COVID-19 situation. And as I said, that most affect of that comes to retail business. We have to go through second and third quarter to understand what the results will be. We'll do our best to sustain this result, but some risks from COVID-19 situation on retail business is in place. But overall, the result comes, as I said, from the great effort of the retail business unit team. And from the top managers in RusHydro, leading the retail business unit. So we are also very glad that we have achieved these results for retail business for the first quarter, and we'll do our best to sustain this trend.

Your second question was about the swap of assets in the Far East. So we are in the negotiations with SUEK Group. It's difficult to say for how these negotiations might progress, but they own the first level of management and at the top management level. So we are discussing this in the details. Let's wait some time and see whether this deal might be complete in the nearest future or later.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Analyst [19]

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Yes. And maybe a small one. You mentioned that you wouldn't start stating CapEx from normalization program before the legislation, they're already set and the presentation is done. But where do you -- when do you expect to start the CapEx at least maybe a little bit? This year or next year? Next year, right?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [20]

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I think not earlier than next year.

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Operator [21]

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Moving onto the next question. We have Mark Z from (inaudible) Bank.

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Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [22]

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It's Matvey Tayts from Sova Capital. So as you said in the presentation that you expect 2021 -- 2022 to be free of impairments. But what about 2020? Can you give us a guidance about like potential impairments for this year? This first one. Second one is about your CapEx expectations for this year in terms of IFRS numbers, how much do you plan to spend on the investments this year, measuring like in IFRS results? And also, what's the timing for dividends for 2019? When do you expect the announcement from the Board, when it will be approximately this year? And maybe also on the divestment of the non-controlling stakes and in particular, in the Caucasus region, I think you still have this 40% stake in Caucasus distribution company. Do you plan to sell it anytime soon?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [23]

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So about impairment, we will probably have an impairment on Sovetskaya Gavan project if we commission this project this year. We plan to do it and commission it this year. As of now, the timing has not changed. To give you the exact number of impairment now, I will not dare to do so. And given that the regulation will take place from the 1st of July. So even if we calculate the impairment given the former rules, there will be some recalculation from the 1st of July probably. So let's wait and see what is that?

About CapEx, on Slide #17, you can see our CapEx program that is approved by the Board of Directors. It's maximum level. So if you look back, we always go lower in comparison to the approved level. So this is the maximum level. So all the years before the annual CapEx is between RUB 80 billion and RUB 90 billion. So I would take these numbers as a good indication in the midterm of our CapEx.

What of dividend? So we are waiting for the final approval for the government and the decision will be taken in our view in June and about Caucasus grid company. So we did have some options to divest this unit in our common projects with RUSAL Group. So it was discussed. But given that we stopped negotiations about aluminum projects with RUSAL. So those options are not valid now. So we will have to reevaluate how we should proceed with this subsidiary. Of course, it's non-core, and of course, we should think how to divest this. But given that we closed negotiations with RUSAL on new aluminum projects as of now. So those options are not viable at the moment.

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Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [24]

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Yes. Okay. Just to make it clear, on this Page #17, this new investment program, when was it approved? When this number appears first time?

So yes. I see, sorry, yes, it's March. Yes, it was in March. Okay.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [25]

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But again, I would like to emphasize, these are the maximum numbers. So if you take the same approved numbers from the previous 5 years, and you take the actual spending, you'll see the difference, 20% to 30%. And it's not like for 1 year. It's a trend, it's for each year. So here, we submit the maximum to be able to -- many were inside this CapEx program. In the final end, it's usually much lower.

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Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [26]

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And maybe 1 more question. So now we have this very low like interest rates in Russia as well. So we see like small distribution companies raising cash for like below 6%. So at what extent do you think RusHydro is able to decrease its average cost of debt by the end of 2020 like -- because the structure -- what do you think about it?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [27]

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So we have -- so we will go with the market. So I think you should take the average market numbers and project the lower cost of debt for the year-end. So of course, we will raise that at the most efficient levels, low level, we will see, and we will wait for the decision about key rate in June. And after each decision, we renegotiate with banks. The decrease of their interest rates, and they reduce interest rates. So I think we will. Matvey, I'm not ready to give you the final number because I haven't calculated yet. So I can take it for from somewhere, but you know me, I don't want to mislead you. You're an analyst, you, of course, can calculate that even probably better than we can. So all the numbers about our debt are open.

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Operator [28]

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Moving on to the next question from Alexey Adonnin from Veles Capital.

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Alexey Adonin, Veles Capital Investment Company, LLC, Research Division - Analyst [29]

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I have a couple of minor questions from my side. The first one is connected to VTB forward deals. We know that it's been like prolonged till 2025, but still I would like to ask maybe we could see some news about this deal quite sooner than in 2025? And what would be a trigger for that? It's my first question. And the second question is still about CapEx, about new modernization projects on Far East CapEx. Can you envision one more time, we did mine for capacity payments, when will we get the formula or the return rate or some decree from the government, which will aid the concrete capacity payments for these projects?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [30]

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So about internalization, we are anticipating the final document this year. And we are all waiting for them this year to go ahead with this project going forward to the next year. About VTB forward. As of now, no discussions about prepayment of this financial instrument or presettlement of that. It's effective from the cost side. So as you know, that the cost of this instrument is key rate plus 1 minus dividend. So if you calculate that. So it's a very modest cost of funding. So what might be the trigger to go ahead with the VTB forward -- economic reasons. So if we have good share price and other economic reasons to go ahead with discussion with the VTB, how to change the structure, we'll do that. But as of now, no such plans are discussed.

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Operator [31]

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Moving on to next question from Anastasia Tikhonova from VTB Capital.

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Anastasia Tikhonova, VTB Capital, Research Division - Equities Analyst [32]

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Questions actually on most of the key ones were already answered, so just a few ones please. Also a small follow-up on the forward. Actually in the first key numbers, we see there's also a small interest payment as part of the format, actually some 300, I think -- while usually...

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [33]

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Anastasia, I'm sorry to interrupt you. Some problems with connection maybe. So we don't hear you, just speak to the microphone, please, because they're not...

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Anastasia Tikhonova, VTB Capital, Research Division - Equities Analyst [34]

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Is it better now?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [35]

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Yes.

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Anastasia Tikhonova, VTB Capital, Research Division - Equities Analyst [36]

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So a small question on forward. In first Q number, we see a very small interest payment as part of forward. Usually, you have the payment that is 3 or 4x higher. Could you please explain the reason why it is so soon in the first quarter? Secondly, for -- you also have some nice contribution from swapping your finance income. Could you please elaborate what it relates to? And the third question is about the full year Far East subsidy you expect. So there was nice growth in the first quarter, whilst we also here in '20, you were guiding for some RUB 40 billion subsidy. So what are the current expectations?

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [37]

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Okay. So let's start from the end. Subsidies for 2020 should be in line with subsidies for 2019. You asked about some swap differentials in the financial statements. If I got your question correctly. So we have a swap on our yuan Eurobond. So we hedged yuan exposure to ruble. So for us, the final payment is in rubles. And there are probably some interim fluctuations inside period. So there might be some effects inside this period. But in the end, this is a ruble exposure for us. And no foreign exchange risk here at all. About forward as I know, we pay regular payments, if you give me a couple of minutes because our guys work remotely, I can connect to them and ask what's the reason we pay less, but less, not more, but no extraordinary reasons for that. So we pay on schedule on this contract. So if it's important, I will need 2 minutes to get the answer to your question, more exact answer.

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Anastasia Tikhonova, VTB Capital, Research Division - Equities Analyst [38]

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There's no problem. Probably just Timur can follow-up later on.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [39]

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So Timur will get back to you.

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Operator [40]

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Moving on, we have Igor Goncharov from Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [41]

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Just a couple of follow-up questions. Basically on investments and on the dividends. One the investments, on Sovetskaya Gavan, you said you expected to be commissioned this year. Are we talking about the end of the year or somewhere before that? Because, I mean, previously, I think you were talking about middle of the year. So when approximately this station, you expect the station to be completed? Or are there any risks that it may be moved to the 2021, the commissioning date. And then on second question on CapEx, again, on new CapEx program on Slide #17, which you said is kind of the higher -- far high bound of the possible range. If we take 2020, you have RUB 109 billion, of which RUB 13 billion basically is for modernization project. You mentioned that you're not planning to do investment in modernization this year. So if we take out RUB 13 billion out of RUB 109 billion and get to RUB 95 billion broadly. Is it the number RUB 95 billion? Is it the number that we should look at for this year of investments, including VAT or would it be a lower number? And that's now question #3 on the dividend. I mean you have a slide on the dividend policy, which we know pretty well. Did you ever consider kind of removing the nonmonetary adjustments from the dividends from the base of calculation of the dividend? As for example, another large state company, Gazprom, has done in its new dividend policy. In this case, the situation -- the dividends will become much more predictable and the issue with impairments would disappear, would become relevant basically. That's it. So 2 questions on investments and on dividends.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [42]

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So about Sovetskaya Gavan. They are discussed in September, something like that. So -- and as far as I understand, there are some COVID-19 effects on the construction process in terms of logistics. So some months of the year, logistics was limited people were limited to move freely in the Russian federation. So that took some effect on the commissioning time. So we still hope to commission this project and plan to commission this project in 2020. But now our construction people are discussing September. So we'll see how this situation goes forward. In terms of CapEx, as far as understand in 2020 number, we see -- on the Slide 17, we have a modernization program of hydro business as well. So it's not that's easy to deduct that. So we don't have investments for Far East segment this year. So as a answer to Matvey, I would take the average factual CapEx spending for the last couple of years. It's something RUB 80 billion, RUB 90 billion. And I would take these numbers a good indication for this year. So previous year, the year before previous are good indication for what we plan to spend. And about dividend, I think we discussed this question during last call, so thank you for your question for your proposal. So we have approved dividend policy as of now, we keep on working ahead. So we'll see what happens. So as of now, we work according to our approved documents.

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Operator [43]

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Moving onto next question from Vladimir Sklyar from VTB.

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Vladimir Sklyar, VTB Capital, Research Division - Equities Analyst [44]

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I have a few questions. So first of all, about the situation with non payments. You mentioned that from what you see right now, it's all within 4%, 5% reduction of payment discipline in the areas where your company operates. I have 2 questions. First of all, if -- let's imagine the current 5% of nonpayments will last until the year-end, if there is such scenario, which will materialize. How do you expect to cover the working capital gap? Do you plan to use your own available resources or your -- you would be looking for government programs, which will tackle the nonpayments in electricity. And if government programs are fine with you, do you see any risks to your ability to pay dividends in the future? That's my first question. My second question is about your sentence on impairment free 2021, 2022. So besides Sovetskaya Gavan, there are no other impairments, which you expect to happen in 2021, 2022, am I correct in understanding that? So you will not be revaluing your PPMD using new GCF and using new assumptions and so on and so forth, right? So only Sovetskaya Gavan is the only viable impairment charge in the next essentially 36 months. Next one is about Sovetskaya Gavan, you mentioned that there are some logistics issues arising from quarantine measures imposed in the region of construction. We already see some other companies like Unipro moving the commissioning of their projects by as much as 3 months. Is there a chance that Sovetskaya Gavan might fall into 2021? Or you're certain that this will be completed in the current year? And final question, more general one. But Boguchanskaya BEMA project, what's your view on the latest? Are you comfortable with current shareholder structure? Are there any thoughts about potentially splitting the assets into aluminum smelter and hydro plant and consolidate it, as it seems it's right now in, obviously, a much more profitable stage, maybe it is time to consolidate that asset into your own financials.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [45]

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So about non-P&L. As I mentioned, for RusHydro main operations that nonpayment is 1%, 1.5%. So this is very close to the normal level. And we are -- we have passed April and May. So we understand that during these months, nothing tragic has happened, yes. So we don't know how the situation will progress. But the first forecast that the nonpayments will be 10, 15 and more percent given the crisis and the pandemic situations, business realized -- have not realized. So even if we have some partial on payment for the certain parts of the group, we are very well equipped to withstand this credit situation. So we have a financial ability. We have good liquidity. So we will overcome this situation. In terms of applying for the state support, we are a state owned company. So we have the direct access to the government in case we needed as of now, we don't need it. So the company is stable. It's profitable, is operating with very efficient results, as you see. So I don't think that these aspects could lead to the negative changes in dividend payments. So we don't anticipate such changes. So -- and I hardly can forecast the negative changes that can make the situation much worse. So of course, if we imagine the furious second wave of the pandemic situation, but as we look at the current situation now wherever financial markets, our financial results, wholesale market of electricity consumption you will be surprised, but in the Far East, the electricity consumption is still growing in certain areas, at least. So our assets and our business model are very strong to withstand these difficulties and will not affect our dividends and financial results. About Sovetskaya Gavan commissioning this year or next year, as you imply. As we are informed by our CapEx people, they plan to commission this of CapEx projects this year, they discussed in September, it can be a plus/minus September. I cannot guarantee that we will be on September 1 of 2020, but official information that this will happen this year. Of course, construction is a very difficult process, and there are some risks involved. So we cannot guarantee that no risks will realize, but official information and the information from the most recent meetings with our CapEx people is that the plan is this year, September or around that.

And about BEMA, as of now, no discussions of the split of this project or any changes to this project. To have a dream, we have a dream, but to -- as you discussed, that, of course, the hydro business is our core business, the aluminum business is non-core. So we know how to operate hydro business and this presented like a dream, of course, we would like to concentrate on our core business, and this is what we do in our strategy. But as of now, the reality is that no discussions and no real plans to split it to divest or to change their ownership structure. If we see the window for such opportunity. We will discuss it internally, and we will discuss it to that with the state, with the government, and we will proceed the government approach. But as of now, the project is stable.

And the impairment. Yes. And Vladimir, I just missed a part of your question, I'm sorry.

So if Sovetskaya Gavan is commissioned as we anticipate in 2020, there will not be major impairments in '21 and '22. And you can model in different ways given this information.

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Operator [46]

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Vladimir, are you done with the questions?

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Vladimir Sklyar, VTB Capital, Research Division - Equities Analyst [47]

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Yes. Yes.

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Operator [48]

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All right. Thank you. As there are no further questions, I will hand the session over to you, Dmitry. Please go ahead.

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Kazachenkov Andrey Valentinovich, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - First Deputy CEO & Member of Management Board [49]

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Let me add some final comments. Thank you very much for your questions, for your interest in RusHydro. So we did our best to present you as the best result possible that we have from the first quarter. All management team is focused to continue the good performance of the RusHydro Group and to provide the results to our shareholders and investors. So we trust in RusHydro, and we hope that you will do it with us. So we provided some proofs of our solid position in our trust in RusHydro with this result. Thank you very much, and we go ahead with our work. We wish you to stay healthy and to stay healthy for your family members and for all the community around. So thank you very much for your support we are with you.

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Operator [50]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.