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Edited Transcript of HYDR.MZ earnings conference call or presentation 29-Aug-19 1:00pm GMT

Q2 & H1 2019 Federal Hydro-Generating Company RusHydro PAO Earnings Call (IFRS)

Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Federal Hydro-Generating Company RusHydro PAO earnings conference call or presentation Thursday, August 29, 2019 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

* Timur Akhmedzhanov

Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR

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Conference Call Participants

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* Alexei Adonin

Veles Capital Investment Company, LLC, Research Division - Research 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 - Analyst

* Matvey Tayts

Sova Capital Limited, Research Division - Research Analyst

* Roman Alexeevich Filkin

Prosperity Capital Management Ltd - Director

* Sergey Garamita

Raiffeisen CENTROBANK AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to RusHydro First Half 2019 IFRS Results and Management Conference Call. I will now hand over to your host, Mr. Denisov, Head of Strategy; and Timur Akhmedzhanov, Head of Investor Relations. Sir, please go ahead.

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [2]

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Dear, ladies and gentlemen, thank you for joining us on this conference call following the release of consolidated financial results of RusHydro Group for the first half of 2019, most recent developments and outlook for 2019. Participating in the call today is Head of Strategy, Dmitriy Denisov; as well as Line Managers from Sales, Business Planning and Operations. The report and the presentation are available on our website and in Bloomberg Terminal. So please note that some of the information announced during this call may contain projections or forward-looking statements regarding future events or future financial performance of RusHydro. Please refer to the beginning of the presentation for a full disclaimer.

Now Dmitriy Denisov got held up in a -- at an outside meeting. So I will start the presentation and then we together will answer your questions.

Now to the presentation. So results for the second quarter and first half of the year came expectedly lower than in 2018, given very high base of the last year driven by abnormal water inflows. However, we're already seeing improvement in hydropower output as of July this year, which should help somewhat recover the results of the second half of the year. Also we have a number of positive initiatives and projects in the pipeline that we will likely communicate at upcoming Eastern Summit in Vladivostok in September, and we expect that this news will invigorate investors through 2019.

Now let's go quickly through the presentation. Slide 4. The main highlights in the second quarter were as follows. Now in April, the Board of Directors approved new dividend policy, as you know. As part of this dividend policy, we aim to pay out 50% of the company's IFRS net profit. And the new policy also guarantees a minimum dividend amount by setting threshold payout, which is determined as average amount of dividends over the last 3 years. The changes to the dividend policy will be in effect for 3 years starting from 2019. Now also, we have launched a new phase of Boguchansky aluminum smelter, expanding its capacity to 289,000 tonnes per year. We have also launched -- now, we have also completed divestment of 40% stake into wire manufacturing joint venture VolgaHydro in Saratov region to Voith Hydro.

Now let's look at Slide 5 and 6 for operating results. Now the main factors of change in production were total water inflow to the reservoirs of hydropower plants of the Volga-Kama cascade and Siberia in the reporting period were below 2018 and in some cases below long-run average. Also, we are seeing a decrease in output, which was partially caused by high base effect, as I told, due to abnormally high water inflows in the similar period of last year. The other factor was growth of electricity generation by thermal power plants in the second quarter on the back of increased consumption.

So let's look at the situation on the electricity spot market on Slide 7. RusHydro's average selling spot price increased quite significantly, so about 14% in the first and 23% in the second price zones. Also, the unregulated power prices in European part of Russia were supported by lower hydropower output and relatively stable demand. Going forward, we expect prices in the first zone to remain stable in light of expected gradual decommissioning of excess fossil fuel capacity and also stable demand.

Now Slide 8 provides regulated market overview. So both electricity and capacity tariffs over the last few years demonstrated solid growth. In the Far East, tariffs, both on electricity and heat vary from region to region. And in most cases, the tariffs are subject to indexation above CPI levels. But as you know starting from -- starting this year, a new legislation has been introduced for the long-term tariff regulation in the Far East, which will be in effect in 2020, and I think we can cover this topic later.

Now please look at Slide 10 at our financial results in the second quarter of the year and 6 months of 2019. So overall revenue in the 6 months was almost flat. EBITDA in 6 months decreased by 15%. Operating expenses for the period increased by 7% mostly driven by fuel cost increase and higher cost of purchased electricity and capacity, which was partly offset by new revenue. Nonetheless, manageable costs, excluding fuel cost, increased by 4.4%. Net profit for the 6 months was 24% lower than in the same period of 2018. Adjusted net profit decreased 23% as compared to the same period last year. So the financial performance during the reporting period was primarily affected by decline in hydropower production. It was partly -- partially mitigated by increase in revenue from electricity of RAO ES East due to higher tariffs, also growth of electricity spot prices and growth of capacity sales following indexation of capacity tariffs.

Now Slide 12 presents a breakdown of operating expenses. So major factors that affected expenses in the reporting period were: First, increase in purchased electricity and capacity, mostly in RAO Far East subgroup following higher volumes and tariffs, which, as I said, was partially covered by additional revenue; increase in fuel expenses, mostly due to higher cost of fuel as well as increase in output by thermal power plants; third factor is increase in depreciation due to increase in value of property and equipment after commissioning of new facilities; the next factor is increase in employee benefit expenses in line with collective agreement for the operating personnel. And as I said, excluding fuel costs, manageable costs, we calculate, increased quite moderately by 4.4%.

Now let's look at segment analysis on Slides 14 to 18. So let's look at Slide 16 for Hydro segment. So in the reporting periods, the key results -- the key factors that affected the financial result was the 21% decrease of electricity output from hydropower plants operating in price zones as water inflows were below 2018, and at some hydropower plants they were even lower than long-run average. Now at the same time, we have seen quite favorable pricing environment, which was basically an effect of lower hydropower output. And the third factor was an increase in operating expenses on the back of purchased electricity and capacity as well as employee benefits expenses.

Now let's look at Slide 17, so which was mostly -- the Far Eastern segments, which was mostly affected by increase in electricity production in RAO Far East subgroup due to high demand and lower hydro output in the reporting period. We have also seen lower heat output on back of higher air temperatures during the last 6 months in most regions of the Far East. And we have also seen increase in electricity sales through energy system of Siberia and exports to China.

Now next slide for electricity retail segment. So some decrease in electricity output and this decrease was primarily driven by our electricity sales companies in Krasnoyarsk and Ryazan as a result of mostly temperature factor, but also a decrease in customer base. At the same time, we have seen an increase in consumption from a number of large consumers, such as Polyus Krasnoyarsk and Yandex, which positively contributed to increase in output from our electricity retail companies.

Now Slide 20, which presents financial position of RusHydro as of the end of June. Now effective ruble interest rate stands at 7.8%. 91% of debt has fixed rate and 98% of the debt is ruble-denominated. Weighted average maturity for our debt is at comfortable level of 2.7 years. And we have total liquidity cushion of almost RUB 300 billion, which exceeds total repayments during the coming years and provides sufficient coverage on -- for our investment needs. Also, as you can see from the graph, fair value of the forward contracts with VTB has decreased in second quarter following increase in share price of RusHydro.

Now Slide 21, we present an overview of the hydrological situation in the first 6 months of the year and also a brief overview of what to expect going forward. Now in the first half of the year, water inflows, as you know by now, were lower than in 2018. And as I said, we have seen abnormally high inflows in 2018, which, of course, are not repeated this year. Now I won't probably go into details. You have seen the operating numbers, but now we see that the situation started to change in July as water inflows to major reservoirs is at long-run average level or, in some cases, even above it. We see that the water reservoirs at Sayano-Shushenskaya reservoir at the end of the August were 8% above long-run average and higher than last year level. So just in the middle of August, we have seen load of Sayano-Shushenskaya at the highest historic peak, which was at 5,250 megawatts. We have also seen that Bureyskaya reservoir is currently filled to the maximum level. So -- and the reservoir current levels are sufficient and have enough reserves to safely pass the autumn and winter period. So this kind of gives us optimism to the second half of 2019.

Now on Slide 22. We outlined key highlights of our dividend policy. So we -- you already know that we -- as part of this dividend policy, we basically guarantee a minimum amount of dividend, which could be paid next year, and you can see that this minimum amount for 2020 is around RUB 15.7 billion, which is almost the same level as in 2019. In case 50% of IFRS net profit is higher than this threshold, then potentially we could pay more.

Now Slide 23 displays our investment plan through 2023 and on Slide 23 -- 24 you can see the current state of our long-term plan for capacity renewal and development in the Far East. In July, the government committee approved RusHydro's projects submitted for modernization. There are 4 of them. It is Artyomovskaya CHP-2, Khabarovskaya CHP-4, second phase of Yakutskaya GRES-2 and Vladivostokskaya CHP-2. So this is, of course, an important step in improving the reliability of the energy system as well as long-term sustainability of our business in the Far East.

Now let's get to slide -- to our last Slide 25. So in July, as already mentioned, the government rolled out the regulation introducing long-term tariffs for non-price zones, including Far East, as well as compensation of prior tariff losses. This regulation will be effective as of July 2020 and will also require additional legislation to be introduced later. But, of course, we are very optimistic regarding this development, which could be transformative for our Far East business in the long-term. Also going into 2019, we maintain solid operation outlook, but at the same time still expect total electricity production for 2019 below all-time high production that we achieved in 2019. Also, new facilities that we plan to commission during the year together with 94% -- 49 megawatts that we will add through rehabilitation and modernization will increase RusHydro Group's installed capacity by over 900 megawatts.

Also, among the expected development is that currently tender is underway for selection of contractor to level out the Zagorskaya pumped-storage 2, and we expect that this tender will be finalized soon and the works will be underway. Now apart from this, we expect other important announcements that our top management could make during the Eastern Economic Forum in September, including details on negotiations with VTB on adjustment of the forward deal. And, of course, we will update you on these and other developments at our conference calls and meetings.

And on this, I would like to conclude my presentation and move on to your questions. So thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mr. [Dmitry].

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Unidentified Analyst, [2]

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(foreign language) Should I speak English?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [3]

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Yes, yes, please.

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Unidentified Analyst, [4]

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Okay. My first question -- I'll get you the only one question is about funding of your investment program. As we see in your presentation, your investment plan for 2019 is historically high kind of RUB 130 billion, right? And so, well, hiding this situation, I mean, current situation this year with your pretty moderate operating cash flow, do you -- are you planning kind of some sources to -- some other sources to fund your investment program, like new debt issue, so some other things, or are you planning to move your investment spendings to further periods? I mean are you comfortable with your funding plan of your investment program for this year having the situation in the first half of the year?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [5]

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[Dmitry], thanks for your question. So well, we think that we are more or less balanced in terms of both cash flow and current cash reserves to fully finance the CapEx of 2019 ourselves. Of course, we are looking at the debt market for potential good windows. We are always looking at good debt deals. But in terms of 2019 CapEx, we are balanced. But at the same time, if you look at prior experience, you can see that we adjust quite regularly our CapEx even within the year and it's likely that the total CapEx number for the year could be lower.

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Operator [6]

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Our next question comes from Igor Goncharov, Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Analyst [7]

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My question is kind of related to the previous one, but I guess, this in relation to the commission of the power plants that you are in process of construction, could you update on the possible -- on the plant -- timing of the commission of the Zaramagskaya hydro, Sakhalin DPP and Sovetskaya Gavan DPP. Though on the last call you were saying that you plan to commission those this year, is this still the plan?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [8]

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Igor, thank you very much for your question. So starting from September, we are going to complete Sakhalinskaya GRES. We have all necessary documents for the start of production of electricity. And speaking about Zaramagskaya, our plan is to complete the construction in October. And regarding Sovetskaya Gavan power plant because of heating period of -- and the winter period, we are going to postpone the completion of works to the beginning of the next year.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Analyst [9]

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Okay. And this -- 2 follow-up questions. The CapEx plan which you indicated on the Slide 23, does it already interpret the possible shift of the commissioning of Sovetskaya Gavan to the next year? That's question number one. And also question on the financial results of the Far East segment. As we can see the EBITDA of Far East has declined noticeably year-on-year in the second quarter. How should we think of the further development of EBITDA of this segment going forward? Is the decline -- I mean, is decline level is a new normalized level or should it return to the levels that we have seen in the previous years?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [10]

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So Igor, thanks for your additional question. Now regarding the CapEx relating to Sovetskaya Gavan, the power plant is in very high completion stage and basically most of the CapEx has already sunk in. So we're just talking about the kind of moving the potential launch because of the heating -- because of the start of the heat period because we still need to do some tests at the power plant. So basically, it won't affect significantly our 2019 or 2020 CapEx numbers. Now talking about EBITDA of our Far Eastern business, well, I think, first of all, we expect an improvement in terms of fuel costs, primarily coal prices which potentially will improve the performance of our Far Eastern business. And then going further into the second half of 2020, as I said, we expect the rollout of the new legislation for non-price zones in the Far East, which basically will introduce long-term tariffs in some of the regions of the Far East. I think we will do kind of a special presentation when we know all the details and when all the additional legislation is introduced.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Analyst [11]

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And, if I may, just one additional follow-up question on the CapEx program on Slide #23, do I understand correctly than the bottom part of this chart, rehabilitation, modernization does not include the CapEx for the modernization for the projects under the modernization program that you have -- that have been accepted recently?

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Unidentified Company Representative, [12]

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Yes, you are right, Igor.

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [13]

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Absolutely.

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Operator [14]

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We have a question from Matvey Tayts, Sova Capital.

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Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [15]

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So the question number one is relating to investment plan. So we see that comparing to the previous one, the total CapEx increased by RUB 10 billion roughly. Are there any like new specific projects or it's just overall review of the investment program? So this is the first one. And second one is, if you can please provide some guidance, what kind of impairment on the assets you can recognize after the launch of Sakhalin Power Plant and Sovetskaya Gavan? So if you can provide any guidance, it would be really helpful.

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [16]

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Matvey, could you please detail what you're comparing the figures of our CapEx because these are basically the same CapEx projections that we have highlighted in our last presentation as well.

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Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [17]

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Okay, sorry, I will have a look again. I will check my numbers.

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [18]

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Okay. Thank you.

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Operator [19]

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Mr. Matvey, do you have any further questions?

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Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [20]

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Yes, please. About these impairments on the Far East power plants, if you have any guidance, please?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [21]

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Matvey, yes, so basically, as we have maintained, we do expect some impairments related to the commissioning of some of the projects in the Far East. But at the same time, it will still depend highly on the schedule and when these are commissioned either in 2019 or maybe some, as I said, could be delayed to 2020 and booked in 2020. So it's a bit premature to do this kind of communication.

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

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Okay. So -- and when I compare your investment plans, I compare investment plan from the presentation for first quarter 2019 and this current presentation for the second quarter 2019, and I see that numbers are different. I mean, for example, 2029 (sic) [2019] the old one, RUB 123.4 billion, the new one RUB 126.2 billion. And like 2020, RUB 72.5 billion, here we have RUB 75.9 billion, then like step-by-step we have like different numbers.

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [23]

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Matvey, let us check for the numbers and we will get back to you, okay?

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

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Okay.

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Operator [25]

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Our next question comes from Alexei Adonin, Veles Capital.

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Alexei Adonin, Veles Capital Investment Company, LLC, Research Division - Research Analyst [26]

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I have several questions. Regarding your CapEx outlook, the basic discrepancy compared with your previous plan using rehabilitation and modernization. If we sum up all the figures till 2023, we see the difference of like RUB 11 billion, RUB 12 billion or RUB 13 billion. So it basically shows that you've decided to like modernize like some plants even more. So there is a question what was the change, the reason of this? Secondly, I wanted to specify the amount of fines that you pay for Zaramagskaya HPP per month? And my final question is regarding to like IRR for your Far Eastern projects. As far as I know, it isn't decided yet that like -- that you'll get 14% like revenue for the CapEx there. And on your Slide 23, you indicated that -- 22, you indicated that this guaranteed return should not be less than 14%. Do we -- can we interpret that in a way that if it's like 12%, you won't participant in this program?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [27]

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Now, Alexei, thanks for your questions. Now the first question, as I said, we need to check the numbers on the CapEx and get -- later get back to you. Now regarding the fines for Zaramagskaya, so the monthly amount is roughly RUB 40 million.

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Unidentified Company Representative, [28]

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Regarding the third question about the interest rate and investment of modernization projects, so you are right that the decision has not been made yet by the government, but we still stand on the position that the rate for Far East should be equal to rate of our projects in Europe, part of Russia and in Siberia. So we're trying to just stand on this position, and we hope that government will make correct decision for Far Eastern projects.

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Operator [29]

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Our next question comes from Mr. Sergey, Raiffeisen Bank.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [30]

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Actually, most of my questions have been already answered. The remaining one concerns this adjustment to your forward agreement with VTB. Could you share some details on that because the media reported that the settlement date could be put off? And if you don't -- right now, when would you be just able to clarify the changes to your forward agreement?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [31]

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Thank you for the question. We are not ready and we are not entitled to address detail -- to address this matter in detail, and we hope that we provide you with additional information within 1 week at sales of Eastern Economic Forum because we are going to make a disclosure with VTB Bank.

But I can -- but right now I can say that these additional terms are good for company, and I think our investors will be okay with this corrections of terms of this instrument.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [32]

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Yes. And also as a follow-up on this impairments thing, is there any possibility that you could also impair your station, which commissioning could be delayed, to 1Q next year? You -- could be impaired in the 2019 IFRS results similar to the case with Vostochnaya, which tariff was only approved like late this year, but it already -- its impairment was already put in the IFRS results for 2018. So could there be any possibility that, that might happen as well?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [33]

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Sergey, so it's -- well, if our proposal regarding the potential shift in commissioning is approved, it's very likely that any potential impairment could be booked to -- in 2020. But again it's still not written in stone and it could change.

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Operator [34]

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Our final question comes from Albert Kornachev, Sberbank.

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Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [35]

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Yes. Actually, it's Fedor Kornachev from Sberbank. So one question regarding your impairments. So we've seen, well, impairments of PPE, we've seen financial assets impairments, and now there are also impairments of other assets. Could you please clarify what are the assets, which have been impaired in the second quarter of 2019? What was the main rationale behind that? I mean the other assets, which were impaired for roughly RUB 2 billion.

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [36]

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So Fedor, thanks for your question. Now this is kind of a one-off that we have seen in the first half of the year. So this relates to parts of a previously recognized revenue from some of the budget organizations that we have received in the Far East. Now this part of revenue is now contested. And as a result, following consultations with our auditors, we had to basically write down this previous recognition, but we are still kind of contesting this issue and potentially could be reversed in next periods.

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Operator [37]

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Our next question comes from Roman Filkin.

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Roman Alexeevich Filkin, Prosperity Capital Management Ltd - Director [38]

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This is Roman Filkin from Prosperity Capital. Yes, and most of the questions were already answered. But still maybe you can provide more comments if any solution has been found for this DVEUK assets, which are going to come to your asset base at some point of time?

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Dmitriy Gennadyevich Denisov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Member of Strategy Committee [39]

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Roman, this is Dmitriy. As I know, it's your usual question about DVEUK, one more another organization from Far East. Well, at the moment, we do not have any proper solution for DVEUK integration and consolidation. We addressed our proposal to the government and to Ministry of Energy to move this asset to RusHydro, not using additional shares and shared mission, and we are still waiting for their decision because from the one hand the legislation -- there is a method in legislation to move assets from Russian Federation to state-owned companies using the Article 32.2 of Joint Stock Companies' Law. But at the moment, the government doesn't have the way how to do that. And so we are waiting for the decision and their position, and that's why I think we don't see this year, maybe beginning the next year any movements in this direction. So we still hope to take these assets, but, of course, we need to take into account the price of these assets because so much -- big fund was spent to make these assets and of course, the government is trying to move these assets and to take it to state-owned companies for the current shareholders capital, but, of course, we need to do it taking into account the interest of our minor shareholders, of course, our minorities. So that's why we are still in discussions with the government.

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Roman Alexeevich Filkin, Prosperity Capital Management Ltd - Director [40]

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And maybe one more, a bit more difficult question. Could you remind me what is the currency interest swap you have? So we have this forward contract and you accrued some gain of RUB 3 billion for the second quarter because of the share price growth of RusHydro. And at the same time, you have almost RUB 1 billion loss on the change of the value of this interest currency swap also with VTB Bank as far as I understand. Could you elaborate what is the link between 2 of them or if any link there?

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Unidentified Company Representative, [41]

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[Julia Lechner], Department of Corporate Finance. We have swap for our obligations that we managed in November 2018. So presently, it's valued in our IFRS for 20th June of 2019 at about RUB 228 million.

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Roman Alexeevich Filkin, Prosperity Capital Management Ltd - Director [42]

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And why did you accrued RUB 900 million expense in the interest cost that I don't understand, and RUB 1.7 billion for the 6 months?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [43]

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Roman, where do you see this? Sorry, we need to check.

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Roman Alexeevich Filkin, Prosperity Capital Management Ltd - Director [44]

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If you look at this Note 22, financial income and expense, you have financial expense number, second line, yes, which is called the change of the fair value of the currency swap. And you accrued an expense of RUB 1.7 billion for the 6 months this year, that was 0 last year and also RUB 0.9 billion in the -- for the 3 months for second quarter. Do you see this?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [45]

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Roman, now we just see it as an obligation towards as -- potential obligation of RUB 228 million. But again, that -- this is still subject to the currency exchange ratio with offshore renminbi. So that again could change. Let us probably check the numbers.

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Roman Alexeevich Filkin, Prosperity Capital Management Ltd - Director [46]

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Yes. Can you check please because like if you now see the obligation of RUB 228 million and you at the same time accrued RUB 1.6 billion -- like RUB 1.7 billion loss, then, yes, it doesn't sound great, frankly speaking, or maybe it's somehow linked to this foreign exchange gain which you accrued as income as well, so if you could follow-up on this matter, that would be fine.

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [47]

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Okay, sure. Thank you.

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Operator [48]

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We have a follow-up question from Igor Goncharov, Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Analyst [49]

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I hope a quick question on Zaramagskaya, which you said you plan to commission in October. When do you plan to start receiving DPM payment for Zaramagskaya? What is approximately size of this payment or maybe size of -- probably estimated size of contribution from the Zaramagskaya at EBITDA level?

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Dmitriy Gennadyevich Denisov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Member of Strategy Committee [50]

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So, Igor, we hope that we can start receiving DPM payments the next month after we commission Zaramagskaya. And the total payments -- I think the DPM payments have already been approved, we need to check, but the total payment for the year should be around RUB 8 billion. But again, the tariffs have been approved already and you can see them on the site.

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Operator [51]

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We have a question from Anastasia Tikhonova, VTB Capital.

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Anastasia Tikhonova, VTB Capital, Research Division - Equities Analyst [52]

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A small question from my side on DPM-2. When do you expect to record the first investment for the projects that were approved?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [53]

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Anastasia, thanks for your question. So as we have previously communicated, we aim to start construction in 2021. And basically that means that we need to start -- that we have already started all the preparatory work, including feasibility studies and development of the projects, and we will need to start purchases of the equipment starting from, well, probably 2020, second half of 2020, something like that. But again, that will highly depend on the approval of the feasibility studies and the schedule when we can start the construction.

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Operator [54]

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We have a follow-up question from Fedor Kornachev, Sberbank.

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Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [55]

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Yes, okay. So actually, the major question has already been answered, but still I wanted to try to clarify an issue with this long-term tariff for the Far East. So actually, if we expect any increase in the long-term tariff for the Far Eastern consumers and at the same time we have this special mechanism, well, the reallocation of, well, let's say, tariff burden from the Far East to the consumers of the European part of Russia, so should we read it that if there is an increase in the -- well, let's say driven by the implementation of the new regulatory principles for the Far East, it will be in this case covered by consumers of the European and Siberian price zone, well, in the framework of this special subsidy you currently have -- you currently collect on your HPP division and transfer to the Far Eastern division, I mean, this one?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [56]

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So Fedor, thanks for the question. As we see it now, the -- this long-term tariff regulation should be sourced basically from the necessary revenue of the Far East and basically it won't require any kind of transfer from European part of Russia or Siberia to the Far East unlike the mechanism for building new capacity -- for building and modernizing new capacity which is DPM-2. But again, we still expect some additional legislation, and we need to conduct additional negotiations with the regulator to understand how this long-term tariff regulation will be implemented and what kind of compensation of past losses we can expect. So it's still work in progress and right now we are not ready to communicate more about the issue.

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Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [57]

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But do we need to try that it is to be implemented starting July 1, 2020?

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Timur Akhmedzhanov, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro - Head of IR [58]

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Well, this regulation states that it will be effective as of July 2020, and we will go from here and we expect that it will be effective and all the necessary preparations will be done by then.

So there are no further questions? Thank you all for participating in our conference call and for your questions. So feel free to contact us further with any other questions. So have a good evening.

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Operator [59]

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Ladies and gentlemen, this concludes our conference call. Thank you for participating. You may now disconnect.