U.S. Markets open in 9 hrs 3 mins

Edited Transcript of IRAO.MZ earnings conference call or presentation 15-Nov-19 9:00am GMT

Nine Months 2019 Inter RAO YEES PAO Earnings Call (IFRS)

Naberezhnaya, 12 Moscow Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Inter RAO EES PAO earnings conference call or presentation Friday, November 15, 2019 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alexandra Panina

Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board

* Evgeniy Nikolaevich Miroshnichenko

Public Joint Stock Company Inter RAO UES - CFO & Member of the Management Board

* Larisa Sadovnikova

Public Joint Stock Company Inter RAO UES - Head of IR

* Pavel Fominov

================================================================================

Conference Call Participants

================================================================================

* Alexey Adonin

* Dmitry Skryabin

BCS Financial Group, Research Division - Senior Sectoral 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

* Roman Alexeevich Filkin

Prosperity Capital Management Ltd - Director

* Sergey Beiden

Renaissance Capital, Research Division - Research Analyst

* Sergey Garamita

Raiffeisen CENTROBANK AG, Research Division - Research Analyst

* Vladimir Sklyar

VTB Capital, Research Division - Equities Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the conference call dedicated to presentation of consolidated financial performance and operating results for 9 months 2019. For your information, this information is being recorded.

And now I would like to give floor to Larisa Sadovnikova, Head of Investor Relations.

--------------------------------------------------------------------------------

Larisa Sadovnikova, Public Joint Stock Company Inter RAO UES - Head of IR [2]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Inter RAO is happy to see you. It's our webcast. And I would like to announce the speakers today. It will be Evgeniy Miroshnichenko, Management Board Member and CFO of Inter RAO; Pavel Fominov, the Head of Financial Analysis and Forecasting; Alexandra Panina, Member of the Board and Head of Inter RAO Electricity Generation.

We are happy to see you, and I'm giving the floor to Pavel Fominov, Head of the Financial Analysis and Forecasting Department.

--------------------------------------------------------------------------------

Pavel Fominov, [3]

--------------------------------------------------------------------------------

Thank you, Larisa. Good afternoon, dear ladies and gentlemen. I would like to highlight the key factors that determined financial performance of Inter RAO Group for 9 months 2019.

Page 2, please. On this page, we traditionally highlight the events, which became the drivers of financial and operating performance across different business lines in the reporting period.

As to the generation in Russia. It was full operation of 3 power plants in the Kaliningrad region, Talahovskaya, Mayakovskaya and Pregolskaya, with a total installed capacity of 776 megawatts; and our -- the full-scale operation of our last CDA facility, Zatonskaya CHPP; then decommissioning of Kashirskaya GRES for a total of 600 megawatts since the 1st of January; growth for the CDA payments due to CDA delta and growth of day-ahead market coefficients for a number of facilities; and the positive price environment in day-ahead market in the first half of the year.

As to the Supply business. The key drivers were -- it's the average price growth for our end consumers; continued migration to benchmark [supply model], which drove up the efficiency of our Generation and Supply segments; and active expansion, that's acquisition of supply company in Vologda, and also an active development in the Vladimir region. Also, it was the continued development of active -- of additional paid services in the reporting period.

I would also like to highlight the Trading segment. It was showing substantial growth of sales in Europe, specifically Lithuania, 50% year-on-year growth.

And as to our Foreign Assets. We completed our Trakya project and the considerable generation and sales to Moldova from Moldavskaya GRES.

Page 4, please. Electricity generation and heat generation. I would like to note that in the reporting period, our operating performance are in line with the average industry metrics, that is around 1% growth in the electricity generation and reduction of heat generation by 4.5%, triggered by some weather factors.

As to changes in the structure of electricity generation, I would like to highlight minor readjustment and rebalancing of capacities used within the electricity generation group towards the most efficient generating units and considerable sales growth by the Bashkir Generation Company, which was driven by the full year operation by Zatonskaya plant and increasing growth of Karmanoskaya GRES. TGK-11 performance in the reporting period was driven by the load determined by the system operator schedule and requirements for [supplies]. In general, Trakya was discontinued.

And Page 5, please. Increase in efficiency in the electricity and heat generation. It's the key factor of capitalization growth for our company. And that's why we keep focusing on this aspect.

In the reporting period, we continue to work on efficiency improvement in terms of rebalancing sales by our generating assets. Specifically, we considerably increased workload of Urengoyskaya GRES; Perm Power Unit #4, which is a CDA facility; and Zatonskaya GRES as part of Bashkir generation. It boosted our sales and brought us additional margin.

I would also like to say that the key contribution to Bashkir generation company was our CDA facilities. Our electricity generation revenue grew by 12%, and sales by CDA facilities in the heat generation segment also gained 21%. And it helped us to boost the profitability of this segment.

I would also like to note that payment collection rate increased substantially. It was 105.8% compared to 105% a year earlier.

Next page, please. This is energy supply business. Our Supply business share in the Russian market increased by 0.7 percentage points to 18.3% of the whole country's market. It was due to the extensive growth. We acquired Vologda Supply Company and the operation of Bashkir Supply Company since beginning of the year. Our supply companies were in line with the general market trend, which is actually relevant for the guaranteed suppliers.

Companies like Mosenergosbyt increased their customer base in the reporting period, which gained 8.7%. So the number of our clients increased to almost 16.5 million users. As to additional paid services, we keep increasing the profitability of this business, which gained 20% year-on-year. The key driver in the marginal profit in this segment was driven by Mosenergosbyt, chiefly, and Bashkir Supply Company.

Also, I would like to draw attention to the fact that in this year, we managed to increase the payment collection rate for guaranteed suppliers, which rose by 0.3 percentage points year-on-year, which is a very good sign in this quite tough collection situation.

As to the payment discipline, we run a number of initiatives with -- we develop different instruments to control and limit energy consumption; also, we impose finance and penalties in pursuance of the law; and we also use different measures up to legal liability.

In conclusion, I would like to say a few words about our Foreign business and Foreign Trading businesses, Page 7. The total imports and exports in the reporting period were 15 terawatt hours, which is 10.5% below the previous reporting period. Exports increased by 15% to 13.8 terawatt hours, which can be considered a strong success because it's a record high level during the recent 5 years. And our exports were mainly driven to supplies -- driven by supplies to Finland by around 500 million kilowatt hours or by 10% and to Lithuania by 1.5 million kilowatt hours or 50%. That's a very solid success of our business, Foreign Trade business.

And note that prices in the European Union, Lithuania, Latvia in Finland decreased a little bit by 2% to 3%, while prices in the day-ahead market increased significantly. But we used hedging instruments, and we used the throughput of our grid system from Kaliningrad to Lithuania. We optimized our supplies and increased supply volumes.

Also due to seasonal factors, we moved our supplies to China to periods with higher margins. In -- by and large, the results of the 9 months 2019 are fully in line with our strategic expectations, and they lay substantial grounds for our efficiency improvements, performance improvements going forward.

That's all I meant to say. Thank you. Now I mean I'm giving forward to Evgeniy Miroshnichenko, our CFO.

--------------------------------------------------------------------------------

Evgeniy Nikolaevich Miroshnichenko, Public Joint Stock Company Inter RAO UES - CFO & Member of the Management Board [4]

--------------------------------------------------------------------------------

Yes. Thank you, dear colleagues, and good morning. I'm happy to introduce you to our key financial performance. You can see them on Page 9. EBITDA increased to RUB 105.9 billion, which is 21% up. Net income amounted to RUB 64.7 billion, which is 16.2% up. Net debt was negative minus RUB 181 billion. And our lease liabilities before Kaliningrad region facilities amounted to RUB 57.1 billion.

Next page, please. The key driver of revenue was triggered by the Generation and Supply businesses. The revenue was slightly above RUB 0.5 trillion. And the key contributor to EBITDA was also by Generation by RUB 17.5 billion, and by Trading, RUB 2.8 billion.

All right. We can take a look at segment breakdown. As to Generation, I'll highlight on the financial performance, such as EBITDA. First of all, in the Generation business, EBITDA grew by RUB 17 billion or by 31.4%. As Pavel said, the key drivers were commissioning of power plants in the Kaliningrad region and CDA delta price growth year-on-year in the day-ahead market in the first price and optimization of loads in the favorable environment.

As to Supply segment, our revenue grew by almost RUB 50 billion, which was mainly driven by the tariff and supply margins, but the Supply segment reduced by 2.5% for the high base effect because in the previous year, there were additional penalties and fines, Oboronenergosbyt, mainly. So now this company is in the bankruptcy proceedings. So we are dealing with the situation. And that's why these fines and penalties figure reduced our EBITDA this year. As to other companies, everything is mainly in line with the previous periods including PSK company, which grew by RUB 400 million.

Next page shows our Trading and Foreign Assets business. As to the Trading segment, we had a very good growth. It grew by 26.9% or by almost RUB 3 billion. The key factor was foreign trade operations and experts in Poland and in Lithuania. As to EBITDA of Foreign Assets, the dynamics are mixed. In Turkey, we completed the operations. EBITDA grew by RUB 0.2 billion. In Georgia, it was slightly down because of the price growth of electricity repurchase, but it was offset by Moldavskaya GRES. Also prices and supply volumes increased, which helps to offset.

Next page, consolidated operating assets. They grew slightly by 8.7%. The key triggers were indexed factors such as purchase of electricity and transmission fees and fuel expenses. But in general, it's not low. It's not higher -- the growth rate is not higher than the revenue growth rate. So it's mainly in line with our expectations.

Next page is about the debt. We don't have material debt. It's mainly represented by foreign assets. You can see it's 50% denominated in rubles mainly at fixed interest rate. Net interest debt amounts to RUB 181 billion as of the end of September.

Well, that's the end of my report, and I will happily take any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Vladimir Sklyar, VTB Capital.

--------------------------------------------------------------------------------

Vladimir Sklyar, VTB Capital, Research Division - Equities Analyst [2]

--------------------------------------------------------------------------------

First of all, I have 3 questions. First one, it's about fuel expenses. In your presentation, electricity generation was 1% and fuel expenses gained 5%. Can you please explain this increase for fuel expenses? And the second question is about profitability of the Supply segment. On Page 11, we can see that EBITDA reduced in this segment but supply margin increased almost by 13%. How is it aligned? And the third question is, in your recent financials, we saw some decline of profits for Inter RAO generation. It was triggered by higher dividend payouts, but can you please announce -- can you please comment on your dividend payouts of your subsidiaries and affiliates? How will it be comparable to your parent company's dividends going forward?

--------------------------------------------------------------------------------

Pavel Fominov, [3]

--------------------------------------------------------------------------------

Good afternoon, Vladimir. This is Pavel Fominov. For the first question, I would like to say that it's mainly triggered by the increasing price growth for coal due to growth -- due to prices in autumn 2018 prices. So it was like the increasing growth rate of coal costs, while rest of fuel types were in line with inflation or even slightly below. So it was driven by the price environment in 2018. So now have the growth rates reduced finally since spring. You all know that. There was a substantial price decline in the external markets for coal for -- and it's reflected also in the Russian market. Thank you.

--------------------------------------------------------------------------------

Evgeniy Nikolaevich Miroshnichenko, Public Joint Stock Company Inter RAO UES - CFO & Member of the Management Board [4]

--------------------------------------------------------------------------------

And this is Evgeniy Miroshnichenko. As to the Supply business, the supply margins are applied since the 1st of July. That's why this -- the second half of the year will be compensating the beginning of the year. So we expect that it will be offset for the full year. Also, there is one more factor, which is not a very good factor economically. This last year, we imposed a lot of penalties and fines. This is double the key rate of the central bank. And part of those our -- of our customers went bankrupt. And those penalties and fines were accrued last year, but they will hardly be ever paid. And this year, there will be no accruals like that. So that's the first major factor. And this was a one-off factor, which unfortunately took place.

And the second factor is that from time to time, we have different disagreements with the grid companies in terms of balances. And we have some court proceedings with them because we regard different costs differently. And I can't specify exact figures. But last year, it was reflected as net income provision. And this year, it became part of EBITDA, but it's just the specifics of accounting. But for the full year, to sum it up, we expect that the Supply segment will show positive performance. And globally, it's all fine in terms of supply margins. Now we are discussing tariffs for the next year. And by the next -- by the end of the year, we'll see what we'll be seeing next year already.

And your third question about dividends. I remember that. As to our subsidiaries and fuel rates, briefly, yes, everything will be fine. Please don't be encouraged by the 9 months because we keep implementing our consolidated dividend policy for the group. And we will use all the instruments in order to ensure its correct application. So please don't worry, everything will be all right in this respect.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Next question comes from Alexey Adonin of Veles Capital.

--------------------------------------------------------------------------------

Alexey Adonin, [6]

--------------------------------------------------------------------------------

I have 4 small questions. First is about Tomsk CHPP this could be -- am I right thinking that there will be no fines? And the second is about Ukraine. So what about export supplies to Ukraine? I can't see them in the reporting. Will you increase them going forward? And [at Yerkovetskaya] plant, I think some project was approved as far as I know. How soon will it be implemented? And the last question. So -- about the acquisition plans. Are you going to acquire something?

--------------------------------------------------------------------------------

Unidentified Company Representative, [7]

--------------------------------------------------------------------------------

We can explain. So Tomsk plant, so it's an official transfer. So there will be no fines. And since the launch, everything will be in place in line with the law. So there will be no dramatic consequences. Then export supplies to Ukraine, that's the second question. Alexandra Panina will comment.

--------------------------------------------------------------------------------

Alexandra Panina, Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board [8]

--------------------------------------------------------------------------------

Exports to Ukraine are in 2 modes. First, it's a parallel work between our energy systems. But these are just minor volumes. That's a traditional line. And commercial supplies, what you were talking about, we didn't have them in the first 3 quarters. And you'll see them in the fourth quarter reporting. They are just minor volumes. And you will see them in the fourth quarter financials. Yes, this is a question about -- you are correct, the status is the same. We are still negotiating with the Chinese party. This big project will not happen. RUB 7 billion or RUB 8 billion or -- RUB 8 million or something. But now we're looking into different opportunities of running this project. As soon as we find some positive outcome with our Chinese counterparty, we'll inform you. As to the another mandate, all these potential targets are interesting. We will just be looking into the value, which we may get as a result of those potential acquisitions. But it's not only about the property that you mentioned, but it's just a standard procedure for all acquisition -- potential acquisition targets according to all procedures.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Next question, Fedor Kornachev, Sberbank.

--------------------------------------------------------------------------------

Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [10]

--------------------------------------------------------------------------------

Most of my questions have been already answered. So I would like to try to understand, looking at your RAS financial statements, we can see only -- we cannot see only your independent supply companies. In the third company -- in the third quarter, we see a solid growth of operating profit by 20-something percent. However, you are consolidating EBITDA shows some small decline. I'm just trying to understand the provisioning or how do I understand that? This effect comes from the independent supply companies or what? How can you explain the difference?

--------------------------------------------------------------------------------

Unidentified Company Representative, [11]

--------------------------------------------------------------------------------

Because there is a substantial difference between different reporting standards. It's driven by the application of 2 standards, recently the 15th and 16th. The revenue recognition and lease. But in terms of our operations, it's all fine. But there is a factor of grids. Last year, it was classified according to one procedure. And this year, it's classified into EBITDA. Also, there is one-off factor of finances and some fines -- penalties and fines.

Yes. My colleagues told me that the idea is that according to our Russian standards -- accounting standards, we book all revenue. And then we create provisions below operating results. We reduce net income by this way. According to IFRS, everything is assessed in terms of the solvency of the counterparties, so it influences revenue. So this effect comes from different reporting standards, according to IFRS. So it's money we expect to receive. And according to Russian standards, you should see a broader picture.

--------------------------------------------------------------------------------

Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [12]

--------------------------------------------------------------------------------

Okay. So the logic is that you have provisions related to discrepancies with grid companies and the debt of Oboronenegosbyt company, which in line with IFRS 15 was reflected in revenue, right?

--------------------------------------------------------------------------------

Unidentified Company Representative, [13]

--------------------------------------------------------------------------------

First, yes. But apart from those 2 cases, there are different debtors. And depending on their status and the probability of repayment, so -- that influences our revenues. And after that, we create provisions and -- which reduce net income.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Next question is Roman Filkin, Prosperity Capital.

--------------------------------------------------------------------------------

Roman Alexeevich Filkin, Prosperity Capital Management Ltd - Director [15]

--------------------------------------------------------------------------------

I would like to give a deeper insight about Ukraine. Can you please explain what are the potential volumes? And what is the throughput of this line? According to Ukrainian sources, in November, it was around 12 million kilowatt hours per day. So if we annualize it, it will be 4.5 billion kilowatt hours. So is it -- is that the baseline figure? So will it be reduced or increased? And am I right thinking that margins of Ukrainian exports will be even higher than exports to Finland and Lithuania because the wholesale prices in Ukraine are around 6 tonnes per kilowatt?

--------------------------------------------------------------------------------

Alexandra Panina, Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board [16]

--------------------------------------------------------------------------------

Dear colleagues, this is Alexandra Panina. I will give you more color on Ukraine. You know, historically, our energy systems were closely connected. That's why there are lots of line connected to our 2 countries. So theoretical -- theoretically, throughput could be high, but it was -- Ukraine was -- has always been profited. But Ukraine hasn't yet defined where it will import from Russia or from Belarus. So this is a recent market. For us, it opened from the 1st of July. Now the prices are not stable in November. The price grew substantially since the launch, but we have quite a warm outdoor temperatures in Russia and Ukraine. Now the prices are lower. So it's hard to make a forecast right now about the prices because we have only a few months running. But the throughputs of line between Russia and -- Russia and Ukraine. So it's quite substantial. In Russia, there are system operators. This is -- in our Ukraine, which determines the throughput for each line, and it's different day to day. That's why imports may fluctuate. So we have some growth or decline potential if the energy system of Ukraine decides that no -- that there is no need for energy. So the exports will be 0 or close to 0. So we do not expect very much from our relationship from business with Ukraine. So I would just look how it will develop.

--------------------------------------------------------------------------------

Roman Alexeevich Filkin, Prosperity Capital Management Ltd - Director [17]

--------------------------------------------------------------------------------

Alexandra, I have a second question about the quarter -- third quarter of the modernization project for 2025. When do you expect some decision to be taken by the government? Can you please share any news regarding the criteria for the selection of projects for the quarter because we have different information from different sources now.

--------------------------------------------------------------------------------

Alexandra Panina, Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board [18]

--------------------------------------------------------------------------------

I will try to explain. As to the date when a quarter will be determined, it will be based on the KOM procedure for 2025. It was established by the government decree for the 17th of February. So before that, we need to determine the CDA facilities. So by that date, we need to have the resolution by the government, a listing of the facilities to be modernized. So in my opinion, I think that for the quarter, if we aim to do that before the 15th of February, given the new year holidays to recall this, so the decision should be taken by the mid-December, I suppose. Because if it's not done, so they will be threat to the timing for this KOM procedure.

As to criteria, we don't have some certain ideas as to how the state commission decides on certain port parameters. Last year, the criteria were one thing. This year, this may be different. As far as I know, decision hasn't yet been taken. It's in the competence of the state commission (inaudible), I think, 3 options. First is to use the Minister of Energy. The second option is to use the old criteria, which the state commission already used for those substantial changes. And the last option is some minor changes. For example, increase the heat supply business or increase the innovation -- share of innovations. But it's up to the state commission to determine these criteria. So we'll wait for the decision.

--------------------------------------------------------------------------------

Dmitry Skryabin, BCS Financial Group, Research Division - Senior Sectoral Analyst [19]

--------------------------------------------------------------------------------

Okay. Dmitry Skryabin, BCS. I have 2 minor questions about import and exports. The first is about Poland. It's gaining ground. Can you indicate as to the extra price. And the second question is into relation expressed to Lithuania. It's -- in Page 2, it says it's 50% growth. Now and on the other page, you say that the price fell by 2.5 -- 2.8%. But so the volumes increased by 50% and price grew by almost 3%, revenue should grow by 45% rather than 20-something. Or am I mistaken somewhere?

--------------------------------------------------------------------------------

Alexandra Panina, Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board [20]

--------------------------------------------------------------------------------

This is Alexandra Panina speaking. I'll try to say about Poland. Russia doesn't have direct exports to Poland. We have a subsidiary, which is engaged in purchasing and selling electricity in Poland. So as to the prices, it's higher than EUR 50. So there is no direct link, direct supplies to Poland. So everything you see, our volumes grow not because of exports from Russia, it's due to trading business like purchasing and selling. So it's like profiting activities. And as to this revenue, you didn't mention one more factor. Our wholesale market price change. For example, in Kaliningrad region, the supply tariff increased, and Evgeniy already mentioned that wholesale market price grew, and our volumes grew, but average margins declined, but that was the factor that offset the effect of volume growth.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Next question comes from Vladimir Sklyar, VTB Capital.

--------------------------------------------------------------------------------

Vladimir Sklyar, VTB Capital, Research Division - Equities Analyst [22]

--------------------------------------------------------------------------------

I have few more questions from my side. First is about EBITDA guidance for this year or maybe for the next year even, the traditional question. And the second question is about this Inter RAO strategy. Maybe you already have something you can share with us at this point. And the third question about [success of] 2 projects. You have a GE, General Electric or the gas turbines. So will it be implemented? And also smart metering devices. So supply margin growth is expected around -- by 160% for 2020 from those smart metering devices. So what stage is this project at the moment? And how will it develop next year?

--------------------------------------------------------------------------------

Evgeniy Nikolaevich Miroshnichenko, Public Joint Stock Company Inter RAO UES - CFO & Member of the Management Board [23]

--------------------------------------------------------------------------------

Okay. Thank you, Vladimir. This is Evgeniy Miroshnichenko. I will take questions 1 and 4, and Pavel will take the second and third question. As to EBITDA, we are not yet ready to say what will be next year. We're just discussing it, and it will be up to the Board to decide. But I think you can calculate it like we do. So as to the growth, it will be around 10% to 15%. So that's the average growth rate.

And as to smart metering devices, there will be new laws and regulations approving the requirements for those smart metering devices. So as soon as these resolutions are approved, maybe next year? Only then we'll return to this project. We pilot different initiatives in order to be able to fully implement them. And it should be financed by the tariff. So there is no worry about that.

--------------------------------------------------------------------------------

Pavel Fominov, [24]

--------------------------------------------------------------------------------

This is Pavel Fominov speaking about the strategy. Now we are working on the strategy. We're about to complete this. First, it will be approved by different committees. And the board is planned for -- the board meeting is planned for the second quarter next year. And I think that in the second quarter, accordingly, we'll be able to disclose specific details about the new strategy, but now we keep working on the documents. So you can -- you can think that in May, we'll be able to publish this document.

As to the GE project, we are negotiating with them. We have an NDA signed for them. Accordingly, we cannot disclose any specific details. As soon as any major decisions are taken, you will be informed anyway.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Fedor Kornachev, Sberbank.

--------------------------------------------------------------------------------

Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [26]

--------------------------------------------------------------------------------

My question is day-ahead market prices, and I'm interested about your opinion about a substantial decline in the second price zone in the third quarter? And what will happen to the story going forward? For the full year, the fuel spreads will be widening. So what would you expect in the next few years? Will situation will be stable, or the spreads will be narrowing or widening, vice versa? Because the last KOM auction showed that there is -- the excess capacity in the system is going down.

--------------------------------------------------------------------------------

Alexandra Panina, Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board [27]

--------------------------------------------------------------------------------

This is Alexandra Panina. I'll handle the question about day-ahead market prices. It's very interesting. Okay, I'll start with the distant past. In the past 10 years, day-ahead market prices have been growing -- have grown substantially by 78 percentage points, in line with the gas prices. For the last 3 years, day-ahead market prices were mainly in line with the gas price again. Now while in the past, they were lagging behind, this year, they were broadly in line. In the first half of 2019, this topic was broadly discussed. Prices in the first price zone exceeded the gas prices. And in the second half of the year, the day-ahead market price started to lag behind substantially behind the gas price. So for the full year, I think day-ahead market price will be slightly ahead of the gas price, maybe slightly -- maybe 1% above the gas price. So for the full year, the prices for gas and for day-ahead market will be mainly in line with each other.

--------------------------------------------------------------------------------

Fedor Kornachev, Sberbank CIB Investment Research - Research Analyst [28]

--------------------------------------------------------------------------------

And as to what happened in the second and the third quarter, day-ahead market prices?

--------------------------------------------------------------------------------

Alexandra Panina, Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board [29]

--------------------------------------------------------------------------------

It's high water level at HPPs. In the first half of the year, it was a low level at our HPPs, in both [price sales]. It's one of the factors which drove prices, above gas prices, vice versa in the second half. We have high water level. So we have high generation, mobile, it's even -- it's not -- it's higher than normal. So HPPs have strong generation rates. It's reduced prices in the second price zone in the third quarter.

And in my opinion, the price decline in the second price zone, it was substantial in the third quarter. And there are some other reasons. But to my mind, I'm not sure that HPP generation can reduce the price by 50% in the second price. Then, I think there are some other triggers, and we need to look into them.

And looking forward, in the short run, I think, the trend for -- in day-ahead market price will be lagging behind the gas prices. We have a few factors to consider, this is commissioning of 2 nuclear power plants, Novovoronezh nuclear power plant, which will be commissioned at the end of the year; and Nizhnevartovskaya nuclear power plants, which will be launched in the 2021, 2022, which is quite soon. So this is -- and also renewables will be in the -- commissioned quite soon for around 5 gigawatts. It's not that much, but anyway. So that's why, in the mid-term, the picture will be a little bit different. The spread will be broadening because consumption will be growing. It will affect the net spreads in terms of its widening.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Sergey Garamita, Raiffeisen Bank.

--------------------------------------------------------------------------------

Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Congratulations to your strong performance. Actually, I have a few questions. First is about day-ahead market. How would you comment this Federal Antimonopoly Service? What risks you see for yourselves? And the FAS watchdog looked into -- investigated the price deal of the generators -- generating companies? So what can you say about the ambition and interest of the FAS service? So will it have any claims against the generation companies and maybe even claims? That's the first question.

--------------------------------------------------------------------------------

Alexandra Panina, Public Joint Stock Company Inter RAO UES - Interim Head of the Trading Block & Member of Management Board [32]

--------------------------------------------------------------------------------

This is Alexandra, again. I'll try to take the question about the investigation about the price in the first half of the year. I think you should ask the service itself, which supervises this topic has its own vision. But in my opinion, we didn't take part in any -- [imports] and any price negotiations. So the prices are, well, volatile. And for the full year, the process will be offset, I suppose. So it's a question not to us but to the Federal Antimonopoly Service. But I think the prices were driven by objective reason, objective factors. And I cannot say for everyone, but it's only -- but I can speak only about our price request, price orders, so I cannot comment on other generation companies.

--------------------------------------------------------------------------------

Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

All right. I have a couple of questions about recurring growth generation in the long run. As soon as the last power plant was moved to August through December, previously, the media told that its future will be discussed with the Rosneftegaz. So this decision about this plant, we can expect it when in August to December? And how do you consider an acquisition of the plants? Because looking into the 9 months results, you keep around 30% of this -- of free cash flow for guaranteed payments. So wouldn't it be better for you to keep this leasing and discard acquisition of this plant, because it would be quite -- could be quite profitable for you. It will be translated -- translating into decent financial results.

--------------------------------------------------------------------------------

Unidentified Company Representative, [34]

--------------------------------------------------------------------------------

Yes, thank you for your question. That's true as we move the reschedule. If so, it will be depend -- it depends on the commissioning date. And as to its future, we are not here to speak about that because decisions will be taken by the government of Russia, according to the road map approved by the government. So it's too early to speak about that.

And as soon as we approach the launch, there will be different consultations and negotiations with the government and the Rosneftegaz will be the key investor. That's all we can say at the moment.

--------------------------------------------------------------------------------

Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

So we can expect anything by the new strategy approval date rate on the next year?

--------------------------------------------------------------------------------

Unidentified Company Representative, [36]

--------------------------------------------------------------------------------

Yes, exactly. You're right.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Next question from Matvey Tayts, Sova Capital.

--------------------------------------------------------------------------------

Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

I have a question about your financials, about other costs. It's quite material. So in 9 months, it's RUB 25.5 billion, but it's quite volatile within the year. Within these 9 months, so in the first half, it was a growth by 18% and the decline by 22% in the third quarter. So what will be the overall performance of this item for the full year?

--------------------------------------------------------------------------------

Unidentified Company Representative, [39]

--------------------------------------------------------------------------------

Matvey, thank you for your question. We need to -- if you need any breakdown, we will provide that, but the key contribution was from devaluation -- so provisions for devaluation of receivables. And this was the key driver of this item. Provisions were created in the second quarter. Now we don't create any more provisions. And this value fluctuates within the year, when we estimate our fixed assets and financial investments, et cetera. Now we engaged auditor and the independent appraisers. So now it's very difficult to make any forecasts right now.

--------------------------------------------------------------------------------

Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Okay. And a follow-up question. There is a provision for accounts receivable. This figure [3.903.] So that's some additional provision for impairment, right?

--------------------------------------------------------------------------------

Unidentified Company Representative, [41]

--------------------------------------------------------------------------------

Yes, Matvey. My colleagues told me that the right answer would be that these costs includes our construction costs. And they are very volatile. [So it's all the exception certificates when we act as a general contractor]. So for example, for the Kaliningrad region, they will be fluctuating from quarter to quarter.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

(Operator Instructions) Next question from Denis Stepanov from Gazprombank.

--------------------------------------------------------------------------------

Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [43]

--------------------------------------------------------------------------------

This is Igor Goncharov. Excuse me, I'm calling from different line. I have a few follow-up questions. The first is about guidance for the next year. You confirmed EBITDA guidance and CapEx or -- no, no, for next -- not for next year, but for this year, what will be the CapEx for 2019 and maybe even in 2020? And the second question is about M&A transactions. Could you please conceptually describe, speaking about assets in Russia? Strategically, do you consider only cash acquisitions or you could use some quasi-treasury shares for your potential acquisitions?

--------------------------------------------------------------------------------

Evgeniy Nikolaevich Miroshnichenko, Public Joint Stock Company Inter RAO UES - CFO & Member of the Management Board [44]

--------------------------------------------------------------------------------

Yes. This is Evgeniy speaking. Thank you for your questions. As to CapEx, we last year guided for around RUB 24 billion, including VAT for 2019. And as to the use of quasi-treasury shares, we don't consider this option for M&A deals. Because we have quite a substantial investment resource [institution] in order to rely on that. And our shares are substantially undervalued too as we think.

--------------------------------------------------------------------------------

Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [45]

--------------------------------------------------------------------------------

Okay. Just a small follow-up. Do you still see the use of this interest to attract a strategic investor? Or it could be redeemed at some point in time?

--------------------------------------------------------------------------------

Unidentified Company Representative, [46]

--------------------------------------------------------------------------------

Yes, Igor, indeed, from quarter to quarter, we don't change these approaches. So it's according to the strategy approved by the board. We are going to look for the strategic investor in the long run. But in the short term, at this moment, we are not discussing any opportunities like that. But strategically, you are right.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Sergey Beiden, Renaissance Capital.

--------------------------------------------------------------------------------

Sergey Beiden, Renaissance Capital, Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

I have a very small question. Do you have any specific dates about the combination, the merger of the energy systems of Russia, Belarus and Kazakhstan?

--------------------------------------------------------------------------------

Unidentified Company Representative, [49]

--------------------------------------------------------------------------------

Speaking about Kazakhstan and Belarus, you mean the Eurasian Energy Market, right? This common market program. I can say a few words. But decisions were taken and they were documented that the launch of the common market will be moved from the 1st of July 2019 to the 1st of January 2025. But before that, we need to develop lots of regulatory documents, 7 to 8 regulations. This overflow rules and transfers, those documents should be developed before the 1st of January 2024, the trial run is planned. So we'll be testing a different trade mechanism. So the target date is the 1st of January 2025. So it's in the medium term, this -- so the risk of this merger is nonexistent. And the scope of -- Europe Asian Economic Union (sic) [Eurasian Economic Union], yes.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

A follow-up question from Dmitry Skryabin, BCS.

--------------------------------------------------------------------------------

Dmitry Skryabin, BCS Financial Group, Research Division - Senior Sectoral Analyst [51]

--------------------------------------------------------------------------------

All right. I have a small question about the update on the -- on the long-term incentive program, which was supposed to be approved by the end of the year. Do you have any guidance or give us some color on that?

--------------------------------------------------------------------------------

Unidentified Company Representative, [52]

--------------------------------------------------------------------------------

Yes, Dmitry, we are looking into it, together with the updated strategy. So it will be announced earlier, no sooner than May 2020, only together with the strategy announcement will come. Currently, we don't have any more information that we could share. We can't provide any more comments.

--------------------------------------------------------------------------------

Dmitry Skryabin, BCS Financial Group, Research Division - Senior Sectoral Analyst [53]

--------------------------------------------------------------------------------

Initially, it was supposed to be approved by the board by the end of this year. And now it turns out to be only in May, together with the strategy, right?

--------------------------------------------------------------------------------

Unidentified Company Representative, [54]

--------------------------------------------------------------------------------

Yes, indeed, it will be considered by the board, the long-term incentive program and the strategy. So the announcement will come only together with their business strategy.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

We have a question from Denis Stepanov from Gazprombank.

--------------------------------------------------------------------------------

Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [56]

--------------------------------------------------------------------------------

Again, it is Igor Goncharov. Just a follow -- a small follow-up about dividends. As far as I understand, the strategy should be expected in May next year. Am I right thinking that your dividend decisions will be taken in line with existing provisions, existing strategy? And we should be -- should be guided by 25% of net profit under IFRS rather than any other figure, right?

--------------------------------------------------------------------------------

Evgeniy Nikolaevich Miroshnichenko, Public Joint Stock Company Inter RAO UES - CFO & Member of the Management Board [57]

--------------------------------------------------------------------------------

This is Evgeniy Miroshnichenko. Yes, Igor, that's right. We will follow our dividend policy -- existing policy.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your questions. For now we don't have any questions. And I would like to give the floor to our speakers to conclude the conference.

--------------------------------------------------------------------------------

Unidentified Company Representative, [59]

--------------------------------------------------------------------------------

Dear colleagues, thank you very much for taking part in our conference call and webcast. We will be happy to see you on the Investor Day on the 2nd of December. And please note that today, it's the last day for registration. And if you wish to hear us on the conference call so hear us soon. (inaudible) Well, this is to conclude the call. Thank you for your participation. You may now disconnect.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]