Economic and Financial Performance

The main financial management tool used by Federal Grid Company is a hierarchical budgeting structure.The Company’s financial and economic planning covers the following levels:

  • Long-term planning involves a five-year financial plan broken down into one-year steps. This involves establishing guidelines to implement a government-mandated policy concerning the UNEG management, as well as the Company’s own strategic plans, subject to acceptable risk levels and focused on financial sustainability;
  • Mid-term planning is built around a three-year business plan, which is also divided into one-year steps. The goal is to set mid-term financial and production targets, to develop a production program and to identify necessary resources while balancing the economic interests of the Company, its investors, customers, shareholders and creditors;
  • Short-term or current planning focuses on the Company’s annual budget with quarterly interim steps. Budgeting helps the management team align day-to-day activities with mid-term targets outlined above.

With the goal of building a financial management system that meets modern corporate governance standards, Federal Grid Company has introduced the following measures:

  • To implement a process-based management model, the Company has described and regulated business processes and singled outBusiness Planning and Budgeting processes. The processbased management model is currently being rolled out;
  • To form a financial structure, financial responsibility centers have been formed;
  • A cash flow control system has been established;
  • A management accounting system has been developed and implemented;
  • The budget management system was introduced via efforts of the Company and its branches to draft, review, approve and execute budgets, control budget execution, maintain budget records, and complain, review and approve budget reports.

The performance analysis system is based on comparing set targets with actual performance.

The Company’s cash flow management is grounded in a mechanism that utilizes the centralized accumulation of cash as proceeds from operations, financing and investing it so that it can be used later to finance operations and capital expenditures. Operations are financed by distributing funds to corporate branches. Throughout 2010 the Company’s financial management bodies focused on ensuring financial stability while working within the Company’s established leverage limits. One of the Company’s top priorities in financial policy was to reduce operating costs per unit of equipment without sacrificing grid servicing efficiency or reliability.

During 2008-2010 there was an increase in corporate revenues. In 2010 revenues from Federal Grid Company’s usual activities grew by RUR26,007 million, or 30.6% year-on-year, driven by higher revenues from electricity transmission services by RUR29,337 million, or 36.6%. Compared to 2009, the principal drivers of higher revenues from electricity transmission services were expanded corporate production capacities and a larger investment program approved by Order No. 547 of the Russian Ministry of Energy, as of 12 November, 2010.

Indicator (RUR, mln) 2008 2009 2010
Revenues 68 485 85 078 111 085
COGS 58 977 64 080 75 518
Sales profit (loss) 5 156 15 870 29 357
Other incomes 38 377 113 770 148 393
Other expenses 37 356 183 688 109 431
Profit (loss) before tax 6 177 -54 049 68 319
Deferred tax assets 7 -180 -33
Deferred tax liabilities -217 -722 -1 181
Current income tax -3 225 -4 876 -9 264
Other similar compulsory payments 1 724 -39 249
Net profit (loss) for the reporting period 4 465 -59 866 58 088

In 2010 the Company’s COGS (excluding administrative expenses) increased RUR11,438 million (17.8%) year-on-year, as a result of an increase in equipment units, the launch of new facilities, inflation growth and greater depreciation charges resulting from PP&E revaluation.

In 2010 Federal Grid Company posted a net profit of RUR58,088 million:

  • Additional profit generated by mark-to-market financial investments;
  • Re-stored and accrued bad loan provisions that were reduced by an amount equal to the provision for inventory depreciation;
  • Profit allocation to the Company’s investment program.

2010 Key Asset, Equity and Liability Figures in Accordance with Corporate Accounting Reports, RUR mln

Indicator As of 31.12.2008 As of 31.12.2009 As of 31.12.2010
Indicator 723 940 660 517 871 546
Non-current assets 511 588 437 915 640 787
Current assets 212 353 222 602 230 759
Total equity and liabilities 723 940 660 517 871 546
Equity 666 177 579 467 763 884
Long-term liabilities 18 622 7 440 52 668
Short-term liabilities 39 141 73 609 54 994

Revenue and Expense Performance

The above balance sheet data indicates no clear trend. There were declines in 2009, compared to 2008, and growth in 2010, compared with 2009.

In 2009 non-current assets declined in value. The principal reason was a revaluation of long-term financial investment, due to lower market value for securities in the Company’s portfolio and that a portion of the Company’s long-term investments were re-classified as short-term ones.

In 2010 Federal Grid Company’s total assets grew, driven primarily by a higher non-current assets value. The following factors affected the 2010 increase in non-current assets:

  • Higher construction-in-progress value as the Company implemented its investment program;
  • Increased long-term financial investments primarily due to mark-to-market financial investments and the reclassification of Energo-Finans promissory notes from long-term receivables to long-term financial investments under novation contract;
  • Increased PP&E, which was revalued 1 January, 2010, with the revaluation netting a total of RUR 86 billion.

The increase in Federal Grid Company’s current assets was driven by the following factors:

  • Increased inventories, including materials, due to larger material procurement for repair activities using the Company’s own resources;
  • Reduced long-term accounts receivable, partly as a result of reclassifying Energo-Finans promissory notes from long-term receivables to long-term financial investments under novation contract and redeeming promissory notes of Mobile GTES;
  • Increased short-term accounts receivable as advance payments required for the investment program grew and bad-loan provisions for the promissory notes of Energy Index – Federal Grid Company were re-created;
  • Reduced short-term financial investments driven by a reduction in Federal Grid Company’s cash deposits at banks.

In 2010 the Company’s equity grew at a higher rate, driven by an increase in Federal Grid Company’s share capital following the registration of a RUR40,178 million equity issue in 2009, an increase in surplus capital driven by PP&E revaluation and a RUR58,088 million net profit reported in 2010.

In 2010 the increase in the Company’s short-term receivables was driven by series 7, 8, 9, 10 and 11 bond issues aimed at financing the corporate investment program.

As with the previous year, during the 2010 reporting period, the Company increased its share capital. This resulted in payables to participants in contributions to share capital being reported as short-term liabilities. Following the FFMS registration of the Report on results of the additional share issue, this amount became part of share capital. In the 2010 reporting, this was equal to RUR11,194 million, whereas in the 2009 report, it totaled RUR40,178 million.

2010 liquidity ratios indicate that Federal Grid Company is capable of meeting its short-term obligations. The cash, current, and quick ratios are all high, which is considered a positive factor given that the current ratio is within the normal range of 1 and 2, whereas, the quick ratio is between 0.7 and 0.8. The reported values illustrate that the Company has reasonably high levels of both liquidity and solvency.

In 2010 the year-on-year decline in liquidity ratios was caused by a reduction in short-term financial investments following a decline in Federal Grid Company's deposited cash at banks, the redemption of promissory notes of VTB Bank and Glavsetservis UNEG and the purchase of short-term promissory notes from Alfa Bank and Bank Rossiya.

Assets Structure Performance

The ratio of equity to total assets demonstrates the degree of financial independence from creditors. In 2010 the change in this ratio was driven by an increase in total assets and is currently at a fairly high level, pointing to Federal Grid Company's strong financial stability.

Profitability ratios continued to increase during the reporting period. The main growth factor is higher profit before tax (without taking external factors into consideration).

Federal Grid Company’s after-tax profit (net profit), as per accounting statements, is the source for accruals of the corporate reserve fund and for paying dividends. In FY 2010 Federal Grid Company reported a net profit of RUR58,088 million.

Net Profit Distribution

2008-2010 Corporate Financial Ratios

Indicator 31.12.2008 31.12.2009 31.12.2010
Liquidity*
Cash ratio 1,41 2,41 1,3
Quick ratio 5,01 5,91 4,9
Current liquidity 5,43 6,66 5,3
Capital structure**
Equity to total assets 0,92 0,94 0,89
Leverage 0,09 0,07 0,12
Profitability
EBITDA margin***, % 47,8 47,5 61,5
Operating margin***, % 6,5 11,1 23,2
Return on assets***, % 0,62 1,4 3,0
Assets turnover 0,09 0,13 0,13

* For 2009-2010, payables were reduced by amounts owed to shareholders for shares contributions.


** For 2009-2010, charter capital was increased by amounts owed to shareholders for shares contributions.


*** For 2009-2010, the impact of factors outside Company management competencies was not taken into account when calculating EBITDA (net profit).



2008-2010 Net Profit Allocation, RUR mln

31.12.2008 31.12.2009 31.12.2010
Retained profit (loss) for the reporting period: 4 465 -59 866 58 088
Net profit, adjusted - - 25 777
Distribution:
Reserve fund 223 - 2 904
Development 4 242 - 18 578
Compensation for previous year losses, remuneration to members of the Company’s Board of Directors - - 34 028
Dividends - - 2 577,7

The profit primarily consists of:

  • Positive financial results from mark-to-market of shares (not secured by monetary funds);
  • Positive financial results from re-storing and accruals of bad-debt provisions, reduced by an amount equal to the provision for inventory depreciation (not secured by monetary funds);
  • Profit from corporate operations.

The Company plans to distribute posted net profit in the following way:

  1. In accordance with Article 35 of Russian Federal Law No. 208-FZ dated 26 December, 1995 “On Joint Stock Companies,” the Company plans to allocate 5.0% of net profit, or RUR2,904,419,000, to its reserve fund;
  2. The profit of RUR18,578,192,000 will be allocated to development, including RUR16,614,772,000 to be allocated to finance the Company’s approved 2010 Investment Program, RUR1,277,414,000 for financing capitalized interests accrued on loans raised for the Company’s Investment Program and RUR686,006,000 for purchasing PP&E.
  3. In accordance with Clause 4.3 of Federal Grid Company’s Regulations on Dividend Policy, the Company plans to pay dividends based on net profit secured by monetary funds and excluding financial results from security revaluations and provision accruals. Dividends totaling 10% of net profit are backed by monetary funds and equal RUR2,577,664,000.
  4. RUR34,028,113,000 of net profit are allocated to cover losses posted in 2009, as a result of losses from asset revaluation and the provision accruals, and as remuneration to be paid to members of the Board of Directors in accordance with Clause 4.3 of the Federal Grid Company’s Regulations on Compensation and Remuneration to Members of Board of Directors, as approved by the Resolution of the General Shareholders Meeting dated 26 June, 2010 (Minutes No. 9 as of 2 July, 2010).
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