In the opinion of the Company’s auditor, Ernst & Young, the consolidated financial statements present fairly, in all materials respects, the financial position of the Group as at 31 December 2014, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

RUB mln, unless otherwise stated 

* EBITDA and net profit for 2014 and 2012 are indicated with adjustments on the loss on impairment of property, plant and equipment recognized in the structure of operating expenses

EBITDA is calculated as profit before tax + depreciation of property, plant and equipment and amortization of intangible assets + finance expenses – finance income  

Net debt is calculated as long-term and short-term borrowings – cash and cash equivalents – short-term investments

Revenue

In 2014, electricity transmission revenue, net of normal (expected) losses amounted to RUB 30,263 mln, +10% y-o-y (2013: RUB 27,480 mln).

The main part of revenue was received from OJSC PSK and LLC Energia-Holding amounting to RUB 26,770 mln (2013: RUB 20,673 mln) and RUB 3,790 mln (2013: RUB 3,512 mln), respectively, comprising 74% (2013: 63%) of the total revenue from transmission of electricity before technological losses at the normal (expected) level.

Revenue from technological connection to electricity grids in 2014 increased by 26% y-o-y and totaled RUB 8,581 mln.

Other income for 2014 totaled RUB 2,757 mln, or -9% y-o-y as a result of decreased income from non-contractual electricity consumption by 20% due to the systematic work on revealing and reducing non-contractual electricity consumption held by the Company. The main part of other income amounting to RUB 1,535 mln was received due to the revealed non-contractual electricity consumption.

Electric power losses in 2014 were up by 0.95 p.p. and totaled 11.06%. The growth of losses was caused by transition since June, 2014 to AIMS CEM in the section of Lenenergo - FGC UES for scoping of electric power supply to the network of JSC Lenenergo (the calculation method agreed upon by the parties was previously applied). Thus, as the level of electric power consumption by consumers of St. Petersburg and the Leningrad Region has not essentially changed, the growth of electric power supply to the network resulted in the growth of reported losses in the electric networks of Lenenergo. 

Costs

Operating expenses of the Group in the reporting period were RUB 35,516 mln, + 15 % y-o-y.

Comments on the dynamics of key cost items:

·       Transmission fee

Transmission fee increased by 8% y-o-y and totaled RUB 14,739 mln. The growth in the expenses was caused by increased required gross revenue of third-party grid companies pursuant to the tariff and balance decisions of the regulators in St. Petersburg and the Leningrad Region. Expenses on JSC FGC UES fee in 2014 decreased by 2% y-o-y due to cancellation of the lease contracts of the UNEG facilities property (cancellation of “last-mile” contracts).

·       Depreciation of property, plant and equipment

The growth of depreciation expenses by 23 % was caused by the increased book value of property, plant and equipment due to commissioning of fixed assets as a result of implementation of the investment program.

·       Provision for litigations and claims

The essential increase in provisions in comparison with 2013 is associated with the assessment of recognition of possible risks of expenses on disagreements regarding determination of volumes and cost of services in electric power transmission on the networks of a number of the adjacent network organizations. The main subject of disagreements is the type of a tariff applied in calculations and the lack of coordinated essential terms of contracts on electric power transmission set forth by the current legislation of the Russian Federation. JSC Lenenergo intends to defend its position in the court. Final judicial practice in similar controversies for the date of the report has not been defined yet. The Company’s management made the decision to assess possible risks and create necessary provisions.

It is expected that judgments in claims will be accepted no later than the first half of 2015.

Financial result

Operating profit of the Lenenergo Group for 2014 amounted to RUB 6,085 mln (-3.7% y-o-y).

By results of 2014 the Lenenergo Group received net loss in the amount of RUB 4,216 mln, the financial result has deteriorated that is RUB 7,497 mln below the indicator of 2013 (in 2013 the Group earned net profit amounting to RUB 3,281 mln). The main influence on the growth of net loss was rendered by:

·         creation of provision for impairment of investments for RUB 8,607 mln associated with the problems of JSC Tavrichesky Bank;

·         creation of provision for litigations and claims for RUB 3,905 mln.

EBITDA* for 2014 was RUB 13,429 mln, 29.6% higher than the indicator of 2013.

Debt position

Credit portfolio (short-term and long-term borrowings of the Company for the end of the reporting period) was RUB 49,770 mln, 49% higher than the indicator for the end of 2013. Net debt for the end of 2014 was RUB 44,163 mln (+89.5% y-o-y). Net debt/EBITDA* amounted to 3.29 for the end of the reporting period and was acceptable to the Company.

Bonds

In 2014, the Group fully executed its obligations on payment of coupon yield on the 4th and 5th coupons of the 4th bonded loan in the amount of RUB 127,140 each and on the 2nd and 3rd coupons of the bonded loan of series BO-01 in the amount of RUB 123,420 each.

Credits

In 2014, the Group received a number of trenches totaling RUB 22,682 mln, of them:

·       RUB 5,719 mln under the contracts with JSC Sberbank of Russia signed in 2013;

·       RUB 16,963 mln under the credit lines of 2014 by results of procurement procedures.

The average rate on the credit portfolio as at 31.12.2014 was 9.09% per annum.

Forward-looking statement regarding expected results 2015:

Due to the deteriorating financial performance of the Company by the end of 2014, the Lenenergo management has prepared and submitted for approval by the Board of Directors the list of priority actions to ensure the financial stability of JSC Lenenergo for 2015-2019, providing for the adjustments of the Business plan and the Investment program of JSC Lenenergo and aimed at the fulfillment of obligations towards the Company’s creditors and counterparties. The List comprises the following main directions:

1.   Protection of the Company’s interests in terms of the tariff and balance decisions

2.   Reduction in operating expenses.

3.   Adjustment of the volume of financing of the Group’s investment program for 2015-2019.

4.   Implementation of activities aimed at ensuring financial stability in part of technological connection:

·            Inventory of the signed contracts on technological connection, including connection specifications of the applicants. Structuring obligations of the Company and the necessary volume of investment expenses for performance of its obligations.

·            Analysis of total sources of financing of investment expenses required to perform obligations and timing of performance of obligations on the basis of prevailing financial and economic conditions.

The list of priority actions to ensure the financial stability of JSC Lenenergo for 2015-2019 was considered and approved by the Board of Directors of JSC Lenenergo on 03.03.2015.

The Group also undertakes the following measures to cut its costs:

·            For 2013-2017 the Program of performance management was created which ensures the achievement of the target indicator to reduce the cost of service per unit of electrical equipment concerning the level of 2012 according to the requirements of the Strategy of development of the electric grid complex of the Russian Federation. The Program of performance management is a key tool to improve internal operational efficiency of the Group’s activities.

·            The Program of energy saving and increase of power efficiency is annually developed and implemented.

·            Tender procedures are conducted aimed at reducing costs of the acquisition of goods, work and services per unit of production by at least 15% by 2017, taking into account the level of inflation in 2012 per unit of service of electrical equipment (c.u.) approved by the Resolution of the RF Government of 3 April 2013, # 511-R.

·            Analysis of price parameters of investment projects is carried out.

For reference:

The Lenenergo Group Structure

Dynamics of Key IFRS Indicators of JSC Lenenergo for the Five Recent Years:

EBITDA is calculated as: profit before tax + depreciation of property, plant and equipment and amortization of intangible assets + finance costs – finance income  

EBITDA and Net profit for 2014, 2012 and 2011 are indicated with adjustments on loss on impairment of property, plant and equipment recognized in the structure of operating expenses

Net debt is calculated as: long-term and short-term borrowings – cash and equivalents, and for 2011, 2012, 2013 and 2014 also net of short-term investments for the end of the period

Dynamics of Key Indicators of the Consolidated Statement of Financial Position for the Five Recent Years:

Dynamics of Key Indicators of the Consolidated Income Statement for the Five Recent Years:

Financial statements prepared in accordance with IFRS and other publications for investors are available on Lenenergo website in the Investor Relations section (www.lenenergo.ru)