* The indicator is calculated as: EBITDA = Net profit + income tax + Depreciation + Interest expense + Provision for impairment of debt financial investments.

** The amount of outstanding borrowings (debt of the Company) including interest (sum of lines 1410 and 1510 of the balance sheet) is reflected.

 Note: Actual indicators for Q1 2014 and 2015, and forecasted indicators for Q1 2015 in accordance with the Business Plan approved by the Board of Directors of JSC Lenenergo on 30.12.2014 regarding Q1 2015 (Minutes #18 of 12.01.2015) are given in the table. 

Formation of Revenue and Financial Result

Sales revenue in Q1 2015 amounted to RUB 10,972 mln, revenue growth was RUB 381 mln, or 3.6% Q-O-Q. The growth of total sales revenue relative to 3 months of 2014 was primarily influenced by increased revenue from technological connection services (by RUB 417 mln, or 79.1%), and was due to the increase in the commitments under property contracts in Q1 2015 on the territory of St. Petersburg. The volume of connected capacity thus increased by 19 MW, or 33.0% Q-O-Q. Revenue from electricity transmission services decreased by RUB 11 mln, or -0.1% due to lower volumes of electricity transmission in connection with a higher outdoor air temperature in Q1 2015 compared with Q1 2014. 

Electricity losses in Q1 2015 increased by 3.65 percentage points over the fact of Q1 2014 and amounted to 14.71%. The growth of losses was due to the transition from June 2014 on AIMS CEM in the cross section of Lenenergo - FGC UES to determine the amount of electricity supply to the network of Lenenergo (the calculation method agreed upon by the parties was previously applied). Thus, since the level of electricity consumption by the consumers of St. Petersburg and the Leningrad Region has not changed significantly, the increase in electricity supply in the network has resulted in the growth of factual losses in the electric networks of Lenenergo.

Cost of services (including depreciation) in Q1 2015 amounted to RUB 10,577 mln, the growth was RUB 240 mln, or 2.3% Q-O-Q.  The cost increase was primarily due to the growth of costs for purchased power to compensate for losses. Decreased operating expenses for a number of articles were associated with the implementation of the Company’s anti-crisis Program.

Gross profit of Lenenergo for Q1 2015 totaled RUB 395 mln that is above the indicator of the similar period of previous year by RUB 141 mln, or 55.5%. In Q1 2014, the Company received gross profit of RUB 254 mln.

Net loss at the end of Q1 2015 amounted to RUB 1,295 mln, and the financial result was below the indicator of the same period of 2014 by RUB 971 mln (in 4 times, the Company received net loss in the amount of RUB 324 mln for 3 months of 2014).

The main influence on the increase in net loss was rendered by the growth of the negative balance of other income and expenses relative to the same period of 2014 through the establishment of valuation allowances on existing disagreements with third-party grid organizations and recognition by Lenenergo of some differences in the volume of losses, and increase in interest expense due to the growth of interest rates under the loan agreements.

The key point of disagreements with third-party grid organizations is the type of tariff used in the calculations and the absence of agreed essential terms of contracts for electricity transmission stipulated by the legislation of the Russian Federation. In Q1 2014, expenses for rendered services were not reflected in the cost, and valuation reserves were not formed due to the lack of judicial practice in disagreements with third-party grid organizations. In Q1 2015, judicial practice of the disagreements for the date of report formation is not finished. The Company management decided to evaluate the possible risks and form necessary reserves.

In 2014, Lenenergo did not recognize electricity supply for a number of delivery points in the cross section with FGC UES. As a result, there were disagreements on the amount of losses in Lenenergo networks, the cost of which was not reflected in the cost and valuation reserves were not formed. The disagreements were settled in Q1 2015 as owners of outgoing connections were defined and disagreements with FGC UES on the contentious points were resolved. The cost of losses was reflected in other expenses as losses of past years.

EBITDA Formation

EBITDA characterizing cash flow generated by the Company before taxes and interest payments in Q1 2015 totaled RUB 2,104 and dropped by RUB 595 mln, or 22.1% Q-O-Q. The decline in EBITDA was generally influenced by a deterioration in the financial result compared with Q1 2014. The share of EBITDA in revenue (EBITDA margin) dropped by 6.3 percentage points Q-O-Q and amounted to 19.2% (as a result of lower EBITDA values at the revenue growth).

Credit Portfolio and Debt Position

The growth of debt on loans and credits as of 31.03.2015  including interest (Company’s debt, the sum of lines 1410 and 1510 of the Balance Sheet) compared to the same period of last year was RUB 12,804 mln, or 34.5%. Loans and credits were raised to finance of the Company’s Capex program and for the purposes of refinancing. Due to the deterioration of the situation on the capital market in 2014 and the growth of the average interest rate on borrowings under active and signed loan agreements as at 31.03.2015 was 10.18%, which is higher than the indicator for the similar period of previous year by 2.05 percentage points.

The increase in net debt for 3 months of 2015 to the level of the same period of 2014 exceeds the growth of debt on borrowings due to the reduced value of the most liquid assets at the end of the period (the sum of short-term investments and cash). The ratio of Net Debt/EBITDA for 4 quarters increased by 1.8 points compared to the same period of 2014 due to the growth in net debt and decline in the value of EBITDA for 4 quarters.

Investment Activity

Capex in Q1 2015 amounted to RUB 1,698 mln, which is 39% below the indicator of Q1 2014 (RUB 2,788 mln).

The negative indicator of the Capex program financing was due to the recovery in Q1 2015 of debt towards contractors for their work performed in 2014 on non-produced payments by the Bank Tavrichesky in Q4 2014.

Forward-Looking Statements Regarding Expected Results in 2015:

Due to the Company’s deteriorating financial performance by the end of 2014, the Board of Directors of Lenenergo on 03.03.2015 reviewed and approved the List of priority actions to ensure the financial stability of Lenenergo for 2015-2019 providing for adjustments of the Business Plan and Investment program of Lenenergo and aimed at the fulfilment of obligations towards the Company’s creditors and contractors. This List comprises the following key elements:

1. Protecting the interests of the Company in terms of tariff and balance decisions.

2. Cutting operating expenses.

3. Adjustment of the volumes of financing of the Capex program of the Group for 2015-2019.

4. Activities aimed at ensuring financial stability in terms of technological connection activities.