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Address of the Director General

Dear Shareholders, Partners, and Colleagues,

The absolute priority of Kubanenergo PJSC activities in 2016 was to complete all tasks entrusted on the Company in order to ensure reliable and uninterrupted power supply and technological connections to the electric grids of the Company.

During the reporting period, the Company showed sustainable growth, efficiency, reliability and stability in the achievement of business goals.

By the end of the reporting period, the Company mastered an investment program in the amount of RUB 4.9 bln. The volume of financing of design and survey, construction and installation, commissioning works, and acquisition of equipment and materials amounted to RUB 6.1 bln.

The company commissioned more than 278 MVA of transformer capacity, and more than 1,150 km of power lines.

In 2016, the first priority facility of Kubanenergo PJSC investment program, i. e. “Construction of Adygeyskaya SS 110/35/10 kV”, was commissioned. Commissioning of the substation ensured a natural growth of loads of Adygeysk as well as a possibility of connecting new customers and performing agreements for technological connection.

The total connected capacity under the performed agreements for technological connection amounted to 618 MW.

Director General ubanenergo PJSC A.I. Gavrilov

In 2016, the Company entered into more than 30,000 agreements for technological connection to electric grids for a total capacity of 734 MW and with a total value of RUB 5.301 bln (excluding VAT). The amount of collected funds amounted to RUB 1.873 bln (including VAT).

The electric power supply to the grids amounted to 22.732 bln kWh. The increase in power supply in the amount of 699.7 mln KWh (3.18%), as compared with the previous year, is due to the increase in customer demand for electricity in view of the active development of the region. The normative ratio of power losses for 2016 was fulfilled.

An important area in the Company’s activity was still the implementation of the Program of Energy Conservation and Energy Efficiency Improvement. The main goals of the program are reduction of technological losses and consumption of energy resources required for production and economic needs. The benefit of 2016 is expressed in reduction of power losses by 120.2 mln kWh and reduction of costs for acquisition of energy resources required for production and economic needs by RUB 1.3 mln.

In 2016, the Company was developing the updated Innovative Development Program for 2016–2020 with an outlook until 2025. The Company’s goal is to make a transition to electric grids of a new technological mode with qualitatively new characteristics of reliability, efficiency, accessibility, manageability and customer centricity of the power grid complex. Development of cooperation with universities, research organizations, small and medium-sized businesses was continued. Management System, Production Assets Management System, Risk Management and Internal Control System were improved.

Kubanenergo PJSC successfully passed the inspection by the Commission of the Ministry of Energy of the Russian Federation that checked the preparation of the power grid complex for the autumn-winter period. As a result of the Commission inspection, Kubanenergo PJSC obtained a certificate of readiness for the autumn-winter period of 2016–2017 based on the Readiness Assessment Report.

In order to enhance the efficiency and to improve financial and economic performance of Kubanenergo PJSC leading to financial stability and sustainable positive financial result of the Company, an action plan aimed at enhancement of the efficiency as well as economic and financial performance of the Company, that determines a list of internal and external measures that make it possible to improve efficiency, was developed.

The Company’ objective is to introduce a continuously improving system of management and control aimed at effective and optimal use of the Company’s resources with simultaneous introduction of advanced management techniques and methodological tools. In 2016, Kubanenergo PJSC approved and successfully implements two system documents that may, in the mid-run, positively influence the efficiency and quality of the Company’s activities: complex of measures aimed at improvement of the management system of Kubanenergo PJSC and the Plan of Measures Aimed at Development and Improvement of Internal Control and Risk Management Systems of Kubanenergo PJSC for 2016–2018.

In 2016, the specific costs at 2012 values amounted to RUB 6.12 thou per c.u. that corresponds to 15% of reduction in operating expenses for the reporting period against the level of 2012. This positive trend is the result of the Company’s systematic work on cost optimization associated with the enterprise’s operations.

Following the results of 2016, the net profit of the Company amounted to RUB 2.1 bln (RUB 0.7 bln above the level of 2015). This increase is due to growing proceeds from the electricity transmission as a result of net electricity supply growth.

In 2016, Debt/EBITDA amounted to 2.11 that is by 0.12 lower as compared to the parameters of 2015.

Work to reduce power losses is one of the Company’s priority areas. Following the results of 2016, the benefit from implementation of the measures pursuant to this program amounted to 120.2 mln kWh in general (RUB 495.0 mln). Loss reduction measures of the program were fulfilled; the program target level of power losses was achieved.

The Company is interested in creation of the unified center of responsibility for high-quality and reliable energy supply to customers in the territory of the Krasnodar Krai and the Republic of Adygea. In order to increase a market share of electric grid services in the customer basin of Kubanenergo PJSC and reduction of the number of TGC, the Company implements the long-term Electric Grid Assets Consolidation Program.

The Company continued introducing modern information technologies and automation tools. In 2016, automation of the system of equipment maintenance and repair, electronic certificates for substations and power lines was completed at Kubanenergo PJSC, 66.4 km of FOCL were constructed.

In order to improve the quality of customer service in 2016, the Company expanded the functionality of the Customer’s Personal Account interactive service on the Company’s web-site in terms of technological connections and customers service. Further improvement of Personal Account functionality in relation to forwarding request for temporary connection and for reissuance of technical documents is planned.

The Company faces challenges for further development, modernization and expansion of electricity infrastructure in the region in 2017. The main focus will be on the Southwest and Central Power Districts requiring electricity infrastructure improvement.

The priority areas in the field of technological connection are development of the Temryuk District, including energy supply to electric loads of the investment project of national importance named “Construction of Transport Transition through the Strait of Kerch”, construction of Lagonaki ski tourist resort, as well as liquidation of energy deficiency in large industrial and residential centers of the region. i. e. Krasnodar, Novorossiysk, Tuapse.

The main part of investments of the long-term investment program of Kubanenergo PJSC for 2016–2020 shall be spent for reconstruction and technical re-equipment of the existing electric grids.

Overall, based on year-end results, Kubanenergo PJSC fulfilled its main task to provide reliable, high-quality power supplies to customers, and to strengthen the Company’s image, which has great significance for the stable social and economic development of the Krasnodar Krai and the Republic of Adygea.

Director General
Kubanenergo PJSC                                                                                                        A.I. Gavrilov

 Address of the Director General