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President of Russia Vladimir Putin: Mr Shulginov, let us begin with the results of the company’s performance in the past year.

RusHydro Head Nikolai Shulginov: Thank you, Mr President, for giving me this opportunity to review the company’s performance as a whole, the entire RusHydro Group, including some detailed issues of the operation and development of the power industry in the Far East.

For now, I have the tentative results for 2017, those that do not arouse any doubts. All of our electric power stations generated about 140 billion kilowatt-hours. This is a new record. We have surpassed 2016’s record by about one billion kilowatt-hours. I cannot say that this is due to higher water inflows, because they were registered only at the Volga-Kama cascade and, incidentally, its water reserves are quite large. This also includes a large amount of work on preparing the equipment and on enhancing its efficiency.

In 2017, we commissioned 236 megawatts of capacity.

Vladimir Putin: How did you achieve this?

Nikolai Shulginov: Some 42 megawatts were gained by changing the installed capacity of the modernized hydro turbines at the hydroelectric power stations. And we put into operation the second facility from your Executive Order 1564 – the Yakutsk GRES-2 power station with an electric capacity of 193 megawatts and a thermal capacity of 469 megawatts.

In addition, last year we completed the project for the comprehensive restoration of the Sayano-Shusheskaya Power Station. Those units were brought online but some work continued. Eventually we signed off on all the paperwork on this project.

In December, we commissioned the facilities and are completing this 40-year construction of the Boguchanskaya HPP. We have completed the bridge overpass, surfaced the road and connected both banks of the Angara river. Right bank residents can now easily reach their district centre. It is an important project for both for the Kezhemsky District and the Krasnoyarsk Territory.

RusHydro group revenues were around 396 billion rubles, an increase of 5 billion which is 1.2 percent.

RusHydro group has attained stable financial results by cutting operating costs as well as by streamlining its debt load after we refinanced the Far East companies’ debts following your instruction.

Vladimir Putin: I would also like to ask you about your assessment of the company’s current economic status, keeping in mind the very high load. A number of decisions were taken, how are they proceeding?

Nikolai Shulginov: We can say that today, if we look at the financial indicators, the debt to EBITDA ratio of 1.2 is a good indicator.

At the same time, we have to correctly and fairly consider in a balanced way where we can spend, because RusHydro is a public company, its shares are traded on the stock market, including foreign markets.

The RAO Energy Systems of the East group are regulated companies which are financed only through rate sources, and this is the reason practically all the Far East companies are in the red except for the Far East Distribution Grid Company. All the loans they take out to purchase fuel and pay for repairs, are either under a RusHydro guarantee or are part of the intra-group loan we provide. We have to make a final decision on how thermal generation should be modernized in the Far East as we will not be able to modernise it just like that, with RusHydro loans alone.

Vladimir Putin: As far as I know and as you have told me recently, it would be unwise to base our [energy] policy in the Far East exclusively on prices in the absence of a developed market. Overall, the Government is trying to create good and even privileged conditions for business there, of course, but as I see it, this is having a negative effect on the energy sector.

Nikolai Shulginov: We have not made a pivot to the energy sector yet. For business to develop, the energy sector should grow at a priority pace. As of now, the heat generation sector in the Far East is in a lamentable state; it is worse off than in the European part of Russia. You have issued instructions on modernising the heat generation sector by using the funds that remain following the implementation of capacity supply agreements in Siberia and European Russia. We believe that this programme should also be applied in the Far East, which was not included in the programme at its adoption. Some 30 GW of new capacities have been created in European Russia. There is none of this in the Far East.

We believe that the region must certainly be included in the programme. We have outlined several projects. They are not numerous, and they do not provide for increasing capacities but for replacing 1,300 MW of obsolete capacities. In our opinion, we should not modernise two of these facilities, the Khabarovskaya Thermal Power Plant No. 4 and the Artemovskaya Thermal Power Plant No. 2, which were built in the 1930s, but build new buildings for them. We already have project designs for them. I will insist on the discussion of this programme, so that these two facilities are launched in the Far East, even if as pilot projects.

Vladimir Putin: Please, prepare your proposals. We need a solution that would satisfy you and also the energy sector as a whole, and which would create conditions for development rather than just for maintaining the existing capacities. It is possible that enough electricity is produced there, which we have discussed with you, but some districts do not receive enough energy. Therefore, we need to develop a flexible programme that will promote the development of the energy sector in the Far East without affecting consumers.

Nikolai Shulginov: Ok, we will do this.

I would like to say a few words about our performance last year. We have streamlined our procurement activities by creating a procurement subsidiary, which has already produced a serious economic effect: over 30 billion rubles over the past two years. Moreover, 14 billion rubles have been redirected into the existing contracts, which we have renewed.

Vladimir Putin: Have you benefitted from this?

Nikolai Shulginov: Of course. We did not have to invest 14 billion rubles into equipment and assembly.

Next year, we plan to launch around 1,000 MW hydropower capacity. I am referring to Nizhne-Bureiskaya Hydroelectric Power Plant. Let me briefly describe the situation.

On August 24, a pivoted bearing was damaged and the floodgate fell. After the incident, we continued the work to launch hydropower units. The fourth one has yet to be launched, but it has been completed and has undergone the required tests.

As for the floodgate and the pivoted bearing, we recovered part of the bearing from the water and analysed it.

Vladimir Putin: You have analysed it?

Nikolai Shulginov: Yes, we sent it to Moscow State University to analyse the loads it was exposed to.

Vladimir Putin: Did you run tests on the metal?

Nikolai Shulginov: We tested the loads to make sure that they were not excessive, and the metal itself. Several institutions were involved in testing the metal, but the final independent assessment report was prepared by the National University of Science and Technology MISIS. There are no other reports on the matter. The main conclusion was that the forging technology was not properly used. The metal was overheated and became more fragile. In addition, non-metallic inclusions were detected, as stated in the report. Our current goal is to restore the first floodgate that fell.

Vladimir Putin: Who supplied the metal?

Nikolai Shulginov: The manufacturers of the floodgates, hydro-mechanical equipment in general and the axis of the bearing are Ukrainian companies. There is the Novokakhovsky Plant Ukrhydromech that makes floodgates, while the axis was supplied by Dnepropress from Dnepropetrovsk. We decided not to work with these manufacturers any more given the quality of their products. Not only will we restore the first bearing and floodgate, but we will also replace the axis on the other four gates with Russian-made equipment and under supervision of the same institute that will be in charge of monitoring the technology during manufacturing.

Vladimir Putin: However, this has nothing to do with the complex relations we have with our Ukrainian partners.

Nikolai Shulginov: Not at all. This equipment was made back in 2013–2014. We were unable to oversee the manufacturing technology at the time. We will now adopt a different approach by shifting production to Russian plants.

Apart from the Nizhne-Bureiskaya HPP, the 120-MW Sakhalin GRES-2 power plant, the third station under your Executive Order, [will be launched] by the end of the year. The Zaramagskaya HPP-1 in Northern Ossetia-Alania is for 342 MW. The Vostochnaya TPP is for 140 MW.

Vladimir Putin: Are they on rivers?

Nikolai Shulginov: Yes, this will be a unique plant with a very long tunnel and the most powerful pressure in Russia. But not the most powerful in the world, because the plant has been under construction for a long time. It is also a costly project, but we will complete it – must complete it – later this year.

Vladimir Putin: Mountain rivers?

Nikolai Shulginov: Yes. What are mountain rivers known for? There is a lot of water in summer but slightly less so in winter, when power is most needed. But we still need this station.

We will also engage in modernisation. We will increase power at the modernised hydropower plants and modernised turbines. Perhaps we will manage to build several smaller hydropower plants that we are building under the power supply contracts programme.

This year, we also plan to decide on centralising the internal audit with regard to the key subsidiaries, because it is scattered and inefficient. We will centralise maintenance at the thermal power plants in the East. Several maintenance subsidiaries have been inefficient and we need to centralise them. After the disaster that hit the Sayano-Shushenskaya HPP, we also centralised maintenance at hydropower plants. Now we will do the same for the thermal power plants.

We would also like to fulfil the plans we are outlining to reduce company loss ratio, particularly at the generating companies in the Russian Far East. Last year, losses amounted to about 5 billion [rubles]; in 2018, we are planning to come down to 3.5 billion. But over there this is linked to the price of fuel – coal – which is not regulated. Coal prices have grown by 22 percent on average and tariffs by 2 percent. This means that the debt is building up.

There are other issues as well. A separate request I would like to make to you is that you give comprehensive consideration to provision of gas supply, I mean issues of gas infrastructure development in Kamchatka and energy issues in Kamchatka.

Vladimir Putin: You mean, in the short run?

Nikolai Shulginov: Yes.

In Sakhalin, the contract will expire in 2025, but already now we should prepare for the Sakhalin-1 project. And with regard to Primorye Territory, too. All of this should be linked. There is also the Power of Siberia [pipeline]. This is a major export direction, but we still need to consider everything definitively.

Vladimir Putin: Please, submit these proposals, because this region needs a separate programme; it must be coordinated between agencies and with our major raw materials producers.

Nikolai Shulginov: I will do that.

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