Quarterly report public Joint Stock Company rosseti issuer Code: 55385-E

4.6. Analysis of Trends in the Issuer’s Core Business

The core business of PJSC ROSSETI is corporate management of a transmission grid company and interregional and regional distribution grid companies. In this connection, it is advisable to consider development trends from the perspective of the Company’s SDCs.
The change in demand for electricity is one of the main trends in the development of the energy sector, determining the parameters of the electric grid sector’s development. According to expert estimates, due to the low projected rate of economic growth and a gradual increase in energy efficiency, 2014–2016 will see the continued slow growth in demand for electricity at less than 0.6% per year.

Over the next 10–15 years, Russia will have to introduce technologies that are already used in the grid sectors of developed countries. Specifically, it is necessary to introduce smart grid technology that improves transmission capacity and energy supply stability, reduces electricity losses, and enables customers to cut costs of electricity metering and billing metering.

Russia’s demand for electricity considerably shifts among regions and populated places. With the reduction of electricity consumption in the rural areas of many regions, consumption substantially grows in large cities. At the same time, the reduction of electricity consumption in urban industrial areas is offset by its growth in areas where office and commercial properties or houses are built. Changes in the geography of electricity demand create the following problems:

- it is necessary to keep all electric grids in working order;

- new investment is required for electric grids on new sites;

- network connection expenses should be compensated for in full.

Insufficient investment in the electric grid sector has resulted in the substantial physical and technological obsolescence of electricity networks.

In accordance with the Strategy for Development of the Electric Grid Sector, a separate area of the development of Russia’s modern energy industry should be the construction of distributed generation.

4.7. Analysis of Factors and Conditions Affecting the Issuer’s Activities

The main factors and conditions affecting PJSC ROSSETI’s operational results are determined by:

- the Forecast of the Socioeconomic Development of the Russian Federation for 2015 and the Planning Period of 2016 and 2017 developed by the Ministry of Economic Development of the Russian Federation, scenarios, basic parameters of the Forecast of the Socioeconomic Development of the Russian Federation, and ceiling prices (tariffs) of infrastructure companies’ services for 2015 and the planning period of 2016 and 2017 with due consideration to the objectives set in the President’s Addresses to the Federal Assembly of the Russian Federation;

- the overall economic activity of customers and the socioeconomic development of Russia’s specific regions;

- the condition of companies’ industrial assets, the necessity of modernizing and renewing such assets;

- the General Layout of Electric Power Facilities and the development schemes and programs for the electric power industry of constituent entities of the Russian Federation;

- payment discipline in the industry as a whole and in Russian specific regions;

- institutional problems in the industry, including cross-subsidy issues;

- governmental initiatives of prime importance, including the Action Plan (Road Map) “Enhancing the Affordability of the Power Infrastructure” approved by Ordinance of the Government of the Russian Federation No. 1144-r of June 30, 2012, and the Plan of High Priority Measures to Ensure Sustained Economic Development and Social Stability in 2015 approved by Ordinance of the Government of the Russian Federation No. 98-r of January 27, 2015.

The operation of the electric grid sector is affected by the following adverse systemic factors: the approval of occasionally economically unfeasible tariff and balancing decisions; the considerable volume of lost income from network connections on preferential terms; the decision to terminate lease agreements with FGC UES, PJSC for last mile facilities without finding a source for covering lost income; the remaining high level of cross-subsidies included in distribution tariffs; the failure to ensure that smoothed minimum regulated revenue is returned in tariff decisions; the formation of balancing indicators different from actual indicators. The financial condition of electric grid companies is also impaired by the impact of the economic crisis: decreased electricity consumption, a reduction in customers’ financial solvency, a rise in borrowing costs.

The Strategy for Development of the Electric Grid Sector of the Russian Federation approved by Ordinance of the Government of the Russian Federation No. 511-r of April 3, 2013, sets strategic goals (targets) for the electric grid sector and defines the principal functions of PJSC ROSSETI.

To ensure the achievement of strategic goals and objectives, PJSC ROSSETI works to improve its operating efficiency and reduce its costs under the Operating Efficiency Management Program of PJSC ROSSETI, which is the main instrument for improving the ROSSETI Group’s operating efficiency.

The main areas of the Program are as follows:

- improve operating efficiency (reduce general and administrative expenses, increase workforce productivity, optimize the structure of repairs, reduce network electricity losses, improve the efficiency of receivables management, introduce the benchmarking system, etc.);

- improve the efficiency of investing activities (reduce specific investing expenses by 30% compared with 2012, conduct the price and technological audit of investment projects worth over 1.5 billion rubles, develop the institution of prioritizing capital investment projects, import substitution, increase the share of purchases using the auction procedure of decreasing prices (reverse auctions), create a centralized electronic trading floor, etc.);

- improve the efficiency of financing and other non-operatizing activities (take measures aimed at stabilizing the financial condition and maintaining credit ratings, optimize borrowing costs, find favorable financing terms, establish and monitor limits on the debt position, sell noncore assets, etc.).