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4.7. Analysis of Factors and Conditions Influencing the Issuer's
Activities
Factors and conditions influencing the Issuer’s activities and results of its activities:
1. Reliability and safety of equipment
and hydropower facilities
Physical wear and technological ageing of fixed assets, enhanced requirements to the reliable and accident-free
operation of the Russian Unified Energy System, the growing need for regulating capacity of daily electricity
consumption in the European part of the Russian Unified Energy System, the increasing threat of man-made
accidents with grave consequences as a result of disintegration of hydropower facilities and generating
equipment, and the increased standards of seismic safety at the location of the Issuer’s HPPs require special
attention to the reliability and safety of assets and funds.
2. Seasons
The Issuer's core business activity has no seasonal nature.
The volume of electrical power generation by the Issuer depends considerably on the available water
inflow in the basins of rivers, where its generating capacities are located, and is distributed non-uniformly on an
annual basis depending on the season. Additionally, possibilities of forecasting, as well as decisions by
authorities regulating water economy relations in the Russian Federation, influence the volume generated.
3. Tariff-making mechanisms
Some of the Issuer’s capacities are located in the Far East, where electricity and capacity markets are not
expected to be liberalized in the foreseeable future. Prices (tariffs) for electricity and capacity are still subject to
state regulation within the Far East. All volumes of electrical energy and capacity in the given territory are sold
at adjustable prices (rates) through one buyer in the East UPS and through the guaranteeing supplier in the
territory of isolation zones. Tariff settlement for generation is possible only on the basis of the cost plus method.
According to this method, inclusion of investments in the tariff is almost impossible. Taking into account the
governmental policy aimed at the accelerated social and economic development of the Far East, the tariff-
making mechanisms for the region may fail to ensure the profitable operation of the Issuer's generating
capacities in the region. The tariff situation applied in the region also does not create economic motivation for
improvement of the effectiveness and construction of new generating facilities. At
the same time, liberalization
of the wholesale market in other regions may fail to guarantee the Issuer’s profits sufficiently for cross-subsidy
of the Far Eastern region.
4. Russian hydro potential
development pace
Russia’s undeveloped hydro potential is concentrated in the areas where there are currently no large consumers
or the required infrastructure, while the tariff-making model does not provide for the required rate of return on
investment. At the same time, development of these territories is a key direction of the Russian regional policy.
5. State support
of the Issuer
The specific nature of the Issuer's activity is defined and will be defined subsequently through availability of two
basic vectors: the need to resolve state problems while ensuring the Issuer's business value increase.
6. Forming a new model of markets
The forming market model will define in the long term the efficiency and reliability of operation of electrical
power plants using renewable energy sources, the development rates of their use, and the degree of
compensation for the unique contribution by HPPs to system reliability. Currently, regulatory documents
defining the rules of markets (capacity market, system services market, retail markets) are being updated.
7. Participation in securities market grouping
Inclusion of the Issuer's securities in the listing of leading markets imposes strict requirements in terms of
information disclosure in accordance with requirements of stock exchanges and market regulators, both Russian
and international.
8. Development of electrical power generation based on other renewable energy sources (wind, warmth of
the earth, small hydro power, and other energy). The focus on development of electrical power generation based
on renewable energy sources in the world, the need to diversify energy sources and reduce load on the
environment along with the availability of considerable undeveloped potential of renewable energy sources
under the conditions of adopted legislation supporting generation in pricing zones of the wholesale market in the
Russian Federation open up fresh opportunities for development of electrical power generation based on the
renewable energy sources both at the wholesale and retail markets. The Issuer prepares projects for participation
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in competitive selection at the wholesale market, implements pilot projects on construction of RES generation
facilities in isolation zones of the Far East for subsequent transition to implementation of the full-scale programs.
9. Possibilities
of related sectors
Research and development, design and survey, engineering and construction sectors have sustained considerable
losses in the past few decades due to the low demand for their products and services. Limitations caused by the
shortage of goods and services in these markets may considerably affect the rate of the Issuer’s development.
10. Staff assistance
One of the most acute problems of large-scale hydro power development is the shortage of engineering and
technical personnel.
11. Global climate change
The problem of climate change has increasingly greater direct influence on the Issuer’s activities, which
is represented in complication of forecasting water regimes due to the growth in deviations of hydrographs and
weather records.
12. Inflation influence
It should be noted a significant inflation rate influence on the financial results of the Issuer. It can lead to
an increase in the Issuer's expenses and, as a consequence, to the slump of profit and efficiency of the Issuer's
activities. In addition, inflation rate is associated with cost increase of loan funds for the Issuer that is
characterized by a risk of shortage of working assets of the Company.
Forecast concerning duration of the specified factors and conditions
The given factors and conditions may have a great impact on the Issuer's activity within the next several
years.
Steps taken or planned to be taken by the Issuer in the future for the effective use of these factors
and conditions:
- Overcoming the trends of growing obsolescence and physical deterioration of equipment, raising
reliability and safety of hydro power plants at the expense of the Complex Modernization Program for
Generating Facilities.
- Balanced development meeting the interests of all groups of shareholders, new schemes of financing
and property distribution, including efforts to determine forms of and procedure for the state’s participation in
the Issuer’s projects;
- Opening opportunities and submitting projects to the state and regions concerning industrial,
infrastructural, and social development requiring operation of hydro power plants and constant demand for their
output;
- Assistance in forming a model of markets ensuring efficiency of RES construction and ensuring
adequate compensation for the Issuer’s contribution to system reliability;
- Development of competencies with regard to work in publicity conditions, meeting the requirements of
the investment community and minority shareholders, and also using the best
corporate management practices;
- Developing an effective system of interaction with key participants of resource markets, reduction of
risks through businesses diversification, support for sectoral science and innovation technologies;
- Creating an effective system of engineering personnel training, including the system of interaction with
specialized educational institutions, and also mechanisms stimulating an inflow of personnel into the sector, as
well as development of professional knowledge and skills;
- Creation of the water regimes forecasting and observation system. Methods used and planned to be used
by the Issuer to reduce the negative effect of factors and conditions affecting the Issuer’s activities:
- Strategic
planning;
- Investment planning;
- Business planning;
- Budget planning;
- Tax planning;
- Corporate management;
- Applying modern motivation systems;
- Enhancing financial control and introducing a cost-cutting program;