Page 112 - RusRPTNov19

over to foreign contractors, such as localisation of investment in gas turbines or planned 5G network rollout .
Russia's Ministry of Energy has submitted a federal law draft that would increase Federal Grid Company's (FGC) tariff for those largest industrial consumers directly connected to high-voltage grid. The initiative, potentially harming the largest energy consumers, seeks to reallocate cross-subsidization from smaller industrial players plugged into lower-voltage grids of MRSKs to Federal Grid's direct consumers. The measure was previously opposed by the Federal Antimonopoly Service (FAS) and the Ministry of Economic Development. As reported by bne IntelliNews, energy consumers are getting the burden of capacity modernisation drive shifted to them through higher tariffs, especially in the renewable energy sector.
The latest developments in the Russian utilities space - new modernization tenders, KOM prices (from a capacity auction) that are set to be strong until 2024 , and positive spot price dynamics - are all positive for gencos. We therefore maintain our positive view on the sector as a whole, and continue to favor InterRAO, OGK-2, and TGK-1. From a fundamentals standpoint, we like their high free cash flow yields and elevated dividends secured by cash flows - even taking into account modernization capex. In addition, despite the fact that they have considerably outperformed other gencos since our last sector update in February, we think there is still upside on the table. Modernization contracts for 2022-25 allocated. Following the tenders, a government commission has allocated additional projects to be launched in 2022-24. InterRAO and Unipro seem to be the main beneficiaries, having captured 43% and 17% of all the projects in terms of MWs and 24% and 8% in terms of capex. We expect the projects to be value-accretive for the companies, though future tenders could change the picture and so we believe the actual impact on EBITDA will not become clear until the mid-2020s. We think market participants are focused more on the long-term sustainability of cash flows secured by modernization contracts than on their financial impact at the moment, as the positive FCF effect is still some way from materializing.
RusHydro posted its operating results for 3Q19 and 9m19 on October 22.
After the dramatic output declines of 26% and 17% y/y in the Center of Russia and Siberia in 1H19, these regions managed to post an increase in production in 3Q19 - output was up 4% y/y in the latter and 3% in the former. While this bodes well for the financial results, we note that elevated water flow seems to have affected spot electricity prices, especially in Siberia. Higher production from price-taking HPPs has decreased the load of price-setting coal-fired units, which resulted in a significant 25% y/y decrease in spot prices in Siberia in 3Q19.
9.1.12 Transport sector news
Russia wants to make its Arctic waters more attractive to shippers than the Suez Canal and could be willing to compensate for potential risks to make that happen. President Vladimir Putin has made development of the Arctic one of Russia’s top long-term priorities and huge projects to export liquefied natural gas via the Northern Sea Route have already lured investors above the Polar Circle. But shippers of other products remain reluctant to make the detour from the Suez Canal toward the Arctic due to multiple risks. To deliver a cargo via the Northern Sea Route today, a shipping company needs an ice-class vessel or an icebreaker and to pay insurance costs more than twice
112 RUSSIA Country Report November 2019 www.intellinews.o