Development strategy for 2018–2028

Development strategy

The Board of Directors approved “Samruk-Energy” JSC Development Strategy for 2018–2020 on August 28, 2018 (BOD Minutes No. 08/18).

The strategy of “Samruk-Energy” JSC is based on the current positions of “Samruk-Energy” JSC considering key trends in the external environment and power industry that influence operating conditions of the company. Strategic objectives and tasks of the Company were set on the basis of PESTEL analysis, the study of macroeconomic and industry trends, as well as analysis of the internal environment.

Macroeconomic trends

As of today, the global energy sector faces a major challenge in finding the right balance between the components of energy trilemma: economic availability of electricity, security of supply and environmental sustainability.

At the same time, the priority of balancing the components of the trilemma, as a rule, is largely determined by a country’s level of development and changes from the economic availability of electricity in the case of emerging countries to environmental sustainability in the case of developed ones.

Global energy trilemma, changing of imperative as the result of country’s development

Key challenges

Today the Company faces a number of key external and internal challenges, which are a consequence of the current situation of the Company, the characteristics of the external environment and trends in its development.

Key external challenges
1

Establishment of the capacity market

Expectations on reducing the deterioration level of generating equipment for uninterrupted operation of existing power plants of “Samruk-Energy” JSC as part of electric capacity market. It is planned to ensure the construction of new and retrofit, reconstruction of existing facilities.

2

Establishment of the EEU common electricity market

As a result of the formation of the common electricity market of the EEU, the Republic of Kazakhstan will not only have simplified access to the markets of the member countries of the Union, but will also increase the openness of the domestic market for external electricity suppliers.

3

Availability of free capacities

A significant part of generation in the Republic of Kazakhstan is combined that is, supplying electricity to affiliated companies. The power units in the structure of combined generation as a whole are described by a higher level of load in comparison with power plants operating in the free market and have a guaranteed sales market. The development of combined generation limits the Company’s market opportunities for expanding sales (active competitors, insufficient competencies, high rates for inter-regional electricity transmission).

4

Decrease in coal sales volumes

The decrease in loading of own stations operating on Ekibastuz coal negatively affects coal sales volumes. The growth potential of Ekibastuz coal consumption by thirdparty consumers in Kazakhstan is little. The volumes of supplies to the Russian Federation are variable in nature and this is because of an increase in electricity consumption in the RF. At the same time, Russia continues pursuing its policy regarding the partial conversion of Russian coal-fired power plants to domestic producers’ coal or natural gas.

5

Toughening of environmental legislation requirements

Currently, there is a steady trend in the world to reduce the level of environmental pollution. The commitments made by the Republic of Kazakhstan, as an active participant in international relations in environment field, and Samruk- Energy, as an environmentally and socially responsible company, determine the need for a proactive response to trends in the field of environmental protection.

6

Changes in the regulatory environment for the development of RES

The mechanism of auction tenders for the construction of renewable energy facilities was introduced. Auction are held on the principle of reducing the price of electricity, starting from the established ceiling auction prices, for participation in which it is necessary to provide a collateral.

7

Business digitization

Currently, there is a trend in the world for digitization of production and operational processes, which contributes to optimization of time costs, increase of operational efficiency and development of analytical data obtained in automated mode.

Key internal challenges
1

Comprehensive privatization plan

The need to ensure the sale of the Company’s assets as part of a comprehensive privatization plan for 2016–2020 at a fair market price.

2

Improving operational efficiency

The need for significant improvement of the Company’s operations.

VISION

An efficient high-tech operating energy company – the leader of Kazakhstan power industry

MISSION

To create shareholder value, meet the growing demand through reliable supplies of energy resources, high-tech development, while relying on the principles of sustainable development

SWOT analysis of “Samruk-Energy’s” JSC standing

Strengths

✔ НAvailability of large reserves of thermal coal with a low production cost
✔ Efficient power facilities against the general level of wear and tear of facilities in the Republic of Kazakhstan
✔ Support from both the state and the Fund

Weaknesses

✔ Low capacity factor
✔ Low opportunities of quotations management/p>

Opportunities

✔ Boosting electricity generation through the annual growth of electricity consumption, improving competitiveness and implementation of investment program
✔ Development of export potential
✔ Improving the balance of capacities in accordance with market demand (TPP, CHP, HPP, RES)
✔ Development of RE generation in conjunction with a strategic partner
✔ Expansion of coal use directions, including through coal preparation

Threats

✔ State policy on constraining tariffs ( “tariff silence” principle)
✔ Preservation and expansion of combined generation
✔ Growing gap between the supply and demand of generating facilities
✔ Toughening of environmental legislation
✔ Improving access to the RK market through promotion of unified electricity market of the EEU.
✔ Volatility of geopolitical situation in neighboring countries
✔ The rise in the cost of major investment projects resulted in the change of currency exchange rate

Strategic goals and objectives

Strategic goals

Ensuring reliable competitive energy supply in the markets where the company operates

Maximizing shareholder value

Sustainable development

Strategic initiatives

Increasing the sales margin

Performance improvement

Effective implementation of investment programs

Corporate governance and sustainable development

Objectives

✓ An increase in sales of energy and coal in domestic market
✓ An increase in sales of energy and coal in foreign markets

✓ Improvement of operating of efficiency of existing facilities
✓ Innovative development and digitization
✓ Improvement of financial stability
✓ Transition to the target structure of assets
✓ Implementation of the Company’s transformation program

✓Implementation of investment projects

✓ Effective corporate governance
✓ Human capital development
✓ Implementation of sustainable development initiatives/p>

The results of the implementation of key strategic objectives

✔ An increase in sales of electricity and coal in the domestic and foreign markets

The company supplied 28,6 bln. kWh electricity, including 966,5 mln. kWh for export to Uzbekistan.

✔ Performance improvement

As regards this objective, a number of activities on optimizing production costs have been taken, including: Unit fuel consumption (coal, fuel oil) and water costs for process needs were reduced at “SDPP – 1” LLP, as a result of which the savings amounted to about 1 bln. tenge. The effect from optimization of costs for fuel and energy resources (diesel fuel, gasoline) amounted to 71 mln. tenge. The benefits from reducing expenditures for repairs, which were conducted considering the technical condition of the equipment amounted to about 1 bln. tenge.

✔ Innovative development and digitization

As part of the project “Technologies for furnace devices of boiler units for firing high-ash coal of the Ekibastuz deposit (R&D)”, a research laboratory was established at the premises of Nazarbayev University. With respect to the project “Fuel oil free boiler startup system”, an engineering analysis was conducted among equipment suppliers in China, and laboratory tests of Ekibastuz coal were also conducted in China. An initial study was conducted in order to determine the readiness of the current infrastructure for digitization projects; the Digitization program’s concept based on the study results was prepared. The project “Implementation of an automated power control system” was also launched.

✔ Improvement of financial stability

As part of the measures taken by the Company, according to the 2019 results, the target values of the financial stability ratios Debt / EBITDA, EBITDA / Interest expenses, Debt / equity set out in the Debt Management and Financial Stability Policy were achieved and, accordingly, the green risk zone was accomplished.

✔ Effective implementation of investment program

The Company strives to implement the investment program effectively and comply with the required level of return on equity. The most important ongoing projects with medium-term implementation horizons are “Expansion and reconstruction of Ekibastuz SDPP-1 facilities (Restoration of Unit No. 1)”, “Expansion and reconstruction of Ekibastuz SDPP-2 with installation of Power Unit No. 3”, “Implementation of the project on the transition to cyclic and continuous method of coal mining, transportation, blending and loading at the Bogatyr open-pit mine (CCM)”, “Construction of a 50 MW Yereymentau wind farm”, “Construction of a 60 MW wind farm in Shelek village of Almaty region”. The project “Modernization of the Shardarinsk Hydropower Plant” is at the completion stage.

Achievement of strategic KPI

Description 2017 actual 2018 actual 2019 actual 2020 forecast 2021 forecast
1 Net income, bln. tenge –27,9 3,2 6,8 7,0 37,9
2 Debt/EBITDA (ratio) 4,64 3,18 3,31 3,04 1,98
3 ROACE, % –1,20 2,99 3,43 3,63 7,55
4 Net asset value (NAV), bln. KZT 382,9 385,3 392,1 399,1 437,1
5 Corporate governance rating В ВВ ВВВ
6 Electricity market in the RK, % 28 29,7 28,5 26,8 28,4
7 LTIFR 0,17 0,28 0,33 0,23 0,22

In general, the Company’s strategic indicators have a trend to improve in the period from 2018–2021. The main growth factors are an increase in sales of electricity and capacity in the domestic market, the receipt of individual tariffs for capacity, the reduction of unit fuel and water costs for process needs, reduction of costs for fuel and energy resources, and the reduction in debt burden.

At the same time, negative factors influencing strategic indicators are foreign exchange loss, rising prices for production services and works. The excess of current indicator of Net income for 2019 compared to the same period last year amounted to 3.6 bln. KZT or 213 %. The positive deviation is because of the decrease in expenses from non-core operations due to the reduction of losses from impairment of assets, foreign exchange losses and an increase in the share of profit accounted for using the equity method.

According to the 2019 results, “Samruk-Energy” JSC reached the target values of financial stability ratios (set by the Debt Management and Financial Stability Policy) and accordingly reached the green risk zone. Thus, the strategic indicator Debt / EBITDA was 3.31, with a covenant of 3.5. The actual ROACE indicator for 2019 as a percentage is higher than the indicator for 2018 by 15 %. The indicator improved owing to the decrease in the Company’s debt for the period 2018–2019 by 30,9 bln. KZT.

Net asset value, NAV for 2019 increased compared to 2018 because of an increase in the Company’s net income for 2019 in the amount of 6.8 bln. tenge. Based on the results of corporate governance diagnostics, “Samruk-Energy” JSC was assigned a Corporate Governance Rating of BB in 2018, corresponding to the maturity level of “medium”, which means that the corporate governance system of the Company meets in most essential respects most of the established criteria.

According to the Shareholder’s Expectations for “Samruk- Energy” JSC, the target indicator of corporate governance rating for 2019 has not been set, for 2020 it is set at BBB. The decrease in the Market share against the 2018 actual is because of the existing demand in the market, as well as due to the lack of economic feasibility of export to the RF. As regards LTIFR, the indicator is deteriorated due to the introduction of a transparent system for registration of all accidents (introduction of a moratorium on taking disciplinary actions for identified accidents).

Transformation Program

“Samruk-Energy” JSC has been implementing Transformation Program since 2015 in order to achieve strategic development goals. The transformation program allows identifying and creating the right directions for the development of the Company, reaching a new level and increasing the value of its assets, which is one of the significant strategic goals.

From 2015 through 2019 the Company completed the projects: “Introduction of target processes”, “Development of sales processes and introduction of trading”, “Introduction of the new corporate finance model”, “Introduction of the new IT model”, “Introduction of the new strategic planning and performance management model”, “Transition to the target organizational structure”, “Category procurement management”, “Introduction of the new risk management model”, “Release of Inventory”.

In 2019, the company three times exceeded the target on financial benefits under the Transformation Program, as a result received 10.3 bln. tenge of net benefits.

“Samruk-Energy” JSC updated its Projects Portfolio in 2019. The Company decided to focus on production tasks to increase production facilities, including by using digital resources. The updated Project Portfolio consists of 7 initiatives, includes 4 projects and 13 activities with a budget of 6.38 bln. tenge and net benefits of 27.52 bln. tenge are expected to be made until 2025. Each of the initiatives was developed taking into account the strategic goals and objectives of the Company for 2018–2028.

To achieve targets of the strategic performance indicators, “Samruk-Energy” JSC will continue its work on all of the above-mentioned strategic initiatives and objectives according to a plan.