“In 2014, we will start generating returns resulting from asset consolidation”
Inter RAO has made a huge leap over the last three years, transforming from an energy export and import operator into one of the largest diversified energy holdings in the world. In his interview Dmitry PALUNIN, Member of the Management Board and CFO at Inter RAO, talks about particular aspects of financial strategy development in a large international corporation, financially efficient integration of assets, and maximization of profits in terms of tightening sector regulation and turbulent financial markets.
What are the special aspects of financial management at a company like Inter RAO?
Inter RAO is a truly unique company. There are not many companies in the world that cover such a great variety of business areas: it is one of the major generation companies in the country, a powerful engineering unit, a trader, a center of scientific research, a participant in numerous large-scale international projects, and a retailer. In English, there is a term “footprint.” Referring to a company, it means “the scope of activities.” So, in case with Inter RAO, this footprint is truly great; we are a really significant company, even by international standards.
No wonder, this status implies a great responsibility the company bears for its financial operations, including in the capital, FOREX, derivatives and other markets. All these activities involve a lot of national currencies: Inter RAO operates with 14 various currencies, despite the fact that we are a Russian company and the Russian Ruble is our base currency. And the goal of the company’s Financial and Economic Center is not so much to manage this complex structure as to make it operate effectively, continuously, uninterruptedly, even more accurately than a clock, and make it profitable as well.
However, despite the wide scope of activities conducted by Inter RAO, its bottom line is still under pressure. Why do you think this is happening?
There is no short answer to this question. Inter RAO has restructured itself into a group of companies quite recently – we have just finished the consolidation of our assets. In recent years, we have been growing in size at a record pace, owing to a number of successful M&A transactions. In the last ten years, our assets, revenues, and other key indicators have increased by more than 100 times.
However, the active growth phase is already over, and the key issue on our agenda today is improvement of operational efficiency: we have to translate the scale and coverage of our business into growth of financial indicators and an increased value for our shareholders and investors (including debt investors) as well as for the Group’s employees and other stakeholders. In this regard, 2013 is a momentous year for us. Upon the completion of the consolidation process, all our companies will have to follow a single path, which includes unified management standards, standard documents, development priorities, etc. And we expect that our financial indicators will start growing as soon as in 2014.
Are there any signs of this growth today?
Sure, and there are both purely economic (reduction of the administrative headcount, cost savings) and management-related signs (synergies from the introduction of standardized techniques and practices at our plants, centralization of procurement, production, and repair activities). It stands to reason that a power generating unit at Sochinskaya TPP and another one, let’s say, Kharanorskaya TPP are separated by many thousands of kilometers, and they operate under different conditions. At the consolidation stage, we noticed that these subdivisions of the former OGK-1 and OGK-3 had become unique in terms of financial and business planning processes over the last years, despite operating in the same sector. Nevertheless, we have managed to standardize financial and economic business processes, taking into account all particular aspects of their activities. And now, we clearly observe the synergies based on the best practices that we borrowed from various companies.
It is not a secret that many investors have been expressing their discontent with the Russian energy market recently. The main complaints concern its unpredictability, frequent changes in the game rules, and uncertainty that the market has to face after the introduction of capacity provision agreements. As a finance specialist, do you agree that the energy sector has become much less attractive for investors?
First, it is in the market’s nature to be unpredictable, and when you enter it, you choose your strategy on your own. And the strategy, in this context, can be either entirely speculative (in this case, you count on high returns) or conservative (when you aim merely to protect your funds from inflation).
Second, I do not think that the regulator’s actions have a dramatically negative effect on the sector.
And finally, look at the energy sector anywhere else in the world; let’s take Europe: this market took shape only 15–20 years ago, not earlier; before that time, the situation in all areas had been fully controlled by the state. And now, compare it with financial markets: some countries have had exchange markets, as well as the concepts of financial markets, exchange rates, and stock prices for 300–400 years, and the game rules had been surely established long ago. European energy companies are almost entirely owned by the state or have been run by the state until fairly recently. The market is young and developing, it is creating its game rules; and this is how things are across the entire world. It is a natural process, and those who invest in this market should not hurry either. This is not a market for speculators.
What plans do you have regarding further activities in capital markets? Previously, you announced plans to conduct an IPO abroad.
It is still too early to talk about it. To begin with, we have to build a consolidated company that will be strong and stable, with good financial indicators, a company that will be very attractive for international investors.
However, it should be noted that our current negotiations across the markets reveal certain interest in Inter RAO, for example, on the part of debt investors. And there are particular reasons for it. We are more transparent and, it may be said, friendlier than other players. Many business processes that have been standardized and successfully applied within our company since long ago are still regarded as something new by many Russian companies. For example, this concerns operations in the hedging market, analytics, as well as cooperation with international debt investors. We have strong positions in these areas, confirmed by our successful cooperation with the largest investment organizations and banks, such as Vnesheconombank, EBRD, European Investment Bank, KfW, ADB, largest export insurance agencies (EXIAR, Euler Hermes, etc.).
We are constantly developing and focusing on best practices of the largest international energy companies that we cooperate with in this market in one way or another. We are exchanging experience with them. At the same time, we have never copied any decisions, practices, or development models covertly. At this point we stick to our own truly original way. For example, consolidation: few companies in Russia have been able to make such successful deals of a similar scope and in similar timeframes.
Let’s get back to the role of the state: after the notorious regulatory decisions, we see that power supply companies have lost their supernormal profits, some of them have become loss-making. What is Inter RAO financial strategy in this area?
The retail sector, taken as a whole, is still looking rather steady. There is no doubt that today, power supply companies cannot make the same profit as they used to make, and it has become harder for them to operate.
Therefore, power supply companies have to learn to live within the funds allocated to them as sales premiums. They should learn to deal with local regulators, regional and municipal government authorities: substantiate the required level of sales premiums with supporting documents and, most importantly, with financial forecasts. They should explain to the regulator that otherwise, the retail sector will simply be unable to function steadily in this situation.
Does the Group still need power supply companies in these circumstances?
It surely does. We are not resting on our oars; we are implementing a large-scale initiative to reduce costs across the entire retail sector; it has already been implemented with regard to semi-fixed costs. And again, we are generating synergies by introducing a unified system of approaches and methods applied to document flow, accounting statements, and, consequently, forecasting. Thanks to its automation, the system will allow us to considerably reduce costs. We will continue working in this way.