Public Joint-Stock Company Federal Hydro-Generating Company – RusHydro (OTCQX:RSHYY) Q2 2020 Earnings Conference Call August 27, 2020 9:00 AM ET
Dmitry Yakovlev – Investor Relations Manager
Andrey Kazachenkov – First Deputy Chief Executive Officer and Member of the Management Board
Conference Call Participants
Sergey Beiden – Renaissance Capital
Vladimir Sklyar – VTB Capital
Sergey Garamita – Raiffeisenbank
Matvey Taits – Sova Capital
Igor Goncharov – Gazprombank
Anastasia Tikhonova – VTB Capital
Dear ladies and gentlemen, welcome to the conference call of RusHydro. At our customers’ request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. [Operator Instructions]
Now may I hand you over to Dmitriy, who will lead you through this conference. Please go ahead.
Dear, ladies and gentlemen, thank you for joining us on the call following the release of consolidated financial results of RusHydro Group for the Second Quarter and First Half of 2020, most recent developments and outlook throughout the rest of the year. Participating in the call today is First Deputy CEO, member of the management Andrey Kazachenkov as well as line managers from sales, business planning, and operations. The report and the presentation are available on our website in the IR section and in the Google terminal as well.
Please note that some information announced during the call may contain projections or other forward-looking statements regarding future events or future financial performance of RusHydro Group. Please refer to the beginning of the presentation for a full disclaimer.
Now I will give the floor to our speaker, First Deputy CEO, member of the Management Board, Andrey Kazachenkov.
Hello, dear ladies and gentlemen, thank you for your participation in our quarterly conference call. I would like to begin the call on a positive note. As you know, RusHydro Group has managed to deliver a record high financial results benefiting from systemic initiatives that cost side, aided by sustainability of our business model, commissioning of new capacities and favorable [hydro driven environment]. So given the hardship in the economy overall and globally, we managed to go through this difficult period of time with really good results, and we will continue to do it this year and in the future.
I will now cover the main highlights of the first half of the year. In terms of output, we had a remarkable first half of the year with total production, including Boguchanskaya Hydropower plant, reaching 78 terawatt hours, an increase of 23% of over first half of 2019. I will talk more about operating results shortly.
In February, we have commissioned Artemovskaya Hydropower Plant One, with installed capacity of 346 megawatts. It’s built on the capacity plan agreement, and we expect annual contribution to the group’s revenue of RUB 10 billion per year. Just recently, we have launched 10 megawatts, Nizhne-Bureyskaya small hydropower plant. It’s the first renewable investment projects in Russia under the capacity supply agreement in terms of small hydro plants. Annual revenue contribution of this plant is roughly RUB 500 million.
The Board of Directors approved new investment program. It includes four new DPM-2 projects in the Far East that will guarantee return on investment. We have only one project left for commissioning this year with non-cash impairments affecting the net profit of 2020 and this is the Sovetskaya Gavan power plant, it’s on time to be commissioned in the third quarter of 2020.
Now, 2021 and 2022 will be most likely impairment free with no major project scheduled for commissioning during the period. I would like to highlight that the program is balanced in terms of financing services. Our management’s ongoing focus on improving operational efficiencies continuing to give results. Our manageable operating costs in the first half of the year remained flat year-on-year, while the manageable costs in the second quarter were 2% below the second quarter of – respective quarter in 2019.
Following the divestment of Max, the group’s financial debt has been reduced by $56 million. We no longer have any unhedged foreign currencies and eliminated debt exposure. We have also concluded an FX swap with SUEK Group. So with swap the Luchegorsky coal mine and 1.5 gigawatt [indiscernible] [GRES-2] with SUEK for 42% stake in deck following the transaction.
The share of coal-fired electricity generation decreases and prolong with emissions from this very old coal-fired power plant so this is in-line with our ESG strategies to reduce exposure to all coal technologies and to focus more on ESG friendly technologies. An update on the COVID-19 situation, a brief update, so nothing new in terms of negative news, the situation is under control. We do not see any risk of loss control. So today, there has been a limited number of COVID-19 positive cases in RusHydro Group, and this difficult situation doesn’t accept materials business of RusHydro, and you see the proof of this in our financial statements.
So, now let’s move over to the results. Slide 5 and 6 of the presentation, please. So, I have mentioned earlier, production-wise, we had a record first half of the year. Total electricity production, including Boguchanskaya hydropower plant increased 24% year-on-year to 78 terawatt hours per year. Hydropower plant production increased even more by 32% on the back of increased water inflows and below 2019 base effect. Water inflows to reservoirs of the majority of the hydropower plant were above the normal level with inflow storage in Nizhne-Bureyskaya hydropower plant, at all-time high historic record.
At the same time, as you see in the slide, electricity production from the less marginal Far East segment thermal power plant was flat year-on-year following Hydropower plant production. The situation normalized in July as inflows to most reservoirs were at the level of July 2019, yet, still above the normal level.
We do not expect any risk to production in the third quarter of the year, as well as of when the August water storage as the majority of the reservoirs remains at the normal level or slightly above. In our view, climate change is among the factors behind stronger-than-expected water inflows. In light of the above mentioned, we do not foresee significant volume risks going forward this year and in the next period.
Our Market overview is presented on Slide 8. And our first half post-market price performance scheme is expected. So, you see some decrease in prices. And at the same time, there are some increases in prices in the second price zone in comparison to the 2019 year-end. Once again, I would like to remind that RusHydro price taker well dependent on power consumption dynamics and spot prices and most power generation companies due geographic diversification of our fleet and the role of Hydro in the power system.
Slide 9 is well explanatory. As you can see, our tariffs arise in line with inflation of provided stability to our regulated business in the Far Eastern Hydro district. Regulated tariff outlook will change with introduction of long-term regulation in the Far East, which has been postponed until 2021. The mechanism will be in effect for five years continue to sell sustainability of our Far Eastern business.
At the same time, we will see this trend on Slide 12. So the EBITDA margin of our Far Eastern business is 15.2% as of the half of the year. So the profitability of this segment, of course, is lower than our major hydropower business, but this business is self-sustaining with positive margin – EBITDA margin overall. So – and looking at different parts of economy in the Russian Federation and globally overall. So to have 13% EBITDA positive margin in this time, which is not so bad in comparison to some other market situations. So this business is more or less again will improve step-by-step gradually.
So, let’s now continue to Slide 11 and 12 with our financial results. We have a record highs of [indiscernible] systematic initiatives aimed at deficiency improvement aided by commission of new capacities and favorable hydrological conditions. Additional revenue and EBITDA contribution came from Zaramagskaya hydropower plants and most recently launched Nizhne-Bureyskaya plant consolidated revenue in the second quarter of 2020. And the first half of 2020 increased by 10% to RUB 100 billion and RUB 218 billion, respectively, on high electricity and capacity sales. 71% of revenue came from electricity and capacity sales.
Overall, cost dynamics in the first half of the year remains moderate as the grading expenses increased below inflation and 1.4% year-on-year. Moreover, thanks to effective cost management of our manageable expenses. They were flat year-on-year. In the second quarter of the year, the cost optimization measures [indiscernible] manageable expenses decreased by 2%. Please see Slide 12 for a breakdown of operating expenses.
In light of the above mentioned, EBITDA increased by 46% and 33% in the second quarter in the half, reaching RUB 31 billion and RUB 67.7 billion, respectively, with EBITDA margins of 31%. Our EBITDA stands at all-time historic record, and our LTM EBITDA now is about RUB 114 billion. The Hydropower segment EBITDA margin stands at a remarkable 70% level, given the nature of the business hydro’s role in the power system, the segments have significantly lower production costs as compared to fossil fuel electricity production companies. The segment contributed 73% of the consolidated EBITDA.
Nonetheless, therefore, Eastern segment financial performance in the first half of 2020 has improved significantly. The segment’s EBITDA increased by 39% and the margin reached 15% as I just covered. We have indicated earlier that our consolidated EBITDA margin for the year is expected to be in the range 25% to 30%. As you can see, we stand at a good point to deliver better results by the year-end, and we will do our best to finish this year with remarkable results.
Now, let’s go to Slide 14 and look at RusHydro’s financial position. So, there are no big news or discoveries on this slide. The company has a very strong financial standing in terms of debt. So, not much risks, [global debt], fixed rates, predominantly. So – and all financial ratios and repayment schedule are at good, solid, comfortable levels, and positions. So Central Bank’s latest trend of lowering the key rate has played an important role, as well as by reducing the cost of funding and consequently the average – weighted average cost of capital.
Finally, let us look at Slide 15. We see a lot of positive factors that will drive our financial performance in 2020 and to improve the long-term outlook for our business, primarily in the Far East.
So to sum up, at all, our business remains diversified, sustainable and well equipped to withstand any temporary economic challenges, including COVID-19. We expect the earning potential of our business starting to unfold as of this year, which should spill over into better returns for shareholders and stronger balance sheet.
Our leverage is on comfortable levels; we’re socially responsible company with direct focus on sustainable development; ESG aspects among, our top priority is our environmental policy targets are on track. As opportunity arises with coal-fired facilities or convert them to natural gas.
So, we expect that all projects under the DPM-2 modernization program will be at maximum level of natural gas power. So, just recently, we have launched a floating solar power plant at the Nizhne-Bureyskaya Hydropower plant reservoir. So, you will probably ask about the dividend.
So, we have just appointed our AGM for 30th September of this year. So, we plan to conduct this event in the end of September. We expect the final decision from the government in the very close future. So – and we expect it to be confirmed at the level of our dividend policy. So the numbers we discussed with you in our previous meeting. So this is the information, we are waiting to be confirmed in the near future by the government. I think more discussions on the finalize and form of decision will emerge soon.
So, there are different numbers in this presentation. I would also emphasize that this year is not an ordinary one, given that we moved our AGM to September. So the shareholders will get their dividend in the fourth quarter of [2020 for 2019]. So – and in less than a year, we will announce and pay the next dividend for 2020. So, if you sum up both these payments and evaluate and price the company as of now, so the dividend payout for this year from now to the next dividend payment will be higher than the industry average and will be among the highest payout in the Russian stock market.
Now, you also see the financial results for the half of the year of 2020, even if you deduct some in clearance for [indiscernible] and calculate and forecast the results for the second half of the year. So, you can come up with dividend numbers for 2020 that will be payable next year. So in any scenario, they are strong, they are solid, they should be good, probably higher than this dividend payment. And so next dividend is expected to be at a good level, and as we discussed earlier, 2021 and 2022 are the years that will be most likely without impairment.
So, the dividend for this year’s will be strong as well. So, now we can forecast next three years of very good, stable, strong dividend payment from RusHydro Group. And we will do our best to continue this strength in the future. So, I think we are close to end of the presentation. I probably have not covered all the numbers in the presentation. You have the opportunity to ask questions.
I would like to emphasize again, our business model remains very strong. You see it in our books, and you will see it in our dividend payment and the returns and margins in the future. On this, I would like to conclude my presentation, and thank you for your attention.
So, now we can continue with the Q&A session. Thank you very much.
Thank you. [Operator Instructions] Our first question is from Sergey Beiden from Renaissance Capital. You may begin your question sir.
Good afternoon. Thank you very much for your presentation. I have basically two questions. The first one, you had that deal with SUEK about Luchegorsky coal mine and to the Primorskaya GRES. And so I’m just wondering how that deal will be booked in your – whether it will be booked – when it will go through your P&L at the end of the year? And whether there is a risk that there will be some impairments coming from this deal in particular, and not only from Sovetskaya Gavan? That’s the first question. And the second question is, in part, the Far Eastern tariffs, we know that the implementation of the new tariff structure was delayed till the end of this year, until the start of the next year, but given what’s happening in the Far East, do you see any risk that it could be potentially delayed till, let’s say, July next year or even longer? Thank you.
So, I will start from the second question about the delay in the new regulations. So, it is a pandemic year. So, we’ve got the situation when the state moved to this decision later. I don’t know whether major changes to the logic will be introduced next year. We have several more months for the discussion with the state. So, we will see, I think it’s better to comment on the results then on the expectations. So, in the middle of the year, we have some expectations, and now the decision has moved to the right. So let’s wait and see.
It is better in this situation. But anyway, I would like to emphasize that with new regulation or without new regulation, it’s still a very adequate situation with our Far East business, adequate enough. So, it’s 13% EBITDA margin business, a positive business. Sometimes people concentrate on the losses, on the [red flags] of the business. But overall, we have not so better performance and we improved step-by-step. So, even if you compare this number with the previous year, we improved that by a couple of percentage points. So, we keep on working in this direction.
And your first question about the potential impairment after assets work. So, as we understand now, we will not have significant impairments after this deal. So high risk, high value is our regular case. SUEK is a one-time item without significant impairment results on the balance sheet, net income and dividend. So, a very – consequences, but not of the client that materially affect the numbers of the business and not comparable to the Sovetskaya Gavan, something like that in the part.
Okay, thank you.
Thank you. Next, we have Vladimir Sklyar from VTB Capital. You may begin your questions.
Yes, hello and thank you for the opportunity to ask questions. Congratulations on an extremely strong set of results. I have couple of questions. First one is about the DPM-2 Far Eastern projects. So, as per your presentation, you have the CapEx for those projects included and given some of the CapEx will hit us as early as 2020. So, taking into consideration that you are planning to invest already this year, I suspect you already have a confirmation of the guaranteed level of return you’re going to get on those projects. If you can share with us what kind of return will the company be getting on those DPM-2 projects that would be great?
And my second question on the same issue. In the presentation, it’s mentioned that all the DPM-2 projects will be gas fired. Can you maybe articulate a bit of where the gas will be coming from? And at what price will RusHydro get the gas at those projects in the Far East? And my second question is about the dividends. Yes, you mentioned that you expect the government directive by 30th of September, fully understandable, but maybe you can give us a bit of a sneak peek into the decision-making process, what drove the massive delay at times when all the other state-owned companies announced their dividends on time, what was the reason for such a major delay? You mentioned that in less than 12 months, there will be another set of dividends, is there a chance that next year, the dividends will be delayed as well in-line with the current year?
And my final question, only last week, you – there was a press release that [indiscernible] signed a 10-year supply agreement with RusHydro on its new petrochemical plant, maybe can you specify what kind of pricing formula is included in that agreement, is there any deviation, premium or even discount of the electricity price are you going to be supplying to [Zagor]? Thank you very much.
Thank you very much, Vladimir, for your questions. They are very specific and to the point. And just one comment before I start to answer your questions, we plan to have an IR session at VTB, my investment, application in September. So, we try to utilize this very useful application, and we will communicate with you on the specifics of this event. So, we would like to make it useful for investors, for the company, for all the parties involved. So thank you very much, all this dialogue on this platform.
So back to the question. So no guaranteed return on investment is approved now. I mean that the percentage point. So this issue was discussed in recent business trip of [indiscernible] and other government members to the Far East. So this framework is still under discussion. So, no final figures are approved. Some discussion is still ongoing about this, but the plans are still to have guaranteed return on investments and on investments and to launch these four projects. Because of that, we don’t plan to invest significant amounts of mines this year.
We do our project works, but we will not probably invest significant amounts in any of the projects this year in 2020. So, if we have final framework approved with guaranteed return on investments, we will proceed with investments. As of now, we don’t hurry up. And the investments will start next year after the final approval of all form of documents.
So, about gas, we had Artemosvkaya modernization with coal. And with this is a very big job with the government and with Gazprom to do our best to switch Artemosvkaya power plant to gas. I wouldn’t say it’s like 100% a resolved question, but we have a good background to make such a judgment, to do our best and to construct a natural gas power plant at Artemosvkaya.
In Yakutskaya GRES-2 is also gas-fired and other two plants will be mostly gas-fired as well in the Far East. The major supplier of natural direct gas there is Gazprom and the prices will be based on Gazprom pricing. So no contracts are signed, but everything will be in-line with current situation with ordinary gas supply contracts with Gazprom in the related regions.
About dividends, so there is some delay this year due to pandemic due to some other reasons. But I wouldn’t describe this process as mysterious or sensational, it was just a bureaucratic process with the state. We discussed our dividend policy at different levels with different ministries. Not all of them quickly understood this mechanism as of [3-year floor] for dividends. So, we discussed that. We shared our forecast. And on the final end I think all the parties involved approved the approach, and we will have our dividends for this year signed off very quickly.
For next year, it’s not so easy to make forecast for a long future. But I think we have a dividend policy, we have a track record of payments. So, if you take our dividend payment for the last several periods and make the sum of them and compare them with our peers, so I think the final judgment will be very clear in favor of RusHydro. So, we will do our best to satisfy our investors and make them happy for a certain degree as we can in the next period.
So, at least our internal calculations are favorable in terms of dividend growth during the next several years. And actually, I think you have a lot of analysis, numbers, judgments to make this forecast. And just – I can repeat, believe in RusHydro, I think this approach will pay off for itself in the next period of time. So, we will do all of it. But at the same time, the economy and the situation as we saw this year in terms of pandemics can be difficult, but we will do everything we can to overcome all the obstacles and produce good results, including dividends.
About Zagor, yes, we have a long-term contract. The pricing in this contract is based on tariffs approved for this station by Federal monopoly service. So, also no hidden deviations from the market approved approach. The tariffs for Nizhne-Bureyskaya hydropower plants are good for us. They cover all expenses and profit. So, all amortization and the CapEx was high and significant. So, in this respect, the pricing is based on the tariffs, they are okay. We are satisfied with this decision. Did I answer all of your questions Vladimir?
Yes, very much. Thank you.
Thank you. Next question is from Sergey Garamita from Raiffeisenbank. You may begin your question.
Thank you for the presentation and congrats on the results. Actually, I didn’t catch it, you mentioned that the IRR for modernization projects is already fixed. So it is 12%, right, at 8.5% for rate period? That is my first question.
No, it is not fixed. It’s not fixed yet.
Okay. Okay. Then my second question on the – this delay in regulation for long-term tariffs for the Far East. My question concerns if the regulation is delayed until next year, but you’re going to impair the final station this year in 2020 results. That – will your calculation of the impairment be affected by the projection of this effect, if it’s not still approved by the government? Or maybe you will instead pay book high impairment this year, but then revalued back up next year, and we’ll see some positive effects in P&L, just could you clarify, please? Thank you.
So, we will impair the Sovetskaya Gavan power plant, given the cash flows that it will generate in the future. So, if at the point of impairment, we have approved guidelines for the tariffs for this station for the next 10 or 20 years, we will use them. If they are not approved new rules, we will use current rules, but after new rules’ approval, we will probably make the correction to this impairment. Anyway, as we understand, even if we deduct the impairment of Sovetskaya Gavan from the first half of 2020, and keep on working with the trend that we have now or even on the more conservative side. So, the financial results for 2020 will be good enough to produce better dividend payment in 2021.
Okay. Thank you. And will this delay also result in revaluation of previous impairments, not only for Sovetskaya Gavan, in 2021?
We have to check. I think when the rules have changed, there can be some corrections. But we have to check with our accountants, and we can provide the feedback in a dialogue with you this week or next week.
Okay. Thank you. And also, we shouldn’t probably expect any guidance on the share of impairment of the investment for Sovetskaya Gavan, right, from you at this point?
We have some internal calculations on that. But let’s wait until the year-end and have the results. We don’t – we wouldn’t announce these numbers before they are complete. But you have a lot of examples in the past to calculate this figure. And it’s, in our view, it’s manageable for our results for this year, it’s way manageable.
Okay, thank you.
Thank you. Next question is from Matvey Taits from Sova Capital. You may begin your question.
Hello. Thank you for the presentation and congratulations with historic numbers. So, one question that’s left is about this government grants. So, I see it’s like jumped 40% year-on-year in second quarter. So, can you give us the guidance, what the government grants total number for the full-year, do you expect? Are there like similar dynamics to what we have now in the first half or there will be less grants in the second half of the year? So – and this is one question. And second one is, it’s just general. So these achievements on the cost control in second quarter, is it sustainable or you did some like superior effort during this second quarter, and we can see some back to, let’s say, CPI type of growth of your operating costs going forward? Or do you think it’s sustainable and we’ll see some decrease of your operating expense going forward, I’m talking about the manageable, of course, about the management – manageable items? Thank you very much.
Okay. So you use the good words. You used superior efforts, superior results. Call it whatever you like, but we did superior and efficient good results in terms of all respects of our business this year, including operating expenses. We’ll do our best to sustain this trend in the future for certain degree, it’s sustainable, but again, given the real situation in the market in terms of field oil in terms of other costs in terms of inflation. And you have the breakdown of our different costs. We work on every number, every cost in all the regions for RusHydro presence.
About governance grants. So first, we have an increase in government grants via this Far Eastern surcharge mechanism, so there is an increase of 20% for this year. In terms of other government grants, they should be more or less in line with the previous year and with the average number. So the major increase is Far Eastern surcharge.
Okay. And – but in your like numbers, you’re not split it, you have just one line saying like government grants. And how it’s split between these two, if we look at like first half of the year?
So it’s a split in the – our press release so there is a table with different government grants. If this is not enough, please address Dmitriy, and we will clarify the situation for you.
Okay, sure. Thank you very much.
Thank you. Next question is from Igor Goncharov from Gazprombank. You may begin your question sir.
Yes, thank you very much and congratulations on excellent results. I have some follow-up rations based some of them based on the press report, especially, on the dividend. You indicated that you still – you expect the dividend to be not less than 3.62 CapEx per share, but there has been some speculations in the media that the dividend can be calculated as the 50% of the Russian accounting standards, so net profit for 2019, which would imply some upside risk to this number, 3.62. I was wondering if you can comment on that. Is there any chance the – how significant is the chance of the dividends would be paid calculated for 2019 would be calculated as 50% of the Russian accounting standards, so net profit for the year? That’s the question number one.
Question number two, a follow-up on the subsidies. Still, it would be very useful if you can indicate the expected number of subsidies for the year? We see that in the accounts, the total number for half of the year, showing like RUB 24 billion, what would be the number? What should we expect for the whole year? And also, could you please remind how sustainable this mechanism from the legal standpoint, i.e., what government degrees would have for the future. Should we extrapolate the current level of subsidies to the future? That’s Number 2. On subsidies, and number 3, there has been various press reports on the change in the top management, if you can clarify maybe on what we should expect in relation to the top management? Or at least what is the timing as to when the clarity on this topic can arrive? Thank you very much.
Okay. Thank you very much for your questions. So, about dividends. We have Slide 18 in the presentation on our dividend policy. And I think that the numbers projected for the payment in 2020 are correct. And I don’t see significant likelihood of changes in these numbers. So, let’s wait until they sign the documents, but I think this is a very good and strong indication of what we plan to pay a dividend for 2019 this year.
About subsidies, Dmitriy Denisov will contact you and he will discuss the plan for this year. Your question about sustainability of subsidies, they are sustainable, just have a look back in the past and you will see that most of these subsidies are in the budgets of different regions and governments. They are in these budgets for a very long period of time. So this is more or less very sustainable good sources of additional revenue for RusHydro subsidiaries in different Far Eastern regions. This is about like normal subsidies. And subsidies for the surcharge, they grow up, they can change, but this is a separate mechanism.
You know that this mechanism will be prolonged until 2028, but there will be some changes in this mechanism. So, not all consumers in the Far East will take advantage of lower tariffs with time, but whatever decision is taken is not material to RusHydro because we get this subsidy and we transmit it to regional governance in those regions. So for cash flow position of RusHydro, whether they grow or not growing, it’s not a material factor, but it’s important for regions. It’s important for consumers, for RusHydro it’s stable, manageable situation at any size of this subsidy of surcharge. But as you see, it’s growing. It’s okay.
And your last question about the top management, I’m not in the position to officially comment on that, but I can assure you that the company, including all executives are working every day on a regular basis, do their jobs. So, no specific negative or mysterious situation on that at the moment. So, we’ll keep on working, including our Chief Executive Officer and we’ll see what happens when it happens. I think everything is okay, and the company is as a good standing to continue to produce these results in the near future, mid-term and long-term.
Thank you very much.
Thank you. Next, we have [indiscernible]. You may begin your question sir.
Yes, hello. A couple of questions left from my side. So first of all, if we take a look at Slide 6 of the presentation, and we focus on the center of Russia, then we can see that actually, in July, well, at least after May, there was some turnaround. And in July, your electricity production in the center of Russia was below the long run average. So my question would be whether you expect some, well, let’s say, return back to the normalized level? Or what should we expect, especially for the center of Russia, where it can have material impact on the spot electricity prices for the second half of the year? And what do you see in, not only in July, but maybe in August, as we are almost past as we have almost passed the August? And the second small question would be on your debt profile. So actually, you have like 88% of your debt having fixed rate. Do you see some significant refinancing opportunities because we’ve seen a substantial decrease in the key rate recently, so do you think that your average interest rate could go down further significantly this year? Thank you.
Thank you very much. So, your first question. Yes, in July, the center of Russia is a little bit below long run average. In August the situation has somewhat improved. So, the water situation in the center of Russia is at normal levels and the in-flows at the normal level. But at the same time, the situation in Siberia is better. In Far East is better and in South of Russia is slightly above the long run average. So, the first half was exceptional. The second half will be strong enough to exceed our expectations.
And about refinancing. So, we worked with our banks on a regular basis. And after each reduction of key rate we collaborate with them to reduce the rate of the credit, and we are successful in this calculation. So we gradually reduce our refinancing cost step-by-step. So, with time, you will see that our situation improves very well.
Okay. Good for you. Thanks.
Thank you. Next, we have Anastasia Tikhonova from VTB Capital. You may begin your question.
Hi, yes, hello. Yes, maybe a small question from my side. Probably could comment on the expectations for RusHydro involvement in this [indiscernible] electrification program in terms of financing, timing? Thank you.
Okay. So, as of now, we don’t have any major significant projects related to [indiscernible], separate generation units or whatever. Of course, when we do our modernization projects in the Far East, it somehow helps the reliability of electricity situation in these regions and it support the [indiscernible] development. But we – as of now, we don’t plan to contract separate generation units needed for [indiscernible] reconstruction. We also have some investment projects for our [indiscernible] company. It has its modernization programs, but we don’t have a separate [indiscernible] project for RusHydro. We have just our ordinary investment CapEx that, on average, helps the situation in those regions.
Okay. Thank you.
Thank you. As there are no further questions, I will hand the session back to management team, for closing remarks. Thank you.
Okay. Thank you very much for your interest in RusHydro, your questions. We will keep on working with you. We are always in touch. So, thank you for your support, and we hope to see you in person in different formats or meetings or conferences. We are with you. Thank you very much.
Ladies and gentlemen, that concludes today’s conference call. You may disconnect now.