ANNUAL REPORT 20 09 RELIABILITY MODERNISATION INNOVATION 20 09 Инвестиционная деятельность CONTENTS 1_ _ Chairman of the Board of Directors and Chairman 6_ _ Corporate Governance and Management 90 of the Management Board Statements 6 6–1. Corporate Governance Principles 92 1–1. Chairman of the Board of Directors 8 6–2. Board of Directors 94 1–2. Chairman of the Management Board 10 6–3. Management Board 98 2_ _ Key Developments in 2009 12 6–4. Compensation of Members of the Board of Directors 3_ _ About the Company 16 and the Management Board 104 3–1. Our Business 18 6–5. Internal Control 105 3–2. Strategic Priorities 20 6–6. HR Policy 106 3–3. Structure 20 7_ _ Corporate Social Responsibility and Accountability 110 3–4. Key Performance Indicators 23 7–1. Commitment to Sustainable Development 112 3–5. Key Financial Indicators 24 7–2. Social Policy 114 4_ _ Business Overview 26 8_ _ Finance 116 4–1. Production 28 8–1. 2009 RAS Financial Statements and Audit Report 118 Delivering a Dependable Supply of Electricity 28 8–2. Management Discussion and Analysis (MD&A) 134 Power Transmission and Technological Connection Services 35 9_ _ Shareholders and Investors 148 Improving Energy Efficiency and Mitigating Losses 37 9–1. Equity 150 Maintenance and Servicing 40 9–2. Stock Market 152 Workplace Safety 41 9–3. Dividend Policy 155 Environmental Policy 42 9–4. Taxation Matters for Shareholders 156 4–2. Innovation 46 9–5. Investor Calendar 2010 157 4–3. Investments 55 10_ _ Attachments 158 Development of the Unified National Electric Grid (UNEG) 55 10–1. Subsidiaries 159 Investment Programme 57 10–2. Transactions 160 Development of IT network 63 10–3. Audit Commission Conclusion on the Veracity 4–4. Commercial and Operating Activity 70 of Information in the Annual Report 167 Tariff Regulation 70 10–4. Branches 168 Cost Optimisation 71 11_ _ Glossary 170 Procurement 71 12_ _ Contact Details 174 Risk Management 75 5_ _ Financial Performance Overview 80 5–1. Financial Highlights 82 5–2. Net Profit Distribution 86 5–3. Loan Portfolio and Liquidity 87 5–4. Credit Ratings 89 4 Federal Grid Company Annual Report 2009 5 Federal Grid Company Annual Report 2009 CHAIRMAN OF THE BOARD OF DIRECTORS AND CHAIRMAN OF THE MANAGEMENT BOARD STATEMENTS _ Chairman of the Board of Directors _ Chairman of the Management Board 1 CHAIRMAN OF THE BOARD OF DIRECTORS Federal Grid Company is one of the fundamental pillars of First and foremost, Federal Grid Company was given the Grid (UNEG) units, the creation of the possibility of connecting the economy of the Russian Federation. The Company is green light to switch to a new tariff system for billing electric- new generation units and consumers to the grid, as well as responsible for the dependable operation and day-to-day energy transmission services rendered within the backbone the development of innovative technology. functioning of Russia’s unified electric energy grid. Indeed, grids. Prior to and including 2009, the cost-plus method used the grid is a unique infrastructure that, along with the for billing stalled the attraction of necessary investment in grid The revival of growth in the Russian economy following country’s transportation routes and pipelines, comprises development, and did not provide incentives for cost saving. the economic crisis will lead to an increase in demand for the tangible economic framework of Russia, uniting the Today, in accordance with the decision of the government of electric energy. In line with this, I am certain that Federal Grid majority of the country’s regions. Federal Grid Company the Russian Federation, the Company has fully switched to Company is fully ready to meet the demand and continue to plays a major role not only in the electric energy industry, the Regulatory Asset Base (RAB) regulation of tariffs, which be a sturdy pillar supporting Russia’s economic surge. but also in the social and economic growth of the country guarantees a fair rate of return on invested capital, increases as a whole. the Company’s efficiency, as well as improves the reliability and quality of consumer services. The promising outlook of In 2009, the Company achieved impressive production this model of regulating tariffs has already been demonstrated results and laid a solid foundation for continued growth. worldwide. The achievements were mostly a result of the favourable collaboration between management and the government, The importance of the government’s other decision and its with the goal of gradually overcoming the infrastructure effect on the future growth of Federal Grid Company cannot limitations of the Russian economy. Two decisions taken be overstated: in 2009, the Russian government approved at the government level are of particular importance, and the Company’s 519.4 billion rouble investment programme for Sergey Shmatko, they have substantially increased the potential to modernise 2010–2012. These funds are earmarked for the technological Chairman of the Board of Directors Federal Grid Company in the immediate future. renovation and modernisation of the Unified National Electric Minister of Energy of the Russian Federation 8 Federal Grid Company Annual Report 2009 9 Federal Grid Company Annual Report 2009 CHAIRMAN branch, brought the 220-kV Poselkovaya substation on line, demonstrated by the Company in 2009 are the direct result OF THE MANAGEMENT with transmission lines from Psou to Poselkovaya. The MES of their hard work, and the solid professional potential of our North-West branch continued construction on the Northern entire team lets us look to the future with confidence. BOARD Transit to Karelia and completed the project to supply electricity to Valaam Island, which is an important religious centre in We see our priorities in 2010 as providing reliable and Russia. MES West supplied electricity to the first stage of the uninterrupted operation of the backbone electric grids, the East Siberia-Pacific Ocean oil pipeline (ESPO). The 500-kV continued modernisation of the entire grid via technical Far East-Vladivostok transmission lines were connected with innovation, and the improvement of the Company’s economic the Vladivostok substation, providing the southern area of the and operating efficiency. We have also set ambitious long- Primorsk Territory with 350 MW of additional capacity. term goals and priorities for 2010–2020, such as the set-up and completion of a ‘Smart Grid’ that will significantly improve We continued delivering power from new generating sources: the reliability and efficiency of the UNEG. reconstruction was completed at MES Centre, Moscow Region, on the 500-kV outdoor switchgear at the Kashirskaya state regional power plant (Kashirskaya GRES), with the formation of the 500-kV Novokashirskaya substation. Work was begun on new power units to deliver reliable electricity supplies in the large industrial and oil-production centres of the Urals and West Siberia. Particularly, construction was completed on the 500-kV Emelino substation in the Sverdlovsk Region, and the 500-kV Somkinskaya-Peresvet line was put into service in the Khanty-Mansiisk autonomous region. Oleg Budargin, My first year as the Chairman of the Management Board of to neighbouring countries. Total energy loss in the UNEG for Chairman of the Management Board Federal Grid Company coincided with a rather challenging 2009 was 22,120.61 mln kWh. Federal Grid Company’s 2009 In order to improve economic efficiency and decrease economic period for Russia. This meant great responsibility revenue increased by 24% (by RUB 16.6 bln) vis-àa-vis RUB the Company’s dependence on foreign manufacturers of for Federal Grid Company and for me personally, because 85 bln in 2008. electricity equipment and facilities, we have begun establishing the Company is part of the backbone of the Russian economy innovation centres to produce such equipment in Russia’s directly responsible for strengthening the country and One of the Company’s 2009 operating highlights was its regions. To this end, the Company has signed cooperation assisting domestic companies in overcoming the aftereffects 15.9-bln-rouble operating profit, which exceeded the 2008 agreements with 65 leading domestic manufacturers of of the economic crisis. Today, we can confidently say that operating profit three-fold by RUB 10.7 bln. We firmly believe electricity facilities in Siberia, Urals, Volga, North-West and we handled the challenge that was set before us by the that these financial results strengthen the Company’s growth Centre regions of Russia. government in 2009 well, and placed the Company squarely platform going forward. on the path to continued growth and improvement. As an electric energy company, we were put to a serious The key developments determining the growth prospects of test last year as a result of the tragic accident that occurred We moved forward significantly in all of the top-priority areas Federal Grid Company were the switch to RAB regulation of at the Sayano-Shushenskaya hydro-electric power plant of our activity, from increased reliability of electric energy tariffs as well as the Russian Federation Government’s approval (HPP). The Russian government required Federal Grid transmission to technical modernisation and innovation of the Company’s 2010–2012 investment programme. Company to re-route power from other regions at the same and improved economic efficiency. We continued to grow Jointly, these provide us with a powerful instrument for time as the autumn-winter peak-demand period of power the Company, which, on the one hand, should anchor the planned development and modernisation, lowering wear- transmission in Siberia. In order to fulfill this task, we built the country’s economic growth and modernisation, and, on the and-tear and depreciation, and improving the reliability and 220-kV Beya-Askiz transmission lines in short order and put other hand, should meet the expectations of our shareholders quality of electric energy transmission throughout the UNEG.