1 MOESK ANNUAL REPORT 2010 MOSCOW UNITED ELECTRIC GRID COMPANY 2 MOSCOW UNITED ELECTRIC GRID COMPANY CONTENTS Speech of the Chairman of the Board Speech of the General of Directors of JSC «MOESK» Director of JSC «MOESK» Schedule of milestones 6 8 10 ABOUT THE COMPANY ð. 12 1 1.1. Position in the field 1.2. Structure and characteristics of electric grid facilities 1.3. Top business targets and development prospects OPERATING ACTIVITY ð. 20 2 2.1. Transmission and distribution of electric power 2.2. Energy conservation and increase in energy efficiency 2.3. Technological connection 2.4. Maintenance and operation 2.5. Tariffs for transmission of power energy and fee for technological connection 2.6. Industrial and fire safety 2.7. Occupational safety 4 INVESTMENT ACTIVITY ð. 40 3 3.1. Parameters of investment activity 3.2. Allocation and structure of capital investments 3.3. Funding sources for investment program FINANCIAL AND ECONOMIC ACTIVITY ð. 46 4 4.1. Major results of financial and economic activity 4.2. Analysis of financial status and performance 4.3. Accounts receivable and payable 4.4. Lending policy 4.5. Allocation of net profit 4.6. Dividend policy 4.7. Execution of key persormance indicators 4.8. Information about the auditor CORPORATEC MANAGEMENT ð. 58 5 5.1.5 Principles of corporate management 5.2.5 Report of the Board of Directors on the results of development of core areas of activity 5.3. Governing and supervisory authorities 5.4. Criteria for calculation and amount of remuneration paid to persons being members of governing authorities and Auditing commission 5.5. Securities 5.6. Participation in business entities and non-profit organizations 5.7. Administration of ownership 6 ð.ð 104 MANAGEMENTM OF IN-COMPANY PROCESSES 6.1.6 Quality management system 6.2. Internal control system 6.3. Risk management system 6.4. Management of business processes 6.5. Information technologies and telecommunications ð.ð 120 7 SOCIALS RESPONSIBILITY 7.1.7. HR management 7.2. Social policy 7.3. Environmental safety ð.ð 130 8 PPROCUREMENT ACTIVITY 8.1.8.1 Procurement policy 8.2. Results of procurement activity 5 9 ð.ð 134 PUBLICP RELATIONS, RELATIONS WITH 10 PUBLICP AUTHORITIES AND CONGRESS 2010 AND EXHIBITION ACTIVITY ð.ð 138 GLOSSARYG OF MAJOR TERMS AND REPORT ANNUAL A ABBREVIATIONSA ð. 140 MOESK APPENDIXES ð. 141 Appendix 1. Accounting reports as of 2010 executed in compliance with Russian Accounting Standards (RAS) ð. 178 Appendix 2. Auditor’s opinion ð. 180 Appendix 3. Opinion of Auditing commission ð. 184 Appendix 4. Reports as of 2010 executed in compliance with International Financial Reporting Standards (IFRS) ð. 236 Appendix 5. Data on compliance with the Code of Corporate Conduct ð. 245 Appendix 6. History of transactions executed by the Company as of 2010 ð. 247 Appendix 7. Contact information for shareholders and investors MOSCOW UNITED ELECTRIC GRID COMPANY DEAR SHAREHOLDERS, The largest Russian Interregional Distribu- tion Grid Company JSC «MOESK», notwith- standing the complicated operating conditions caused by natural disasters, managed to dem- onstrate positive results in follow-up of the year 2010. Such achievements became possible due to coordinated work of the members of the Board of Directors and management staff of JSC «MOESK». In 2010 the interests of shareholders in the 6 Board of Directors of JSC «MOESK» were repre- sented by officials of such companies as JSC «IDGC Holding», «FGC UES», JSC, «SO UPS», CJSC «Leader», Gazprombank (OJSC) as well as Ministry of Energy of the Russian Federation, SPEECH OF THE CHAIRMAN Governments of the city of Moscow and Moscow Region. OF THE BOARD OF DIRECTORS Special attention in 2010 was paid to im- OF JSC «MOESK» plementation of energy conservation policy and increase in energy efficiency, adoption of tariff management system for electric power transmission services subject to the method of return on invested capital as well as approval of a range of programs, statutes, plans: Risk management policy, Internal control policy, HR management program as amended, Plan of first-rank events for increase in antiterror- ist and anti-sabotage security of electric grid facilities. Among the overall amount of approved docu- The Board of Directors scheduled as the core ments, special attention shall be paid to the Stat- Company areas of activity for the near-term ute on Dividend Policy of the Company which was prospect events for increase in antiterrorist and executed with regard to the Company and share- anti-sabotage security of Company power grid holders’ balance of convenience and aimed at in- facilities; consolidation of electric grid facilities crease in investment prospects of JSC «MOESK» owned by OJSC «Mosenergo» and located on the and market capitalization thereof. territory of Moscow and Moscow Region; registra- Decisions adopted by the Board of Directors tion of title to real estate objects, registration/ were implemented by the General Director and re-registration of rights for use of land plots for Company management staff who displayed a the period of 2011-2014. high level of efficiency upon execution of tar- The Board of Directors of JSC «MOESK» will 7 gets set up by the Board of Directors. In follow- further aspire to achieve the balance of conve- up of the year the Company managed to reach nience of shareholders and consumers, increase significant financial indices: proceeds according in investment prospects, reliability and transpar- to Russian Accounting Standards made up 110.6 ency with account of public supervision over ef- bln. rub., and net profit – 15.6 bln. rub. ficiency of financial and operating activity of the Approval by the regulatory bodies of the city Company. 2010 of Moscow and Moscow Region of adoption by JSC «MOESK» since January 1st, 2011 of a new tariff management system based on the method of re- turn on invested capital can for certain be quali- fied as a successful completion of the year 2010. A long-term pricing policy will contribute to the REPORT ANNUAL increase in reliability and quality of services for power transmission over the Company power grid with simultaneous modernization of fixed assets. In the course of preparation for fall-winter pe- riod of 2011-2012 5.2 bln. rub. were planned to MOESK be allocated for the maintenance campaign. Yours faithfully, Chairman of the Board of Directors N.N. Shvets MOSCOW UNITED ELECTRIC GRID COMPANY DEAR SHAREHOLDERS, Last year JSC «MOESK» confirmed the Com- pany's status as the entity which has held one of the leading positions within the power grid complex of the country for five years. The year of 2010 became a serious test for viability of JSC «MOESK». We were examined by climatic cataclysms such as heat waves and widespread fires in summer and «icy rain» in winter. Nevertheless, the power engineers of the Company managed to pass this examina- tion «with honours» having demonstrated ca- pability to work in any environment. On the whole we can describe the year of 2010 as a successful one. Productive supply of 8 electric power in 2010 increased up to 74.2 bln. kWh. The core Company activities to have been fo- cused on in 2010 were support of reliable and SPEECH OF THE GENERAL continuous power supply for consumers of the DIRECTOR OF JSC «MOESK» Moscow Region, optimization of capital invest- ment structure and increase in operating effi- ciency. In 2010 the Company implemented a large- scale investment program in the amount of 19.5 bln. rub. The value of connected capac- ity reached 991 MW. Increase in efficiency of capital construction provided an opportunity to reduce the amount of work in progress by ap- proximately 10 bln. rub. For the purpose of increase in operating effi- ciency, JSC «MOESK» introduced process-orient- ed methods for management, standardization and optimization of major business-processes. For resolution of various issues we created ma- trix elements – corporate teams of highest per- formance. JSC «MOESK» in 2010 proceeded with the poli- The Company intends in 2011 to proceed with cy aimed at promotion of customer-oriented ap- implementation of the purposes as follows, with proach. Eager to join the leaders among inter- account of development plans up to the year regional distribution companies in Russia in the 2020: sphere of technological connection in the near – ensuring of reliability and quality of services term prospect, JSC «MOESK» provided for tech- rendered as determined by generally accepted nological connection to the power grid of 17 787 customer interruption and quality indices; consumers in Moscow and Moscow Region. The – reduction in operating expenses; Company made efforts to optimize work with mi- – increase in the efficiency of investment ac- nor consumers, to improve the electronic system tivity by means of reduction in construction costs for record and handling of requests for techno- and increase in the quality of investment plan- logical connection, to introduce the mechanisms ning; for requests to be tracked by the customer via the – expansion of Company representation in the corporate site of the Company. region; Positive dynamics of the key financial and eco- – innovations and energy efficiency; 9 nomic indices suggests an opinion of a steady po- – ensuring of availability of services for tech- sition of JSC «MOESK». Thus, the Company man- nological connection; aged to optimize the leverage having decreased – capitalization growth. accounts payable by 12 bln. rub., and nearly In follow-up of the Company activity in 2010 having doubled net profit: with its estimated we can surely claim that accumulated working 2010 amount of 7 bln. rub. the Company in compli- capacity, financial and production resources ance with its annual accounting reports reached shall provide for successful completion of tasks the level of 15.6 bln.