Seven Wonders of the World IDGC of the South DISCLAIMER
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Seven Wonders of the World IDGC of the South DISCLAIMER The present Annual Report of IDGC of the South, JSC (hereinafter the “Annual Report”) was prepared on the basis of the information available to the Open Joint-Stock Company Interregional Distribution Grid Company (here- inafter IDGC of the South, JSC, or the Company) and its dependent and subsidiary companies at the moment the report was drawn up. The present Annual Report contains information estimations and forecasts concerning future events and/or actions, prospects of development for the industry in which IDGC of the South, JSC performs its core business, and results of business activity, including the Company’s plans, the probability of certain events taking place, the prob- ability of fulfillment of certain actions, as well as tendencies relating to prices for production, production volumes and consumption, costs, expected expenditures, the term of use of assets, estimates of reserves and other analogous factors, economic forecasts concerning the sector and markets, the terms of the beginning and end of certain projects for survey and design works and production activity, as well as on the closure or sale of individual companies (including the according losses). Such words as “plans”, “will be”, “it is expected”, “will come”, “expects”, “will equal”, “will occur”, etc. are projec- tive in character, and bear a risk of possible non-perfor- mance. Owing to these reasons the Company warns that actual results or the development of those or other events may essentially differ from the projection statements contained in the present Annual Report at the moment it is drawn up. Investors should not rely completely on estimations and forecasts of the Company’s management bodies, as they are one of many variants of the succession of events, while the actual results of the Company’s activity in the future may differ from the expected results for many reasons. The Company does not confirm and does not guaran- tee that the results of its activity, given in forward-looking statements, will be achieved. The Company does not hold any responsibility for losses which individuals or legal enti- ties may incur when acting on the basis of forward-looking statements. Such forward-looking statements are simply one of many possible variations for what may happen in each specific situation, and should not be considered to be the most likely. In particular, among other factors which may have an influence on the date of the beginning of construction or production, expected costs and production volumes, and terms of use of assets, one can mention the following: • The ability to receive profit from providing services under the Company’s main business activity; • The influence of currency exchange rates on market relations, and on the tariffs for services provided; • The actions of state bodies of the Russian Federation and other jurisdictions where the Company is studying, developing, or operating assets; • Changes in the tax, ecological, and other legislation and regulations. The given list of significant factors is not exhaustive. When taking forward-looking statements into consider- ation, one must also consider the above-mentioned factors, especially economic, social, and legal conditions of the activity of the Company and its dependent and subsidiary companies. Except for cases directly addressed by the valid legisla- tion, the Company does hold any liability for publishing changes to its forward-looking statements, based either on new information or on the resulting events. TABLE OF CONTENTS Address to shareholders of the Chairman of the Board 4 of Directors of IDGC of the South, JSC Address to shareholders of the General Director-Head 6 of the Management Board of IDGC of the South, JSC GENERAL INFORMATION ABOUT THE COMPANY 10 AND ITS POSITION IN THE SECTOR Geographic work area of the Company 11 History of the development of IDGC of the South, JSC 12 Position of IDGC of the South, JSC in the sector 15 Competitive environment of the Company and risk factors 16 Organizational structure of IDGC of the South, JSC 17 Company mission and strategy 20 Key events of IDGC of the South in 2009 21 Main performance results of IDGC of the South, JSC 24 CORPORATE REPORT 28 Corporate governance 28 Management bodies of IDGC of the South, JSC 33 Control over the Company’s financial and economic activity 55 Risk management 60 Company activities legal support 66 SHARE CAPITAL AND THE MARKET FOR THE COMPANY’S 70 EQUITIES Share capital 70 Circulation of shares on the stock market 72 OPERATING REPORT 78 Main business activities of the Company 78 Key industrial indicators of the Company 79 IDGC of the South, JSC client-oriented policy 93 Communication network and information technologies development 94 IDGC of the South, JSC purchasing activity 97 INVESTMENT REPORT 102 Parameters of investment activity 102 Directions and structure of capital investments 103 Sources of Investment program financing 106 FINANCIAL REPORT 112 Principal provisions of IDGC of the South, JSC 112 Analysis of the Company’s financial status and business activity results 114 Distribution of profit and dividend policy 120 SOCIAL REPORT 140 Personnel policy 140 Environmental policy 149 DEVELOPMENT STRATEGY 124 Future oriented process organization 124 IDGC of the South, JSC top priority goals and strategic objectives 130 GLOSSARY 150 APPENDICES: 156 Appendix 1. Information on participation of IDGC of the South, JSC in other companies 156 Appendix 2. Report on compliance to the Corporate Governance Code in 2009 158 Appendix 3. Information on interested-party transactions completed by IDGC 168 of South, JSC, in 2009 Appendix 4. Information about volumes and tarrifs for services for electricity distribution provided 175 by IDGC of the South, JSC Appendix 5. Information about volumes and tariffs for technological connection 177 Appendix 6. The 2009 annual accounting reports of IDGC of South, JSC 184 Appendix 7. Auditor’s report 200 Appendix 8. Auditing Committee’s report 202 Address to shareholders of the Chairman of the Board of Directors of IDGC of the South, JSC Dear Shareholders! It was characteristic of the 2009 reporting year that Transition to regulation of the tariff for electricity industrial production continued to decrease in Russia transmission services using the method of return on as a whole and in the subjects of the Russian Federation invested capital (RAB); which are part of the Company’s zone of responsibility. Further perfection of the Company’s technical As a result, there continued to be a decrease in elec- policy in the field of informational technologies: tricity consumption. Furthermore, interest rates on the System project for automation of IDGC of the credit resources became higher in 2009 as compared South, JSC for the period from 2009–2012 was to the year before, and there was a decrease in sol- approvedу; vency among electricity sales companies and electricity Prevention of traumatism: the Program for reducing consumers. These and others external factors led to a risks of the appearance of traumatism of IDGC of worsening of the financial results of IDGC of the South, the South, JSC (for 2009–2010) was approved; JSC in 2009. Ensuring stable income for the Company’s share- That said the crisis provides the need and the pos- holders. sibility to search for new methods of organizing the During the 2009 reporting year, as well as during Company’s work, and improving its efficiency. Clients, the whole period of existence pf IDGC of the South, investors and shareholders of IDGC of the South, JSC JSC, the Company has followed all universal principles have the right to expect that such possibilities will be of corporate management: fairness, openness, control- taken advantage of by the Company to the full degree lability of financial-economic activity, respecting the so as to make maximum possible profit. IDGC of the rights of third parties, and has achieved a high level of South, JSC is part of the IDGC Holding, which is a informational transparency. shareholder of the Company, owning 51.66 % of the An inseparable part of the system of corporate Company’s voting shares. management of IDGC of the South, JSC is risk manage- IDGC Holding is one of the largest infrastructure ment. The method for taking management decisions organizations in Russia, and controls about 80 % of all in IDGC of the South, JSC concerning the Company’s electricity distribution in the country. Competitiveness financial-economic activity, as well as the system of and development of the distribution grid companies accountability of executive bodies reduce the risk of which make up the Holding are determined, to a signifi- divergence between the interests of Company managers cant degree, by the policy conducted by IDGC Holding, and shareholders’ interests. JSC through its representatives in the boards of direc- In 2009 the Company fulfilled a series of measures tors of subsidiary companies. aimed at improving the practice of corporate manage- The united ideology, corporate informational policy, ment. One of the main measures was to establish and the united corporate identity in the global public com- elect the following committees of the Board of Directors: munication space make it possible to strengthen the Auditing Committee; corporate business reputation of the subsidiary compa- Committee for Personnel and Remuneration; nies of IDGC of the South, JSC as a whole. Committee for Technological Connection to Electric The main tasks of the business activity of IDGC of Grids; the South, JSC which the efforts of the Company’s em- Reliability Committee; ployees were aimed at in 2009, were determined by the Committee for Strategy, Development, Investments Board of Directors to be the following: and Reform. To ensure quality and reliable electricity supplies to Based on the recommendations of Standard & Poor’s customers; and Expert RA ratings agencies, a number of changes Re-equipment, reconstruction, and new construction; were made to the Company’s internal documents, Perfection of the system of organization of equip- including changes aimed at raising the Company’s infor- ment repairs; mational transparency.