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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 (hereinafter 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 “statements which make forecasts concerning future events” which are susceptible to the influence of various risks. These risks include the possibility of a change in the financial and economic conditions in which the Company operates and in its growth prospects; the possibility of changes in the political and economic situation in Russia; a change in the existing or future regulation of the Russian energy sector; the possibility of a change in Russian legislation; as well as the influence of other factors. The majority of these factors are outside the Company’s control, or outside the Company's ability to make forecasts. Forecast statements, due to their specificity, are connected to integral risks and uncertainty, both of general and special character, and there’s a danger that the estimates, forecasts, projections and other forecast statements won’t come true. Considering the above-mentioned, the Company warns readers that factual results can differ significantly from the figures expressed either directly or indirectly in the given forecast statements and real statements only at the time when the Annual Report was compiled. The company doesn‘t hold any responsibility for losses which individual persons or legal entities might incur when acting based on forecast statements. In each specific case these forecast statements represent only one of many ways in which events may develop, and should not be seen as being the most likely. TABLE OF CONTENTS Disclamer 2 Address to shareholders of the Chairman of the Board of Directors of IDGC of the South, JSC 4 Interview with the General Director — 6 Chairman of the Management Board of IDGC of the South, JSC Basic operating results 10 1. ABOUT THE COMPANY 12 Geographical location 16 Brief development history 16 Corporate structure 17 Key milestones and facts 20 2. POSITION OF IDGC OF THE SOUTH, JSC IN THE INDUSTRY 26 3. DEVELOPMENT STRATEGY 30 4. OPERATIONAL REPORT 42 Activities on Electric Power Transmission 44 Energy Saving and Increase of Energy Efficiency 49 Technological Connection to the Electric Mains of the Company 50 Improvement of Operational Reliability and Electric Power System Efficiency 58 Information Technologies Development 60 Development of Automation Technologic Control Systems 63 Procurement Activity 64 5. INVESTMENT REPORT 68 Investment operations scope 70 Tendencies and framework of capital investments 71 Long-term investment program 74 6. FINANCIAL REPORT 76 Basic Provisions of the Society Accounting Policy 78 Analysis Financial Situation and Business Results of the Society 83 7. CORPORATE REPORT 96 Corporate governance 98 The revision commission 127 Auditor 129 The internal control and risk management system 130 Legal support of the Company business 137 Property management 138 8. SHARE CAPITAL AND SECURITIES MARKET 144 Share capital 146 Circulation of shares at the stock market 149 Dividends 155 9. SUSTAINABILITY REPORT 156 Personnel of IDGC of the South, JSC 159 Environmental policy 167 Customer-oriented policy 169 Forecast of emergencies at facilities of the distribution grid complex in 2012 170 Public relations, relations with public authorities, 176 international cooperation, congress and exhibition activities Glossary 180 APPENDICES: 183 1. Information on electricity transmission services by IDGC of the South, JSC 184 2. Information on tariffs and volumes of demand for technological connection 188 3. Annual financial report of IDGC of the South, JSC for 2011 202 4. Auditor's report 212 5. Auditing Committee opinion 214 6. Report on compliance of IDGC of the South, JSC with the Corporate Governance Code 217 7. Information about the participation of IDGC of the South, JSC in non-core business areas 226 8. Information on interested-party transactions conducted by IDGC of the South, JSC in 2011 229 Contact information 247 ADDRESS TO SHAREHOLDERS OF THE CHAIRMAN OF THE BOARD OF DIRECTORS OF IDGC OF THE SOUTH, JSC Dear shareholders! One of the largest inter-regional distribution grid companies term investment programs by the Society which has allowed not of Russia, IDGC of the South, JSC, despite the difficult working only raising reliability of the power supply complex, but creating a conditions caused by consumers’ debts for the services provided to reserve for its subsequent development as well. them by IDGC of the South, JSC, by legislative restriction of electric The Program of the Society Innovative Development, approved power tariffs growth and for some other reasons, has been able to by the Board of Directors for 2011–2016, defining the innovative, show positive results by the end of 2011: the profit of 117 million research, design and experimental activity as one of the major fac- rbl. has been gained. This was possible due to the coordinated tors of development of the Russian distributive power supply net- work of the members of the Society Board of Directors and due work complex, urged to give to this process a special impulse. The to IDGC of the South, JSC management. program determines the basic directions of innovative development In 2011, the IDGC of the South, JSC included the represen- of the Company, generates priority directions of research, design tatives of the major shareholder, the Holding IDGC, JSC, to the and experimental works, and the plan for execution of research, IDGC of the South, JSC Board of Directors, as well as represen- design and experimental works for the next few years. tatives of the minoritaries. Participation of the representative of For perfection and increase of the management system ef- the Non-commercial Organisation of Investors Rights Protection ficiency, achievement of high industrial and economic activity Association in the Society Board of Directors has become an ad- indicators, IDGC of the South, JSC has shifted to the new structure ditional guarantee of respect of minority shareholders’ interests. of Society branches management since the 1st of August, 2011. During the accounting year, the Company management under The Board of Directors defines one of priority directions of the the guidance of the Board of Directors has focused its efforts on the Society activity. This is implementation of the integrated system system solution for certain priority problems: formation of the uni- of the internal control and risks management. Standardization of form integrated hi-tech control system of IDGC of the South, JSC; the monitoring environment and risks of key business processes realization of client-oriented approach within the Company’s is carried out in 2011 as a part of this work by introduction of activity; provision of qualitative and reliable power supply for Provisions of Monitoring Environment and Risks of Basic Busi- consumers; realization of the Activity Program of Decrease of ness Processes. Injuries Risks of External Persons at IDGC of the South, JSC An integrated management system is developed, implemented, Facilities; improvement of financial indicators of the Society certified and effectively functions in IDGC of the South, JSC, con- activity, including decrease of account receivables as part of the forming to international standards ISO 9001:2008 Quality manage- activities plan of the IDGC of the South, JSC financial improve- ment systems — Requirements, ISO 14001:2004 Environmental ment for 2010–2012. management systems — Requirements with guidance for use, The end of 2011 can be considered successful due to ex- OHSAS 18001:2007 Management system for professional health ceedence of physical indicators of execution of repair and short- and safety. Requirements. 4 Aleksey Yurievich Perepyolkin Chairman of the Board of Directors IDGC of the South, JSC The supervising audit on conformity to requirements of the IDGC of the South, JSC is acknowledged as the company with above standards was conducted successfully in December, developed practice of the corporate management, the 6+ national 2011, on platforms of Astrakhanenergo and Kalmenergo, the rating level of the Society corporate management is confirmed. IDGC of the South, JSC branches, as well as in the executive In 2011, the IDGC of the South, JSC shares rates are the body of the IDGC of the South, JSC. No critical discrepancies same in the Quotation list «B» of Moscow Interbank Currency were detected, which testified to high level of administrative Exchange CJSC. and industrial culture. Certificates lifetime has been prolonged We appreciate your trust, and we assure the shareholders that till December, 2012. the Society management in 2012 will focus its efforts on: SGS Vostok Limited CJSC acted as a certification body. It is Increase of the Society investment potential and value; a part of the SGS group, which is the world leader at the market Maintenance of reliable and safe functioning of the power of monitoring, examination, tests and certification. supply network complex; Recertifying audit of the IDGC of the South, JSC Integrated Increase of information transparency. Management System is planned for 2012. If it is passed success- We hope that obtained results, set tasks and strategic objec- fully, the international standards conformity certificates will be