Interview with SA Arkhipov, General Director — Chairman
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Preliminary Approved by Resolution of the Board of Directors of IDGC of the South, JSC on 28.04.2011 (Minutes dated 29.04.2011 № 64/2011) Open Joint Stock Company “Interregional Distribution Grid Company of the South” р. 162–179 р. 10–29 р. 130–145 р. 92–119 р. 30–79 р. 80–91 р. 120–129 р. 4–9 р. 146–161 р. 185–254 р. 180–184 Address to shareholders of the Chairman of the Board of Directors of IDGC of the South, JSC Dear shareholders! Nikolay Nikolayevich Shvets IDGC of the South, JSC is part of the IDGC Holding, JSC group of companies, which owns 51.66 % of the Company’s voting shares. Chairman of the Board of Directors IDGC Holding, JSC is one of the largest infrastructure organizations in Russia, controlling about IDGC of the South, JSC 80 % of Russia’s entire power distribution grid complex. The competitiveness and development of IDGC of the South, JSC, just as for other interregional power distribution grid companies which are part of IDGC Holding, are determined to a great degree by the policy conducted by IDGC Holding, JSC through its representatives in the boards of directors of the holding’s subsidiaries. The 2010 reporting year featured the consequences of the financial crisis, natural disasters, and, as a result, a decrease in power consumption, and lower solvency of electricity sales companies and The Company implemented preparation and disclosure of closely linked to the process of strategic and operation planning, electricity consumers, including the bankruptcies of a series of the Company’s counteragents. The a social report for 2009 for the first time ever with the aim of and calls for active participation of all the Company’s structural Company’s top management changed, and the Company’s zone of responsibility changed as well: improving corporate management practice, improving working subdivisions in the process of exposing and appraising risks. by resolution of the Board Directors of IDGC of the South, JSC dated 29.10.2010, it was decided that conditions and the quality of life of its employees, as well as IDGC of the South, JSC’s risk management policy was it is expedient to discontinue the validity of the contract for transferring the authority of the individual protecting the interests of other categories of interested parties. adopted (Board of Directors minutes dated 11.06.2010 executive body of Kubanenergo JSC between IDGC of the South, JSC and Kubanenergo, JSC start- Realizing its responsibility before interested parties, IDGC № 47/2010) with the aim of determining the main principles of ing from 01.12.2010. of the South, JSC plans to implement regular compilation of a organization, implementation and control over the processes By the end of 2010 accounts receivable had accumulated to a sum of RUR 4 bln. It was impos- social report in the future. of risk management in IDGC of the South. The Company’s risk sible for the Company to collect such a large sum. Of this amount RUR 2.5 bln was written off by the In 2010 the Consortium of the Russian Institute of Directors management policy is based on world practice at managing Company, and a reserve for doubtful debts of RUR 1.5 bln was formed so as to write off the remain- and the Expert RA rating agency raised IDGC of the South, JSC’s risks in the energy sector, taking into consideration the regula- ing accounts receivable in 2011. But despite the fact that the Company had a negative financial corporate management rating, which was given to the company tions of conceptual bases of risk management COSO ERM, the result for 2010, a series of steps were taken to reduce costs and increase revenue as compared to earlier at NRKU 5+ (“Average corporate management practice”), ISO/IEC Guide 73:2002, as well as other generally accepted the previous year. to NRKU 6+ (“Well-developed corporate management practice”). documents in the field of risk management in the world. The In accordance with article 15 of the Company’s Charter, the Board of Directors conducts strate- This rating class testifies to the fact that IDGC of the South, Company identified and appraised the significance of risks in all gic management of the Company’s business and control over managers’ work, and is accountable to JSC has low corporate management risks, and follows the ma- spheres of its business activity. the Company’s shareholders. jority of recommendations of the Corporate Governance Code The management system of IDGC of the South, JSC was The Company’s management under the leadership of the Board of Directors aimed its efforts at and modern Russian and international corporate management implemented and functions effectively in accordance with solving the following tasks in the reporting year: practice. the requirements of international standards: ISO 9001:2008 forming a unified integrated high-technology management system in IDGC of the South, JSC; The procedure for listing IDGC of the South, JSC shares “Quality management systems”; ISO 14001:2004 “Ecological improving the integrated system of personnel management and implementation of the principles in the “B” quotation list of the MICEX exchange was conducted management systems”; and OHSAS 18001:2007 “Occupational of social responsibility of IDGC of the South, JSC; on 12.07.2010 as a result of implementation of the company’s health and safety information”. All of IDGC of the South, JSC’s ensuring energy-efficient and innovational development of the Company; efforts in 2010 to increase the investment attractiveness of branches received certificates of conformity to international implementation of a client-oriented approach in the business of IDGC of the South, JSC; its shares for potential investors and its market capitalization, standards ISO 9001:2008, ISO 14001:2004, and OHSAS ensuring high-quality and reliable energy supplies to customers; including with the aim of transferring Company shares from the 18001:2007 in 2010. preventing injuries: the Company’s Program for 2010 – 2012 at reducing the risks of injury of list of off-list securities to the “B” quotation list on the MICEX Despite objective difficulties, the Company performed new other parties on equipment of IDGC of the South, JSC; Exchange. construction, reconstruction and technical upgrading of power improving the company’s financial results, including reducing accounts receivable: the Company Furthermore, IDGC of the South, JSC shares demonstrated grid supply equipment, worked at reducing the risk of injury, approved its plan for financial recovery of IDGC of the South, JSC for 2010 – 2012. an increase in liquidity by almost 6 times year-on-year in the fulfilling the yearly revenue plan, optimization of reserves, and The Company plans to approve the concept for forming its production program in 2011. The imple- reporting year: according to MICEX exchange data, turnover other operations in the reporting year. mentation of this program will make it possible to significantly reduce deterioration of electrical equipment. of the total quantity of shares placed by the Company equaled I’m sure that the Board of Directors and the Company man- The Company improved its system of corporate management over the course of 2010. The Charter 5.5 % in 2009, but 32 % in 2010. agement can solve the Company’s main tasks for 2011 — pro- of IDGC of the South, JSC, was adopted in its new edition at the annual General Shareholders’ Meet- An integral part of IDGC of the South, JSC’s system of cor- viding uninterrupted electricity supplies to consumers, fulfillment ing which took place on June 15, 2010. The committees of the Company’s Board of Directors which porate management is its risk management system, which allows of investment and repair programs, and ensuring the profitability were established at the end of 2009 were active throughout the accounting year, including the: Company management bodies to take the most effective and of the Company’s business and the company’s transparency for Auditing Committee; economically justified decisions. The risk management system is shareholders and investors. Committee for Personnel and Remuneration; Committee for Technological Connections to Electric Grids; Reliability Committee; Committee for Strategy, Development, Investments, and Reform. Respectfully yours, Chairman of the Board of Directors IDGC of the South, JSC Nikolay Nikolayevich Shvets 4 IDGC of the South annual report 2010 Address to shareholders Address to shareholders IDGC of the South annual report 2010 5 Interview with S. A. Arkhipov, General Director — Chairman of the Management Board of IDGC of the SOUTH, JSC Sergey Aleksandrovich Arkhipov General Director — Chairman of the Management Board of IDGC of the SOUTH, JSC — Sergey Alexandrovich, IDGC of the South made net losses over the last two years. What can be done to change the situation this year? — We finished last year with a loss of RUR 3.6 bln, but all the company’s losses last year are explained by one factor — writing off and provisioning for debt that can’t be collected: those debts on which the term of the claim has expired or which we weren’t able to collect through court. Accounts receivable are connected to the consequences of the crisis, which is an entirely normal situation for the majority of large companies in the energy sector. We had to write off “dead” debt, and we therefore conducted risk assessment, and separated risky sums from accounts receivable, for which reserves for doubtful receivables were made. It will be possible to write these debts off from our re- serve over the course of 2011, and they won’t have an influence on the company’s financial results. The most important thing is that we managed to clean out our accounting balance. IDGC of the South, JSC doesn’t have any “dead” debt now, which can lead to risks.