Annual Report Public Joint-Stock Company “Federal Grid Company of Unified Energy System” 2016 The Annual Report was approved by the Annual General Meeting of Shareholders on 29 June 2016 (Minutes No.18 of 03.07. 2017) preliminarily approved by the Board of Directors of Annual Report Federal Grid Company as of 29.05.2017 (Minutes No.367 of 29.05. 2017) Public Joint-Stock Company “Federal Grid Company Chairman of the Management Board of Federal Grid Company A. Murov of Unified Energy System”
15 YEARS TOGETHER WITH RUSSIA
2016 Contents
Strategic Priorities Strategic Report In Brief 2 Statement from the Chairman of the Board of Directors 8 Interview with the Chairman of the Management Board 10 Public Joint Stock Company Federal Grid Company of Unified Energy System Key Events of the Year 14 is a unique infrastructure company that provides reliable and uninterrupted electricity Geography 16 transmission via backbone electric grids in the Russian Federation. Management Business Model 18 Market Review of the Unified National (all-Russian) Electric Grid (UNEG) is our key area of focus. 24 Reliability Development Strategy 32 Reliability Key Performance Indicators (KPI) 33 of electricity supply Risk Management 38 to our consumers. Operating Performance 40 Investing Activities 46 Innovative Development 52 Analysis of Financial Performance 55 About the Report Sustainability Results 63 UNEG development Development The Annual Report highlights the successful generation schemes for nuclear, heat and and functionality operations of FGC UES over the course of fifteen hydroelectric power plants, of the Unified National Corporate Governance General Information on the Company's Corporate 72 Governance years, contributing both to the Company's standing — Technological connection of major enterprises of (all-Russian) Electric Report and to the domestic economy in general. The leading industries: oil and gas fields, mining and Grid adequate to the General Meeting of Shareholders 80 development of backbone electric grids has reflected processing enterprises, iron and steel plants, needs of the national Report of the Company's Board of Directors 81 the needs of the Russian economy and the Company's mechanic engineering facilities, airports, large economy and its Board Committees 92 customers. By providing electricity transmission agricultural enterprises and others. citizens. services via backbone grids to 77 regions in Russia, Corporate Secretary 104 the Company creates opportunities for economic The Annual Report includes the Company's data, Executive Governance Bodies 104 open-source information and data from a stakeholder growth and offers solutions for major social and Remuneration System for Governance Bodies 110 survey (questionnaire) conducted by the Company. economic challenges. Risk Management, Internal Control and Internal Audit 112 In the text of this Annual Report, the Public Joint The individual parts of the Annual Report cover Audit Commission 120 Stock Company Federal Grid Company of Unified systemically significant projects that have been External Auditor 121 implemented by the Company over the years, such as: Energy System is also referred to as: PJSC FGC UES, JSC FGC UES (the former name used before 07 July Conflicts of Interest 122 — Improving the reliability of electricity supply to the 2015), FGC, FGC UES, Federal Grid Company, Federal Anti-Corruption Policy and Economic Security 126 regions, Grid Company of Unified Energy System or the Share Capital, Securities Trading 129 — Participating in the implementation of power Company. Economic Dividend Policy and Profit Distribution 133 efficiency Information Disclosure and Communication 133 Economic with Investors and Shareholders efficiency and financial sustainability
Financial RAS Annual Financial Statements 138 Statements of Federal Grin Company for 2016 IFRS Consolidated Financial Statements of Federal Grid 148 Corporate Website: Interactive Company for 2016 www.fsk-ees.ru/eng/ Version
Additional Disclaimer 157 Information Glossary 157 Contacts 159 List of Information Attached in the Appendices 160 to the Annual Report
Appendices are available in electronic format and on our corporate website at www.fsk-ees.ru/eng/
Annual Report 2016 1 Strategic Report IN BRIEF Assets under our FGC revenue structure management in 2016 Technological connection Number of substations, units 939 21% 1% Other revenue Strategic Report 924 931 140.3 Who We Are and What We Do 138.8 139.1 PTL length including leased, th. km Federal Grid Company is a Russian energy company that provides electricity transmission services through the Unified National Electric Assets according to the production 78% Grid. The Company is a natural monopolist in the sector. annual report 2014 2015 2016 Energy transmission 35–1,150 kV substations, pc. 857 861 870 The Company is included in a list of systemically important organisations of strategic Length of 0.4-1,150 kV power 131.5 133.1 134.0 importance to Russia. transmission lines along the route, thousand km
The operations of FGC UES Key operations We provide: The bulk of our revenue
— electricity transmission via backbone The operations of Federal Grid The bulk of our revenue is generated — managing the Unified National Electric grids to 77 regions in Russia, Company are characterised as a through tariffs for electricity Grid; addressing most the important issues low-risk business, steadily developing transmission approved by the Federal — providing electricity transmission and of social and economic development due to the consistent implementation Anti-Monopoly Service. technological connection services of our country; of strategic priorities, effective to Wholesale Electricity and Capacity — transiting electricity over the borders of Regional distribution companies, retail management and professional work Market participants; of its employees. 11 foreign states, collecting and suppliers and major industrial — investing activities in the area processing information on electricity enterprises are among our largest of UNEG development. transmission via 134 cross-border consumers. electricity transmission lines.
Assets under our management:
thousand km of transmission lines substations along the route
2 PJSC FGC UES Annual Report 2016 3 Strategic Report IN BRIEF
Who We Work For How We Work
The scope of the Company's operations requires us to meet the interests and expectations of a wide range of stakeholders: Our Operation Principles Results of 2016
We satisfy the demand for electricity Focus on Customers Electric power supply to consumers transmission and technological connection, from UNEG ensuring the reliability and quality of service as well as providing technological infrastructure of We maintain high standards of customer 540.5 0.8 th. km the wholesale electricity and capacity market service, providing about half of the total bln kWh of electricity transmission lines energy consumption in Russia commissioned Consumers 8.8 th. MVA of transformer capacity 2012 2014 2016 and customers 1 commissioned We ensure the financial stability and growth We create a transparent of the Company's value, as well as a high competitive environment and fulfil Reliability level of openness and transparency of the our contractual obligations information on the Company’s financial and production activities We provide reliable and uninterrupted Specific accident rate Business partners, electricity transmission via backbone electric grids suppliers Shareholders 1.34 and contractors and investors 2 2012 2013 2014 2015 2016 Responsibility Environmental expenses and investments, million RUB Industrial accident rate Regional Communication with stakeholders to Company's communities maintain sustainability in the long-term 0.0091 194 personnel and population 2012 2014 2016 2012 2014 2016 We guarantee fair remuneration We contribute to the development of 3 for work, provide opportunities infrastructure, create jobs and implement for training, professional growth and social programmes, reduce the negative the realisation of creativity; we also The whole impact on the environment Innovation provide safe working conditions and Company R&D financing, billion RUB high social guarantees We invest in upgrading and expanding the We implement projects to develop grid electric power infrastructure and apply infrastructure in areas of potential economic advanced innovative technologies development, and provide the required balance 0.41 of consumption and electricity resources; we are currently implementing an import substitution 4 2012 2013 2014 2015 2016 programme, which contributes to the development of the domestic electro-technical Economic Efficiency industry and Investment Attractiveness Adjusted net profit1 Total shareholder return (TSR) Understanding its responsibility, Federal Grid For more information on We optimise business processes to improve the Company's Company seeks open and mutually beneficial financial results, and maintain the balance communication with the of interests of our shareholders and the cooperation with all of its stakeholders, taking into stakeholders, please see Company's needs for development account their opinion, interests and feedback. the respective sections +239 p.p. by 2015 of the Report on Social billion RUB Responsibility and 5 +2.9 times by 2015 Corporate Sustainability. 1 Net profit secured by cash funds (adjusted for the balance of accrual recovery of bad debt provisions 4 PJSC FGC UES and the revaluation of fixed assets and financial investments). Annual Report 2016 5 Development of backbone grids. The Company's participation in the largest infrastructure projects
Construction of electricity supply facilities of the Valaam Archipelago (2008–2015) p. 13
Construction of power output grids at Boguchanskaya HPP (2008–2014)
Specification of the priorities for the Power supply for the sports facilities of the 2014 electricity industry development. Olympic Games, including the construction and reconstruction of 36 electric grid facilities Optimisation of the Company's activities с.24 (2009–2013) p. 37 Continuation of reforming Unified Energy Construction of electricity supply facilities for the Eastern System of Russia. Reconstruction of SS 220 kV Ledyanaya for power Siberia – Pacific Ocean (ESPO) pipeline system supply to The Vostochny Cosmodrome Consolidation of the Company’s key assets (2009–2014) (2014) p. 125 Construction of OHL 220 kV Neryungrinskaya GRES – Nizhny History Kuranakh – Tommot-Maya with SS 220 kV Tommot and SS 220 kV Maya for power supply to the regions of South Yakutia Construction of facilities for power output to BNPP-2 (Beloyarsk Nuclear Power Plant) (2014–2015) Construction of the 500 kV Aluminievaya (2009–2017) Commencement of reforming Unified Energy substation for electricity supply of the Construction of a power bridge for the OHL 500 kV Zeyskaya Khakassky aluminium plant (2006) p. 103 HPP – Amurskaya – State Border (2010-2013) System of Russia. The Company's development Commissioning of electricity supply facilities at the Construction of OHL 500 kV Krasnoarmeyskaya – Gazovaya Vankor field (2014–2016) Commissioning of facilities to increase the capacity of the with expansion of the SS 500 kV to provide power supply for p. 91 Kolenergo–Karelenergo–Lenenergo transit large industrial enterprises (2011–2015) (2007, 2009)
Elimination of electric power deficiency in the Primorsky Territory, and the development of Commissioning of the 500 kV Emelino Construction of the SS 750 kV Gribovo Connection to the backbone grids of the Vladivostok (2002–2006) p. 125 substation in the Sverdlovsk Region, and the for capacity output of the 4th power unit offshore oil loading port of Kozmino (2015) connection of new capacities of large pipe of Kalinin NPP (2012–2013) p. 23 p. 125 plants (2008) p. 71 Electricity supply to the Kuyumba-Taishet oil pipeline Commissioning of facilities for power output at Construction of the first underground power Connection of the Antipinsky refinery to the new FGC UES Bureyskaya HPP (2004–2005) p. 125 Reconstruction of the Ochakovo substation, facilities in Russia for electricity supply to the 220 kV substation – Gubernskaya and the Moscow Ring 500 kV (2008) p. 23 Skolkovo Innovation Centre (2012–2013) p. 23
Upgrading and commissioning of the 500 kV Commissioning of facilities for power output of the Reconstruction and construction of several substations Commissioning of 501 MVA of transformer capacity in the Kuibyshevskaya substation, covering over 3rd power unit of Kalinin NPP; improvement of the and St. Petersburg Power Ring 330 kV (2007–2013) reliability of the power supply to the Cherepovets context of recovery from an accident and to increase 70% of electricity needs in the Samara region industrial hub (2004) p. 23 reliability at Sayano-Shushenskaya HPP (2013–2015) p. 49
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
State registration Inclusion of the Company A large-scale reform of the electric grid complex was The number of FGC's Approval of the FTS Listing of depositary The endorsement of the Bringing the Company's corporate of JSC FGC UES in the Register of Natural carried out; as a result, the ownership and management shareholders parameters for the receipts of JSC FGC UES Long-Term governance system and practices Monopoly Entities in the Fuel of the backbone grids of JSC RAO UES of Russia were exceeded 470 Company's transition to on the primary exchange Development in line with the key recommenda- and Energy Complex, as well handed over to JSC FGC UES. thousand RAB-regulation for of the LSE Programme of the tions of the Corporate Governance as in the list of commercial The reorganisation of JSC FGC UES was completed in the Listing on the RTS 2010–2012. Company for Code of the Russian Federation and organisations and entities on 2015–2019, with an the listing rules of the Moscow form of merging 56 backbone grid companies, and MICEX Inclusion of the Company's JSC Rosseti, the Federal Wholesale outlook for 2030, by the Stock Exchange, including the JSC RAO UES of Russia, JSC State Holding and exchanges. shares into the calculation a state-owned company, Electricity and Power Market JSC Minority Holding FGC UES Government of the approval of a new version of key Launch of the GDR of the stock indexes of becomes the major Russian Federation. internal documents. programme MSCI Russia and MSCI shareholder, owning
История Компании История Компании Emerging Markets 80.6% of ordinary shares of JSC FGC UES 6 PJSC FGC UES Annual Report 2016 7 Strategic Report
The unity of our strategic priorities – the reliability of energy supply to consumers, the development
of backbone grids, as well as economic efficiency Strategic Report and financial stability of the company – shall be the cornerstone of our success. oprt oenneRpr Financial Statements Corporate Governance Report Oleg Budargin Chairman of the Board of Directors of Federal Grid Company
Statement from the Chairman The Company’s operating expenses are successfully lished efficient communication between the Board of controlled by the management by optimising the Directors and management officers, so we are able to of the Board of Directors structure of the personnel, managing procurement succeed in making approved decisions in the shortest activities and implementing the long-term import time possible. substitution programme. For shareholders, the results of our operations are expressed in the growing value of shares and dividends Appendix Sustainability payments. Upon the results of the reporting year, FGC’s Our priorities in this area remain unchanged. Paying shares took the lead, in terms of TSR, among the most close attention to the Company’s operating and finan- liquid shares in both the electric power sector and on Dear shareholders, customers, partners, cial performance, we understand the importance of the Russian market as a whole. Grid Reliability maintaining a sustainable attitude to the issues of envi-
employees and all other parties somehow Not only are we constructing and reconstructing elec- ronmental protection and the social sphere, as well as
tric grid facilities, but, from year to year, the profession- simultaneously developing and maintaining an effective related to the activities of Federal Grid TSR upon results als of Federal Grid Company make efforts to ensure the dialogue with all categories of stakeholders. of 2016 Company of Unified Energy System! reliability of power supply to our consumers, by carrying Our personnel is one of the core assets of the Compa- out diagnostic studies, performing a large-scale repair ny. Therefore, the KPI system of Federal Grid Company programme and preparing for the peaks of load. All of In 2017, FGC celebrates its 15th anniversary. The includes such indicators as “Growth of Labour Produc- these operations are performed countrywide on a very year 2002 marked a new stage in the development of tivity” and “Absence of Increase in the Number Injured large scale, considering that FGC is one of the largest The Company’s shares are still undervalued from a Russian electric grid industry, which continues to the in Accidents.” electric grid companies in the world. fundamental point of view and are traded at a high present day. Today, Federal Grid Company meets the discount compared to analogues on emerging mar- global standards of the industry in terms of major indi- Economic Efficiency Company s average hea count kets. The growing value of FGC’s shares on the stock cators, and in some indicators, we are ahead of foreign t o sand emplo ees exchanges demonstrates a positive assessment of the companies. and Financial Sustainability Company’s prospects by investors. Our key strategic task is managing costs in order Development of the Unified Nation- to maintain increasing economic efficiency. Capital In 2016, Federal Grid Company maintained its produc- al (all-Russian) Electric Grid investment management is performed in line with tion indicators at a high level and significantly improved the investment programme, which has been adopt- its financial performance in the context of contradictory The Company is successfully carrying out the construc- ed for a five-year period, by taking into account the trends in the domestic economy. tion of electric grid infrastructure, thus contributing to long-term development plans of the domestic electric The mission of Federal Grid Company, the leading the social and economic development of the regions of power industry and compliance with the principles subsidiary of PJSC Rosseti, is to continuously provide our country and providing a reliable electricity supply to of technical and economic feasibility in terms of reliable and safe energy supply to consumers, and consumers. Corporate Governance regulated tariffs. increase efficiency of our core opeartions. The Company follows the basic principles of corporate In the course of business opeartions, we have been governance that are stated in the Corporate Govern- The results of the past year la y a solid foundation for implementing a number of significant projects of Company s revenue illion R ance Code of the Bank of Russia. We work hard to the further activities in the priority areas. regional and national importance for the construction improve the corporate governance of our subsidiaries, of new and the reconstruction of existing backbone grid including the development of internal documents to facilities. meet the Company’s high standards. We continue to develop the Unified National (all-Rus- The Company’s highly professional management sian) Electric Grid taking into account the changing team and qualified personnel contribute greatly to the economic environment. realisation of our long-term strategy. We have estab-
8 PJSC FGC UES Annual Report 2016 9 Strategic Report
What amount of funds were allocated to “The management of our capital and operating ex- finance the repair programme?
penses is the basis of FGC’s financial sustainability” In 2016, total investment in maintenance and repairs amounted to RUB 10.6 billion. The repair campaign of FGC UES is 100% completed. Strategic Report We have managed to overfulfill the targettarget costs optimisation: at present, net investment costs are by 30% below the level of 2012, and operating costs – by “The right balance between the implemen- 46%. Investors especially highlighted our management tation of the repair programme and the of expenses during regular meetings with the invest- ment community organized by the Company. construction of new electric grid facilities
One of key factors that is important for us and has an guarantees a reliable energy supply to our Financial Statements Corporate Governance Report impact on our financial results is the increase in the consumers” payment collection rate for electricity transmission.
How do you assess the role of management What can you say about the Company’s divi- in achieving top results? dend policy? Should shareholders expect the same high returns as in 2015? Consistent work of our team and commitment to the chosen way of the Company’s development are at the In 2016, the Company paid dividends in the amount of heart of our current achievements. The company shows stable positive RUB 17 billion as a result of activities in 2015, which corresponds to 95% of the profit under RAS. We demonstrate obvious improvements: growing rev- enues from the provision of technological connection dynamics of the main idicators “Payments of dividends in 2016 were a record high services, transfer of electricity to direct consumers, and in the history of the Company” decreasing costs. The macroeconomic situation did not affect FGC’s financial sustainability, and the amount of The General Meeting of the Shareholders will take a debt remains at a comfortable level. Chairman of the Management Board of PJSC FGC UES Andrey Murov Answers Ques- decision on the dividend payment for 2016 based on At the same time, in terms of reliability indicators, the the recommendations of the Board of Directors, given tions About the Company’s Main Outcomes Company is comparable to the best foreign counter- with account of the current normative legal acts and parts. the financial performance of the Company.
in 2016 and Prospects for the Future Appendix
As the Head of the Company, what do you Tell us more about the results of the Compa- expect from 2017? Tell us about the Company’s production indi- Record revenue in the amount of RUB 45.5 billion has ny’s investment activities in 2016 and for the cators in 2016. To what extent have been obtained from technological connection, a growth near future. By no means, FGC will keep on maintaining a reasonable of over three and a half times more compared to 2015. balance between development, reliability and economic you managed to achieve the planned At the end of the year, the Ministry of Energy of the efficiency. results? The Company’s adjusted net profit (without taking into Russian Federation approved the amendments to the First of all, I would like to thank all FGC’s employees for account the revaluation of financial investments and investment programme for 2016–20201. The extent of I repeat, the quality of services provided to consumers is their work in 2016. Their professionalism has enabled reserves) has increased nearly thrice compared to the the Programme’s financing for 2016 amounted to RUB definitely globally competitive. Our minimum goal is not the Company to show high performance every year. previous year, exceeding RUB 59 billion. 99 billion; the total amount for the five-year programme to allow any decrease. is RUB 482 billion. The accident rate is a significant indicator of our opera- We have a lot of interesting projects to be implement- tions. It has been declining for several years in a row. “The solid results of FGC at the end of the year The key parameters of the Programme were approved ed in future. In 2017, three substations in the Moscow demonstrate the stable position of the Company by the federal executive authorities and our major Region shall be commissioned upon renovation, power Accident rate reduction shareholder PJSC Rosseti. transmission schemes for Rostov and Leningrad NPPs on the electricity market.” are being implemented. All the major titles to strengthen in 2012–2016 In 2016, capacity in the amount of 8.8 MVA and about -45% the links between UES of the Central Region and UES of 827 kilometres of grids were commissioned. In 2017, In 2016, FGC became one of the leaders by quotation Northwestern Region are being completed. In the reporting year, electric power supply from UNEG in accordance with the adjustment of the investment growth on the Russian stock market. The Company’s to the consumers of FGC services increased by 2.8% programme for 2016 -2020, the planned volume of fi- Activities under macro-projects of state importance will capitalisation has increased almost thrice over the year – and amounted to 540.5 billion kWh. Today we are man- nancing for FGC’s investment programme will be about be continued: external electricity supply of Baikal-Amur a significant indicator of growth in investor credibility. aging 140.3 thousand km of power transmission lines RUB 105 billion, and transformer capacity in the amount and Trans-Siberian railways, ESPO pipeline systems, and The total shareholder return (TSR) exceeded our target and 939 substations with a total capacity of 336.4 GVA. of 13.2 thousand MVA are to be commissioned and 2.3 the Power of Siberia project. value. Foreign investors have significantly increased their thousand kilometres of power transmission lines are to Our customers should be glad to know that the Compa- presence in the Company’s share capital. In 2017, FGC UES celebrates its 15-year anniversary. We be built. ny maintained its key indicators in relation to the terms cross this boundary as a stable, reliable company that is Our financial stustainability is confirmed by credit and quality of technological connection. consistent in its actions and attractive for investors. ratings of the international agencies, maintaining at the level of the sovereign rating of the Russian Federation. How would you comment on the financial and economic results of the Company’s oper- What kinds of measures on financial adminis- ations in 2016? tration were taken in 2016? The financial results of the year for FGC can be recog- In 2016, we continued to optimise costs. With an in- nised as quite strong. The Company’s revenue under crease in the amount of equipment under maintenance RAS exceeded RUB 218 billion, having increased by due to the implementation of a large-scale investment 26%. The adjusted EBITDA amounted to RUB 120 billion programme, we managed to substantially reduce the – a growth of more than 15%. costs of materials and services by 5%. 1 The Order No. 1432 of The Ministry of Energy of the Russian Federation on 28 December 2016.
10 PJSC FGC UES Annual Report 2016 11 Strategic Report oprt oenneRpr Financial Statements Corporate Governance Report
Bac one electric rids of the orthwest Appendix
orthwest PHOTOS:
1 St eters r FGC RA C 1 ey infrastructure pro ects alaam 330 kV SS Vasileostrovskaya S R C AR A 330 kV SS Vostochnaya, 11 entities of the Russian Federation in the St. etersburg nergy Ring North-West Federal district, with a population of 2005–2019 Renovation and construction of substations: 330 kV more than 14 million people. Vostochnaya, 330 kV Volkhov–Severnaya, 330 kV Zavod Ilyich, 330 kV Severnaya, 330 kV Vasileostrovskaya PERSONNEL mprovin t e relia ilit o t e electricit s ppl to t e metropolis and minimi in t e More than 2.3 thousand people likelihood of major contingencies.
АSSETS 1 2010–2019 Capacity output of Pecherskaya SDPP. 220 kV HVTL, HVTL 13.3 thousand km Pecherskaya SDPP – Ukhta-Mikun' 99 substations of 35-750 kV mprovement o relia ilit o electricit s ppl to t e cons mers in t e so t ern part o (in addition to 330 kV SS, Sovetsk, (402 MVA), t e omi Rep lic as ell as relia ilit o electricit trans er to olo da po er s stem leased by JSC Yantar'jenergo) 41 TSS, 6-10 kV 2010–2016 Power generation of Leningradskaya NPP. Construction of 330 Capacity — about 39.5 thousand MVA kV HVTL, Gatchina–LNPP. Approach lines of 330 kV HVTL, Leningradskaya-Balti to SS Kingiseppskaya OPERATIONS Improvement of reliability of Leningradskaya power system, ensuring the power output lectricit transmission e ranc provides of unit 1 of Leningradskaya NPP. electricit connection o S o ort est to t e po er s stems o t e Central Re ion o R ssia ternal electricity supply to the alaam islan elar s as ell as electricit transmission to 2008–2013 Construction of a new 35 kV Valaam substation, a 35 kV aerial Finland, Estonia, and Latvia. cable line with the total length of 50 km, and reconstruction of a 220 kV Lyaskel substation. ns rin relia le electricit s ppl to t e alaam arc ipela o 1 12 PJSC FGC UES accordin to ann al per ormance reports Annual Report 2016 13 Strategic Report KEY EVENTS OF THE YEAR
Investment Corporate Sustanability Key Events of the Year Innovations Finance Programme Governance
FGC connected the Oil Loading Seaport Kozmino to the backbone electric grids. The power volume to the consumer anuary Strategic Report is 28.6 MW. Two 220 kV transmission lines have been constructed, which connect through permanent lines the ctober FGC was awarded the Crystal Pyramid–2016 grand prize The International rating agency Fitch Ratings has substation of the Oil Loading Seaport to the working substation of FGC 500 kV "Lozovaya." in the category of Best Corporate University for its changed the rating forecast for the Company from special contribution in human capital management. The negative to stable. The level of credit quality, according 01 10 awarding ceremony was held during the XVII Summit of to the International scale, was confirmed at the same HR Directors of Russia and CIS Countries. level as the BBB- (investment category), which is equivalent to the credit quality of the Russian Federation. oprt oenneRpr Financial Statements Corporate Governance Report
The works on the first facility were completed within the The long-term credit rating of Federal Grid Company arch activities aimed at strengthening the ties between the according to the National Scale of Moody's Interfax FGC placed exchange-traded Series BO-02 bonds for FGC confirmed the compliance of the environmental power systems of the Northwest and the Centre. The 330 Rating Agency was withdrawn on the initiative of the ovember RUB 10 billion with a 5-year maturity before the formal management system with the requirements of the kV Kingiseppskaya substation was connected to 330 kV rating agency due to the termination of assigning the 03 Leningradskaya-Balti OHL. The first stage of the total National Scale ratings by the agency. The decision to offer. The coupon rate is set at 9.35% per annum. The International standard ISO 14001: 2004; the validity 11 funds received from the placement of bonds will be of the certificate was extended by the certification reconstruction of the substation was completed. withdraw the agency's National Scale ratings will not affect their assignment on the Global Scale. used for the implementation of the investment authority until the next compliance audit. programme.
ecember After a major modernisation, FGC commissioned the 500 kV Kuibyshevskaya substation, which covers more than FGC connected the Antipinsky Oil Refinery to the grids The international rating agency Moody's confirmed the pril in the Tyumen Region. The consumer received 60 MW Company's global rating according to the global scale 70% of the energy needs in the Samara region. of power. Electricity to the refinery is supplied by the at Ba1, which corresponds to the value of the sovereign new substation of FGC UES– 220 kV Gubernskaya. rating of the Russian Federation. 04 12 FGC completed the reconstruction of one of its key The Ministry of Energy of the Russian Federation facilities of the UES Northwest – the 330 kV Kolpino approved the adjustment of the Company's investment substation in St. Petersburg. As a result of this program for the period of 2016-2020. The document
reconstruction, the reliability of the power supply in St. takes into account the results of public discussions Appendix Petersburg has increased and the operating costs have and interaction with the expert community. Financing The annual General Meeting of Shareholders of PJSC PJSC FGC UES and the JSC Corporation for Developing une been reduced. The delivery of 79.4 MVA capacity to the of the investment program is planned in the amount of FGC UES was held. New members of the Board of Small and Medium Business (SME Corporation) signed Izhora Pipe Mill and Rolling Mill No. 3 was provided. RUB 482.28 billion. Directors and the Audit Commission were elected, new an agreement on cooperation. The document provides versions of the Articles of Association and the a set of measures aimed at expanding of the 06 Regulations on the Board of Directors were approved; availability of the Company’s purchases for small and the annual report, annual financial statements, the medium-sized businesses. auditor of PJSC FGC UES was approved; the decision on the distribution of profits based on the results of 2015 and the payment of dividends was taken. Main Events After the Reporting Date
FGC provided electricity for the Kuyumba – Taishet oil The Board of Directors of PJSC FGC UES approved the uly The 220 kV transmission line Shakhty - Donetskaya has been built. New PTL will expand the power supply layout in trunk pipeline. Due to connection to the UNEG, the oil updated Innovation Development Programme of the anuary the North of the Rostov region and will establish the energy ring 220 kV "Shakhty–500 – Donetsk –Pogorelovo – pumping stations received 19.1 MW of electric power. Company for 2016–2020 with an outlook up to 2025. 2017 The programme is updated in accordance with the 07 B–10 –Shakhty–500." instructions of the Government of the Russian Federation. ebruary The International rating agency, Moody’s, changed the The national long-term rating of PJSC FGC UES forecast for FGC credit quality from negative to stable according to the Fitch Ratings metric was withdrawn 2017 after a similar rating event in relation to the Russian on the initiative of the rating agency due to to the Federation. termination of assigning the National Scale ratings in FGC and a Chinese manufacturer of equipment, Huaming Power Equipment, signed a memorandum ugust the Russian Federation by the agency. The decision is on cooperation related to the development of innovative electrical equipment, as well as the promotion taken upon introduction of new regulatory of localisation of production in the Russian Federation. requirements for the operations of credit rating 08 agencies in Russia. The decision to withdraw the agency's National Scale ratings will not affect their The International rating agency Standard & Poor's revised the forecast for the change in FGC’s credit quality, September assignment on the Global Scale. according to the global scale, from negative to stable in the course of a similar rating event in relation to the Russian Federation. The level of the International rating of the Company remained at the same level of BB + (the least speculative category) and corresponds to the value of the Russian sovereign rating. 09 arch The International rating agency Standard and Poor’s changed the forecast for FGC’s credit quality from stable to 2017 positive after a similar rating event in relation to the Russian Federation.
14 PJSC FGC UES Annual Report 2016 15 Strate ic Report G GRA
n ormation on a n m er o t e s stations and t e len t o t e SC FGC S po er transmission lines is ased on t e state re istration o t e o ners ip ri ts Geo rap o SC FGC S and ot er proprietors
r Compan operates in Russian regions coverin an area o more t an . million s . m. Strategic Report e territor in ic t e Compan s acilities are located is divided into ones o responsi ilit or t e corporate ranc es ac one electrical rids S and t eir local enterprises S po er transmission lines s stations SS o p Sparsel pop lated territories it no lar e c stomers s c as C ot a amc at a o p to capacit to capacit Magadan Oblast, Sakhalin, the Nenets Autonomous Okrug and the Altai Republic – are not
integrated into the UNEG because they do not have the economic conditions necessary Financial Statements Corporate Governance Report or la in electricit transmission lines and esta lis in lar e s stations t m A S Siberia
S n ormation on t e n m er o s stations and t e len t o t e o SC FGC a ai als o e S estern S accordin to t e data o t e ann al operation report r ans o e Si eria S arels o e rasno ars o e ostoc no e enin rads o e ass o e sentralno e Novgorodskoye no e t m a ass o e Severno e Yamal-Nenetskoye t e len t o t e o SC FGC s stations it a volta e SS SS S alon t e ro te class o o total and installed S and installed capacit capacit o A aldais o e er ne ons o e o A ol a ons o e S orth- est olo ods o e S Centre os ovs o e rio s o e C erno emno e
S estern Siberia S rals Appendix S olga S Unified National Electrical Grid Am rs o e es South rimors o e a arovs o e
S S Nizhegorodskoye S Siberia ren r s o e S ast Nizhne-Volzhskoye erms o e S Samars o e Sverdlovs o e aspiis o e Sredne ol s o e no rals o e ans o e Rostovs o e Soc ins o e Stavropols o e S a ai als o e estern Si eria rasno ars o e ass o e a ass o e
ac one electrical rids SC FGC S participates ana ement o t e cross order S in siness entities t at interstate po er transmission lines operate in di erent ind stries FGC acilitates t e transit o electric ac one electrical rid incl din t ose t at s pport enterprises S po er at t e order o orei n electrical rid acilities states and per orms t e collection and re ional interstate po er ec nical s pervision centre S sidiaries processin o data on po er exc an e transmission lines ranc es Special p rpose prod ction centre and Associated via interstate po er transmission el Rast Companies lines F rt er details on t e Compan s international operations as ell as on t e electric ener etailed data on FGC s ranc es is availa le on t e site s ees r F rt er details on SC FGC S s sidiaries and associates export and import p rs ant to t e contracts o SC nter RA are availa le in t e section A o t t e Compan ranc es are availa le in t e Appendix ereto in t e Appendix ereto i idated on Fe r ar incl din volta e class acilities t not incl din po er lines and s stations o and lo er volta e class accepted SC FGC S or ree se and operatin in t e territor o t e rasnodar rai
16 PJSC FGC UES Annual Report 2016 17 Strate ic Report BUSINESS MODEL
siness odel
at di erentiates FGC rom ot er companies Strategic Report FGC UES manages the Unified National Electrical Grid, ensures electricity transmission via ac one lines and provides services or tec nolo ical connection to electrical FGC is t e monopol operator or mana in e Compan is a n m er one in t e orld rids o ens re relia le alit and sa e po er s ppl to cons mers e implement and developing the Unified National Electric in terms o t e len t o t e po er pro ects or t e constr ction o ne and t e renovation o existin electrical rid Grid transmission lines and t e trans ormer
acilities in addition to introd cin modern and e ective tec nolo and implementin capacit Financial Statements Corporate Governance Report meas res or environment protection and ener savin t is a ni e in rastr ct re compan t at Contin o s investments are made into t e provides relia le and ninterr pted modernisation and constr ction o t e e tilise vario s capitals as reso rces namel e l o o r reven e is enerated t ro tari s financial and production capital, human resource or electricit transmission t at are approved t e electricit transmission via ac one electric ener in rastr ct re potential innovative tec nolo experience in Federal Anti onopol Service r ma or c stomers electrical rids in t e R ssian Federation constr ctin and operatin t e electrical rids and are re ional distri tion companies retail s ppliers environmentall responsi le sol tions and lar e ind strial enterprises
ore t an a al o all ener cons mption in r oc s on innovative development and R ssia is electricit transmitted via FGC s rids advanced tec nolo Appendix
nd strial cons mers
ec nolo ical connection
nd strial lectricity transmission cons mers via bac bone gri s nter re ional Constr ction and distri tion NPP aintenance reconstr ction o companies UNEG facilities and repairs
o se olds
C s
rade s stem Alternative S stem operator so rces administrator ar et ispatc control alancin lectricit transmission to orei n co ntries
SC FGC S Ann al Report 18 PJSC FGC UES Annual Report 2016 19 Strate ic Report BUSINESS MODEL
Ris Created Capitals Strate Ris s mana ement val e Strategic Report
ncrease o ret rn on ac or increase in cost o Active interaction it investors and R S R RS R billion financial capital and attracted orro ed capital market, diversification of sources of o e it capital maintenance of financial Ris o n alanced tari financing, increasing transparency and TSR siness predicta ilit to red ce t e ris s staina ilit decisions or
R billion premi m as part o t e cost o de t Financial Statements Corporate Governance Report o lia ilities age Preparing economically justified proposals R billion on tari re lation dividend pa ment or
Financial capital Financial conomic efficiency R T ST T nvestments to electric rid ecrease in ret rn on capital nnovations and plannin o t e str ct re R . billion substations in rastr ct re development Cost overr n and ail re to meet o net or assets o tax pa ments and operatin assets eadlines Selection o contractors on competitive asis renovation control o constr ction sc ed les thousan m lectric mains interr ption ail re Reconstr ction o electric rid acilities o electricit R C S RS transmission lines xcess lac o po er Forecastin o rid load age m o electricit transmission
rod ctive capital lines commissioned G evelopment .
. billion h Appendix evelopment o researc Ris s related to innovative mprovement o plannin and acceptance net electricit s ppl R . billion and innovative potential tec nolo implementation o R or s o intan i le assets or tec nolo ical and implementation n rin ement o intellect al S ill improvement contracts connection as o t e end o R million o ne tec nolo ies propert ri ts mprovement o contract al activities of R&D financing age R S
ntellect al capital o s G evelopment thousan R . thousan . thousan Social s pport o t e Reduction in qualification level of eetin t e deadlines or operation avera e salar operation personnel personnel mandator trainin s emplo ees emplo ees oc s on Number of industrial accidents development and trainin Recr itment o personnel it Selection and recr itment o s illed red ced by . it pro essional o t e personnel insufficient qualification personnel ed cation age R S C T S . operatin
man capital emplo ees R million as allocated or environmental protection e vol me o prod ction astes Red ction o t e adverse nvironmental ris s nvironmental polic thousan impact on environment environmental poll tion ris s implementation red ced by cubic metres improvement o ener mplementation o R million ere allocated environmentalactivities o ater cons mption efficiency or t e development o re ions in t e orm o contri tions . million .h age
Natural capital Natural electricit cons mption R million financing or s stations o n needs o sponsors ip contracts
SC FGC S Ann al Report 20 PJSC FGC UES Accordin to t e ann al prod ction report Annual Report 2016 21 Strategic Report oprt oenneRpr Financial Statements Corporate Governance Report
Appendix Bac one electric rid of the Centre PHOTOS:
Centre 1 Moscow 1 ey infrastructure pro ects 500 kV SS Ochakovo FGC RA C 220 kV SS Skolkovo S ol ovo 2004 Construction of 750 kV HVTL, Kalininskaya NPS — Belozerskaya, with 750 kV SS, Belozerskaya S R C AR A Power supply of the third power station of Kalininskaya NPS, capacity of 1,000 MW, to 19 constituent territories of the Russian olo da po er s stem Federation on t e territor o t e Central mprovement o relia ilit o t e electricit s ppl to t e enterprises o t e C erepovets ort estern and So t ern ederal districts industrial cluster – Severstal, Azot, AMOFOS. with a population over 40 million people. 2008 Comprehensive reconstruction and technical reequipment of 500 PERSONNEL kV SS, Ochakovo About 4.8 thousand people Reconstruction of one of the largest facilities of the Moscow power system, improvement of operation reliability of the backbone grid of Moscow (500 kV Moscow ring)
АSSETS 1 HVTL 28.3 thousand km 2012–2014 Construction of 750 kV HVTL, Kalininskaya NPS – Gribovo, 500 kV 196 substations, 35-750 kV HVTL, Gribovo-Dorokhovo, 220 kV ACL, Dorokhovo–Sloboda, 750 1 TSS Belovezhskaya kV SS, Gribovo, 500 kV SS, Dorokhovo, expansion of 750 kV SS, Capacity — about 98 thousand MVA elo ers a a OPERATIONS Power supply of the fourth power station of Kalininskaya NPS, capacity of 1000 MW, to Electricity transmission. The affiliate provides Moscow and Vologda power systems. electricit connection o S o Centre it po er s stems o t e So t ort est ol a 2012–2014 Construction of 220 kV SS, Skolkovo, and 220 kV SS, Soyuz raine and a a stan Creation o electricit s ppl sc eme or t e S ol ovo nnovation Centre Constr ction of the first underground power units in Russia, voltage of 220 kV.
1 accordin to ann al per ormance reports 22 PJSC FGC UES Annual Report 2016 23 Strategic Report MARKET REVIEW Market Review Market of Technological Connection There has been no clear trend in the dynamics of the physical volume of technological connection services Services (consumers and generation) in the past years. This has Strategic Report Macroeconomics been determined, to a great extent, by the demand in grid capacity for investment projects for consumers Physical volume of technological connection The key Russian macroeconomic indicators changed In 2016, the average annual inflation rate amounted to and electricity producers. For further details on services, 1 slightly in 2016. The GDP decreased by 0.2%, the 7.1%, showing a significant decline compared to 15.5% In terms of investment activity, the economic decline technological connection, industrial production index increased by 1.13%, and in 2015. Decline of the inflation rate positively impacted continues to impact the volume of technological see the Strategic investments reduced by 2.3%. the Company’s operations as it led to reduction of the connection to the grids. The significant growth of Report – Operating 2016 5,635 Financial Statements Corporate Governance Report FGC debt cost, a large part of which had been placed at physical volume in 2015 was a result of the completion The volume of electric energy consumption in the Performance – 201 8,185 a floating interest rate. of a number of large-scale technological connection UES was 1026 billion kWh in 2016 and compared Technological 201 5,537 projects. In 2016, the physical volume of technological to 2015, increased by 1.7%. There has been a trend The growth of tariffs for FGC’s services is established Connection section. 201 5,350 towards demand stabilisation in recent years, which by the FAS of Russia: as of 1 July 2017, they will connection services stabilised and did not show any 2012 4,569 will probably remain in the near future. The forecasted increase by 5.5% which, taking into account the trends toward growth. annual average growth of demand for electric energy change of the capacity, corresponds to the increase Electric power cross-border turnover did not have any 1 across the UES of Russia is a maximum of 0.81% of required gross revenues (RGR) by 3%, according e maximum capacit under tec nolo ical connection evident impact on the volume of FGC’s paid export/ agreements. 2013: specification of the maximum capacity for the 1 import grid services in 2016. for the period of 2016-2022 . The optimisation of to the socioeconomic status (SES). Furthermore, the executed C a reements in accordance it t e accountin consumption modes by consumers and the possibility tariff growth is also lagging behind the forecasted statements to use distributed sources of generation are expected inflation rate and corresponds to the forecast of the to restrain the growth of the volume of FGC’s grid social and economic development of the Russian services. Federation in 2017 and for the planned period of 2018 and 2019. Determining tariff dynamics for the long term allows the Company to conduct financial planning and activities to increase its efficiency more accurately and Forecast of demand for electric energy What is PJSC FGC UES’s Response to the Market Trends? with reduced risks. in Russian Federation, illion The key interest rate of the Bank of Russia was Continuation of the Restrictive Tariff Policy the planned period from 2018 to 2019. The Company decreased in 2016 to 10%; at the same time, this is implementing measures aimed at improving the 2022 1,067 decrease did not significantly improve the borrowing with Transition to Establishing Grid Tariffs efficiency of the Company’s operations and investments, 2021 1,062 conditions in the Russian financial market for the on the «Inflation Minus» Principle and at the consistent implementation of the approved Appendix 2020 1,056 majority of investors, nor was there a significant change parameters of RAB regulation, as well as at drawing 201 1,049 in the dynamics of industrial capital investments. The Company’s tariff growth for 2017–2019 up well-balanced and economically justified proposals 201 1,041 corresponds to the social economic development about how to adjust and set these parameters. 201 1,033 For further details, see forecast of the Russian Federation for 2017 and for the Strategic Report – 2016 1,026 Analysis of the Financial Performance Results section Inflation forecast in Russian Federation, Capacity tariff growth, Industry Market 4 201 3 4 201 3 PJSC FGC UES transmits electricity via backbone Market of the Electricity Transmission Services grids and provides technological connection to the 4.7 201 5.5 grid. Electricity transmission via backbone grids is a 2016 For further details 7.1 7.5 naturally monopolistic type of operation. Capacity Paid by Consumers of Transmission on electric power Services to PJSC FGC UES, G According to Russian Federation legislation, PJSC FGC transmission, see in UES purchases electricity and capacity in the wholesale the Strategic Report – For further details, see Repair and Execution of Commitments to 2015, there was certain positive progress in solving electricity and capacity market (WECM) in order to 2016 Operating Performance – 88.3 the Analysis of the this issue after the regulating authorities had approved compensate for the actual losses in the UNEG, with Electric Power Pay for the Technological Connection of 201 87.8 Financial Performance payment amounts in relation to several projects, and the exception of the losses accounted for and paid Transmission section. 201 90.9 Results section Generation Facilities to Backbone Grids in 2016, the Russian Government adopted a resolution by the WECM’s participants in market-clearing prices. 201 91.4 (No. 1265 on 30 November 2016) that established The purchase occurs in the territory of the Russian There is a big gap between the technological 2012 the rules for instalment payments for technological Federation’s constituents, united into pricing and non- 90.5 connection work completed and paid for by applicants connection. pricing zones. that amounts to tens of billions of rubles. Starting from Markets for goods and services that relate to a natural In the reporting year, the value monopoly depend to a significant extent on the general of paid capacity was 88.3 GW economic conditions of the country. The service volume of a backbone electrical grid is determined by on average; the growth of paid Low Capacity Utilisation subject to rapid changes. The Company counts on the volume of capacity provided to the consumers of capacity at the end of 2016 in fruitful cooperation with the System Operator and the transmission services, in addition to the capacity value Low capacity utilisation during peak periods is one of Ministry of Energy of Russia in developing the proposal of the energy receiving devices connected to the grid. comparison with 2015 was 0.5 GW. FGC’s key issues. It reflects the principles that have for enhancing the long-term planning and design of been forming for decades of designing and planning electric power systems, investment planning and the the UNEG, methods of providing reliability and it is not selection of principles for investment projects.
1 According to the Scheme and Development Programme for the UES of Russia for 2016-2022, approved by the Order of the Russian Ministry of Energy No. 147 on 3 March 2016.
24 PJSC FGC UES Annual Report 2016 25 Strategic Report DEVELOPMENT STRATEGY QUESTION & ANSWER Development Strategy
FGC’s mission is to ensure the reliable operation and development of the UNEG Strategic Report adequate to economic growth, and to demonstrate high economic efficiency and cost minimisation.
For further details, on the Investment Programme, FGC’s strategic plans allow the Company to follow its — Programme of import substitution of equipment, see in the Strategic Financial Statements Corporate Governance Report mission steadily while simultaneously responding to technologies, materials and systems Report – Investing such modern technological and economical challenges Activities section. — Energy saving and energy efficiency programme as the state of backbone grid, the demand volume, the possibility to satisfy the demand, and others. — Operational efficiency improvement programme The Company’s strategic objectives are achieved — Environmental policy and implementation through adopting and implementing a number of programme programmes, which include the following: The Company performs the task of backbone grid A list of other — Long-term Development Programme development by observing technical and economical Alexander Zaragatsky programmes in expediency principles. In the conditions of tariff — Investment Programme the framework of First Deputy Chairman of the restrictions, we minimise investments and at the implementing the Management Board, Member — Innovative development programme same time the key projects of national significance are strategic development of the Management Board implemented according to the established schedule. — Unified technical policy plans and the Company’s Long-Term Development Programme is provided in Appendix 1.
PJSC FGC UES is a strategic joint stock company that is obliged by the State to develop a Long-Term Development Programme according to the template established as of 2014. How has the concept of strategic Appendix operation planning been developed at the Company? The key objectives of the Company’s strategic a long-term development programme for 2018-2022 Long-Term Development Programme development are provided in the Long-Term and the short-term outlook. Within, FGC establishes Development Programme (LDP) for the period of 2015- new strategic objectives that have been formed by The key objectives of the Company’s strategic The independent auditor compared the targeted and 2019, which was approved in 2014. The LDP and the taking into account analysis of the implementation development are outlined in the Long-Term achieved KPI values in 2016 and analysed the causes strategic objectives that it contains has become the of the LDP for the past 3 years, the changing Development Programme (LDP), which was approved1 of any detected deviations. top-level document that all of FGC’s other programme socioeconomic and market situation, as well as the in 2014. In addition to an external audit, FGC also carries out documents are coordinated with. The Company is shareholders and management’s viewpoints in terms of The Programme is consistent with the targets and internal monitoring of the implementation of measures expanding the horizons of strategic planning and is the Company’s further development paths. provisions of the Development Strategy for the determined in the Long-Term Development Programme. currently developing a new strategic document – Electrical Grid Complex of the Russian Federation2 At the present time, the Company is developing a and the Methodological Guidelines on the Drafting of At present, the government of the Russian Federation is paying special attention to the disposal of non-core Long-Term Development Programme for the period of Long-Term Development Programmes of the Russian assets by companies of which the State is a shareholder. Tell us about the results that FGC achieved in this 2018—2022 and for the short-term outlook. Ministry of Economic Development, approved by the term in 2016. respective federal executive authorities and by the government of the Russian Federation. PJSC FGC UES has been taking actions to identify In 2016, the approved Business Plan of PJSC FGC UES and dispose of non-core assets since 2012. In 2016, for 2016 was achieved, in terms of the management of The Long-Term Programme takes into consideration the programme for the disposal of non-core assets non-core assets, as follows: any risks that may affect the achievement of FGC’s was updated based on the directives of the Russian strategic objectives and includes measures for risk government and in accordance with the guidelines — in terms of revenue – approximately 95% of the minimisation. on the identification and disposal of non-core assets approved business plan (some RUB 1.9 billion); An audit, initiated by FGC, was carried out in 2017 developed by the Ministry of Economic Development and — in terms of profit – approximately 104% of the in order to monitor the implementation of measures the Federal Property Management Agency. Registers of approved business plan. and achievement of objectives set in the Long-Term non-core assets are modified and approved by the Board Development Programme (the findings of which are of Directors of PJSC FGC UES annually. provided in the audit report on 16 May 2017).
1 Approved by the resolution of the Board of Directors, minutes No. 243, on 22 December 2014. 2 Approved by Russian Federation Government Resolution No. 511-r on 3 April 2013.
26 PJSC FGC UES Annual Report 2016 27 Strategic Report DEVELOPMENT STRATEGY
Strategic Priorities and Objectives Strategic Report
Reliability of Electricity Supply to Consumers oprt oenneRpr Financial Statements Corporate Governance Report Ris s mpactin t e Relevance Assessment Strate ic ective P 2016 Results Plans Ac ievement o ectives t e Sta e olders1
o maintain a i relia ilit level A sence o an increase The specific accident rate decreased Reduction in t e s are o overa e perational and tec nolo ical ris s Relevance assessment High o electric po er transmission 1 e uipment is provided as a result o Environmental ris s and rid sa et and to reduce t e in ma or accidents implementin renovation pro ects Assessment o t e Compan s e undersuppl o electricit to undersuppl o electric po er modernisin and t e tec nical up rade o Ris s related to t e eo rap ical per ormance in t e priorit area Ac ievin t e re uired consumers decreased 20 fixed assets as part of the Investment c aracteristics o a countr or a re ion Positive in all aspects – compared to 201 accordin to relia ilit level o services Pro ramme o PJSC FGC UES includin t e increased ris o natural accident investi ation data disasters and t e possi le termination provided evelopment o an e ective s stem o e duration o t e suspension o o transport communication operation management for UNEG that A sence o an increase in t e electric po er suppl to consumers provides improvement in t e o serva ilit as reduced num er in ured in accidents o t e electrical rid acilities Sc eduled repair and maintenance measures ere ull accomplis ed For urt er details on For urt er details on P s relia ilit improvement see t e Strate ic Report see t e Strate ic Report ar et Revie Strate and peratin Per ormance e Per ormance ndicators Results section Appendix section
Development and Functionality of UNEG to Meet the Needs of the National Economy and Population
Ris s mpactin t e Relevance Assessment Strate ic ective P 2016 Results Plans Ac ievement o ectives t e Sta e olders
1 o implement t e nvestment Reduction o t e unit e unit investment costs ere reduced En ancin control over t e plannin and nvestment ris s Relevance assessment High Pro ramme in t e context o tari 0 compared to 2012 usiness process o investment pro ects Financial ris s restrictions it a reduction o unit investment costs Assessment o t e Compan s Facilit commissionin sc edule as Carr in out a price and tec nolo ical investment costs 0 201 Ris s related to ederal re ulation per ormance in t e priorit area accomplis ed audit o lar e investment pro ects it as compared to 2012 o tari s Positive in all aspects – costs o a ove RU 1 illion nvestment pro ects o national 2 o ensure t e implementation o Accomplis ment o t e acilit significance were implemented investment pro ects t at are o accordin to t e esta lis ed sc edule national significance in due time commissionin sc edule olumes o constructin ne and o ensure ad erence to t e eetin t e deadlines or increasin t e capacit o existin principles o tec nical and electrical rid acilities ere reduced economic expedienc en tec nolo ical connections For urt er details on ris s For urt er details on decisions are ta en on t e sc eme see t e Strate ic Report UNEG development, see Ris ana ement section t e Strate ic Report o ac one rid development and Appendix 1 ereto nvestin Activities section
1 ereina ter t e relevance assessment is determined on t e asis o t e sta e olders uestionnaire includin investors anal sts customers consumers
28 PJSC FGC UES Annual Report 2016 29 Strategic Report DEVELOPMENT STRATEGY
Ris s mpactin t e Relevance Assessment Strate ic ective P 2016 Results Plans Ac ievement o ectives t e Sta e olders Strategic Report
o develop a pro ramme o Reduction o t e total cost o Approved modification of the Investment Ris s related to t e political and p ased consolidation or implementin activities or S P1 Pro ramme or 2016 2020 as economic situation o t e countr and electrical rid acilities t at are 2016 2022 as 2 en compared to optimised ta in into account t e re ion part of the UNEG and meet its S P 201 2021 RU 0 6 illion vs alance o t e need to improve eli i ilit criteria includin t e RU 06 2 illion operational relia ilit o t e ac one
si nin o a reements it ot er electrical rid s stem and t e need to Financial Statements Corporate Governance Report owners of UNEG facilities on the accomplis t e construction o electrical procedures o usin ac uirin rid acilities t at ad started in earlier and or t e lease o suc acilities periods and t e possi ilit to provide financing o optimise t e utilisation o t e existin electrical rid s capacities
Economic Efficiency and Financial Sustainability
Ris s mpactin t e Relevance Assessment Appendix Strate ic ective P 2016 Results Plans Ac ievement o ectives t e Sta e olders
1 o inte rate an economic eetin t e deadlines or e ualit level o tec nolo ical mplementation o t e pro ect or t e Financial ris s Relevance assessment model o tec nolo ical connection to t e rid provided is increase o la our productivit o nvestment ris s connection ased on a alance tec nolo ical connections maintained sta le and i industrial operation personnel High or t e investors and anal sts o interests and e uita le ris perational and tec nolo ical ris s 201 1 02 6 — identification and reduction of Moderate or t e customers and s arin et een t e applicant industrial personnel or time losses ec nolo ical connection consumers and t e ac one rid compan 2016 1 02 22 ris s consolidation o usiness units and Assessment o t e Compan s expansion o service ones Ris o not implementin t e mport per ormance in t e priorit area su stitution pro ramme e unit operatin expenses reduced optimisation o t e personnel Positive in all aspects – 2 o reduce unit operatin 6 compared to 2012 or load expenses 0 compared to Reduction o unit operation 1 2012 s aseline 201 ile costs e comparative anal sis o P ES increase in t e ualit o repair or maintainin relia ilit and operation costs as accomplis ed plannin avoidin an increase o costs in A pro ect or increasin t e la our implementation o standard sc emes t e upcomin periods a our productivit productivit o industrial operation o service improvement personnel as started Carr in out comparative anal sis e tar et values o t e import enc mar in o operation costs su stitution pro ramme ere ull met et een t e P ES aimed at t e identification of cost reduction potential; evelopment o so t are and ard are o maintain t e Compan s s stems to decide on t e impact in e Compan s credit ratin as For urt er details on credit ratin at t e level o t e terms o R and renovation on financial performance maintained durin 2016 at t e same soverei n credit ratin electrical rid acilities en ta in into results see t e Strate ic level and not lo er t an t e account t eir tec nical condition and Report Anal sis o t e soverei n ratin Financial Per ormance relevance index ile usin modern Results section dia nostics and data processin met ods
1 S P t e Sc eme and evelopment Pro ramme or t e UES o Russia developed in cooperation it t e S stem operator 2 ndicatord are iven accordin to t e statements approved PJSC Rosseti
30 PJSC FGC UES Annual Report 2016 31 Strategic Report KEY PERFORMANCE INDICATORS (KPI)
Sustainable Development Strategy indicator for the financial leverage ratio, were set by the Company’s Board of Directors from the the introduced. subordinate management levels and to motivate deputies — The creation of a talent pool with a competency level of the Chairman of the Management Board, Executive — The target values of the number of indicators were The key principle for setting objectives in the area of corresponding to energy sector development trends; Office directors, and the heads of the structural units increased: the reduction of unit investment costs, the Strategic Report sustainable development and social responsibility is of the Executive Office and branches of PJSC FGC UES, — Establishment of responsible personnel electricity loss level and the improvement of labour observing the balance between economic expediency and the Methodology for KPI calculation and the target management practices; productivity. solving social and environmental issues. Special attention achievement evaluation for branch heads, the heads of the is paid to aspects that are top priority for the Company’s — Improvement of the performance of the electrical In order to cascade the key performance indicators Executive Office and subdivisions of the PJSC FGC UES stakeholders. grid’s energy efficiency; of the PJSC FGC UES senior management that were branches was approved2. — The introduction of environment protection activates
PJSC FGC UES has set the following strategic priorities in aimed at minimising the impact on the environment; Cascading PJSC FGC UES KPIs from the Senior Management Financial Statements Corporate Governance Report the area of sustainable development: — The fair distribution of created economic value and Down to Subordinate Management Levels — Development of procedures and practices for the the integration of the social responsibility strategy synchronisation of the plans of the stakeholders; across all operation areas. PJSC FGC UES s mana ement is — Import substitution in order to reduce political and The Company’s activity in the area of sustainable responsi le or t e ac ievement financial risks; development enables us to define and adjust the Company’s strategic priorities, targets and objectives more ective Settin o o ectives and P s — The introduction of innovations and new technology accurately and to improve the effectiveness of achieving with an assessment of their long-term economic our set targets. efficiency;
Corporate Governance Strategy KPI e Compan s development strate as top C airman o t e ana ement defined in the PJSC FGC UES Long-Term managers oard em ers o t e The Company is constantly enhancing its Corporate have been approved by the Company’s Management evelopment Pro ramme PJSC FGC UES ana ement oard Governance System and considers the effective Board; functioning of its Corporate Governance System as — Development of enhancement plans for the the foundation of Company’s reliable and profitable subsidiaries’ corporate governance, including the operation. development of standard internal documentation on KPI eputies o t e C airman o t e corporate governance issues for the subsidiaries; PJSC FGC UES has set the following strategic heads of ana ement oard irectors Appendix — An update of the Company’s documentation in the objectives in this area: executive office of the Executive Office of the area of corporate governance as a result of the — Assessment of the corporate governance of the PJSC FGC UES ana ement analysis carried out in 2016, as well as in relation to oard subsidiaries by applying self-evaluation methods that Goals and o ectives o t e unctional changes in the Russian Federation’s legislation. units set in t e Compan s executive documentation
KPI epartment eads eads o Key Performance heads the Executive Office structural units of directorates Indicators (KPI) executive office
In order to achieve strategic objectives, there is an end- included a condition for annual bonuses into the G s o t e ES to-end multilevel system of key performance indicators annual KPIs – the achievement of the objective on e ranc es oals and o ectives set in t e executive ranc es P ES available at PJSC FGC UES: the Company level (senior the reduction of operating expenses (costs). documentation o t e directors t e management KPIs), the level of the executive office of the KPI — In accordance with the Directive of the Russian Compan and Compan s unctional deputies o Company, and the level of PJSC FGC UES subsidiaries. heads of branches Government No. 1472p-P13 on 3 March 2016, the ranc es ES G s P ES The KPIs of each management level are set at the superior PJSC FGC UES directors Resolution of the Board of Directors included an management level, which allows for the implementation of indicator for the efficiency of innovation activity into an end-to-end control procedure. annual the KPIs. In 2016, the quarterly and annual bonus system continued — In pursuance of the Russian Government Resolution to function at the Company based on a methodology of No. 1352 on 11 December 2014 “On the specific calculating and evaluating the achievement of quarterly aspects of the participation of small and medium- and annual KPIs for the senior management of PJSC FGC eads o t e sized enterprises in procurement of goods, work, UES and was approved by the Board of Directors1. KPI services and services by certain types of legal entities”, the annual heads of branches departments o Key changes made to the senior management KPI system KPIs included the indicator the share of procurement subdivisions t e ES in 2016, compared to the previous year, include the from small and medium-sized enterprises. In 2016, PJSC FGC UES P ES following: this indicator was indicative and was not part ranc es of the bonus system for the Company’s senior — In accordance with the Directives of the Russian management. Government No. 2303p-P13 on 16 April 2015, No. 2073p-P13 on 29 March 2016 and No. 4750p-P13 on — An integrated quarterly indicator for financial stability 4 July 2016, the Resolution of the Board of Directors and a liquidity indicator, instead of financial stability
1 The Methodology for the calculation of KPI and the achievement evaluation of quarterly objectives for senior management of PJSC FGC 2 The Methodology for KPI calculation and target achievement evaluation of PJSC FGC UES’s branch heads was approved by the order UES is approved by the RESOLUTION of the Board of Directors (Minutes No. 325 on 17 June 2016); the Methodology for KPI calculation and of PJSC FGC UES No. 143 on 26 April 2016; the Methodology For KPI calculation and target achievement evaluation of the heads of the the achievement evaluation of annual objectives for senior management of PJSC FGC UES is approved by the Resolution of the Board of Executive Office and subdivisions of PJSC FGC UES branches is approved by the order of PJSC FGC UES No. 145 on 29 April 2016. Directors (Minutes No. 354 on 9 February 2017).
32 PJSC FGC UES Annual Report 2016 33 Strategic Report KEY PERFORMANCE INDICATORS (KPI)
Structure of Indicators Linked to the Company’s Strategic Objectives, Target and Actual Indicator Values
2016 Strategic Report 201 Ac ievement Evaluation o 201 Strate ic ective P Actual P alues ar et P alues t e P (Achieved/Not Achieved) ar et P alues
1 2 ac ieved A sence o increase A sence o increase in ma or accidents 1 2 a sence o increase A sence o increase Relia ilit 1 not ac ieved 1
A sence o increase Financial Statements Corporate Governance Report A sence o increase o t e electricit in t e num er in ured 1 2 a sence o increase A sence o increase 2 not ac ieved 2 suppl to consumers in accidents ac ieved
Ac ievin t e re uired relia ilit level Ac ieved ≤ 1 o t e provided services 0 ≤ 1
Reduction o operatin expenses ≥ 10% Ac ieved e Compan s costs 2 2 vs 2012 ≥ 3% Ac ieved overnance Reduction o unit investment costs 1 vs 2012 ≤ 1 ≤ 1 Ac ieved efficiency Electricit loss level 0 ≤ 4.13% 12 Ac ieved a our productivit improvement 21 vs 2012 ≥ 3,869 RUB/man-hour ≥ 5.90%
Accomplis ment o t e acilit n rastructure commissionin development sc edule 11 ≥ 95% ≥ 90% and execution Innovation activity efficiency ≥ 90% ≥ 90% S are o t e procurement rom small o macro pro ects Appendix and medium si ed enterprises ≥ 10% for the share of procurement in which only small and medium si e usinesses participate and Ac ieved ≥18% for the share of procurement from small and medium si e usinesses includin contracts ic are executed small and medium si e usinesses as su contractors associate contractors
Return on invested capital ≥ of target value, as calculated in accordance with the R C 1 Ac ieved aintenance PJSC FGC UES orecasted indicators set in accordance it t e usiness plan developed ased on t e of financial stability principles of the consolidated financial reporting (IFRS)
1 0 2 0 6 Financial levera e ration 0 0 otal s are older return E RC Re ulated Companies ndex c an e or Ac ieved SR 2 0 t e reportin period 0 01 percenta e points
Financial sta ilit Equity/Debt ratio ≥ 0.67 or the value set in the Business 1 2 ac ieved Plan and the modified current liquidity ratio (MCLR) ≥ 1 and li uidit indicator or t e value set in t e usiness Plan Consolidated net cas lo ≥ - RUB 8,252 million Consolidated earnin s rom operatin activities 1 1 and mont s o t e reportin E A period ≥ 0; annual value ≥ 5.3% Consolidated net de t E A Q1, Q2, Q3, Q4 ≤ 3.0 Execution o an action plan on t e reduction ≥100.0% o receiva les eetin t e deadlines or tec nolo ical Ac ieved 1 02 6 ≤ 1.1 ≤ 1.1 E ective en a ement connections it customers ncrease in capacit utilisation o po er rid Ac ieved e uipment
e ac ieved annual P results re lected or 2016 are ased on a preliminar evaluation 1 Fatal accident (failure of employees to perform their duties) on March 30, 2016 in FGC branch Sredne-Volzhskoye PMES (Act No. 1 on occupational accidents Comparison o t e ac ieved values o t e current ear it previous ears is not carried out due to c an es in t e met ods o a 1 2016 or calculatin and evaluatin t e per ormance o P s 2 Fatal accident (failure of employees to perform their duties) on April 11, 2016 in FGC branch Rostov PMES (Act No. 3 on occupational accidents of May 12, 2016).
34 PJSC FGC UES Annual Report 2016 35 Strategic Report Strategic Report oprt oenneRpr Financial Statements Corporate Governance Report
2
Appendix Backbone electric grids of South PHOTOS:
(MES South) 1, 2 Adler 1 Key infrastructure projects 500 kV HVTL Rostov NPP – FGC RA C i orets circuit 2 330 kV HVTL 2010–2013 Po er output o t e Adler PP alc i ladi av a 2 Control o po er s orta es in Soc i SER CE AREA Second power source for the Olympic Park facilities. 11 constituent territories of the Russian Federation in t e territor o Sout ern and 2009–2013 330 kV HVTL, Mozdok-Artem ort Caucasian ederal districts it a mprovement o relia ilit o electricit suppl sc eme or a estan and Severna a as well as for large consumers in the region (JSC Hasavjurt Instrument-Making Plant, JSC population of more than 19 million people. Dagelektroavtomat, JSC Mozdok Cannery, Khasavyurt railway station, etc.).
PERSONNEL More than 2.3 thousand people 500 kV SS, Nevinnomyssk, 500 kV HVTL, Rostov NPS – Nevinnomyssk. 500 kV HVTL, Rostov NPP –Tikhoretsk circuit 2. АSSETS 1 Po er output o Rostov PP Units 2 and HVTL 12.874 thousand km 87 substations, 110-500 kV 330 kV HVTL, Nalchik–Vladikavkaz-2 229 TSS, 6-10 kV ncrease o relia ilit o electricit suppl to t e ort Caucasus po er s stem Capacity — about 29.6 thousand MVA
OPERATIONS Electricit transmission e ranc provides electricit connection o UES o Sout it t e po er s stems o t e Central Re ion o Russia Ukraine, Georgia, Azerbaijan, and through them – electricit transmission to ur e and ran 1 accordin to annual per ormance reports 36 PJSC FGC UES Annual Report 2016 37 Strategic Report RISK MANAGEMENT Ris Assessment and Ris Assessment and C an es in Ris C an es in Ris in to Strate ic Risk Name Relevance in 201 Relevance in 2016 Priorities
Risk Management ndustr Ris s Ris s related to t e state re ulation o tari s The risk management system that exists at the Company makes it possible to identify, Strategic Report assess and effectively manage risks in due time ec nolo ical connection ris s
Ris s related to t e increase o overdue The Company’s General Approach to Risk Management and ad de ts oprt oenneRpr Financial Statements Corporate Governance Report Countr and Re ional Ris s The stable continuous functioning and development The FGC Regulations on Risk Management was For further details on of the Company requires the timely identification, developed by taking into account advanced Russian the risk management For urt er details on t e Ris s related to t e political and economic situation e ris actors and activit assessment and the effective management of any risks and international standards, including: system and internal o t e countr and re ion on t eir mana ement see that are a threat to its operation and reputation, to the control system, — Guidelines for drafting regulations on a risk t e Appendix 1 ereto Political actors health of the employees, the environment, as well as see the Corporate management system that were approved by the property interests of the shareholders and investors. Governance Report/Risk government of the Russian Federation; Economic actors Management, Internal Advanced Standards of Risk Management — Russian Corporate Governance Code; Control and Internal Audit section — Listing Rules of the Moscow Exchange; Ris s related to t e eo rap ical c aracteristics o a The Risk Management System of PJSC FGC UES countr or a re ion includin t e increased ris o was established based on the generally accepted — International Standards ISO73:2009, 31000:2010 and natural disasters and t e possi le termination o conceptual frameworks for risk management, COSO 31010:2011 in the area of risk management; transport communication ERM Enterprise Risk Management – Integrated — Risk management standards of the Federation of Framework, developed by the Committee of Sponsoring European Risk Management Associations (FERMA). Financial Ris s2 Organisations of the Treadway Commission. The FGC Regulation on Ris o an interest rate c an e the risk management Ris o an exc an e rate c an e 1 system in force is n lationar ris available on the corporate site at www.fsk-ees.ru/ e al Ris s Appendix eng/ in the Investors / 10 Relevance and Dynamics of Key Risks Corporate Governance / ere are no Compan Ris s related to c an es in t e le islation and Corporate Documents investments it an re ulations in t e areas o Compan s operation expected level o income FGC identifies the risks that significantly impact the Company’s operation and are subject to priority management. section o more t an 10 annuall Ris s related to pu lic le al relations Relevance o t e Compan s e Ris s in 2016 evel o Ris Relevance Ris ap Reputation Ris RU 1 ln Ris o usiness reputation loss e total num er o claims Ris s related on unfinished litigations in Critical to state tari ic FGC acts as a Strate ic Ris re ulation de endant stands at RU Strate ic Ris perational and Ris s o tec nolo ical 1 illion as o 1 tec nolo ical ris connection ecem er 2016 Significant Cr Ris s Related to t e Compan s perations e ris o implementin itic Ris s o t e ro t o late al t e mport Su stitution and non collecta le Environmental ris s receiva les Pro ramme Si n Ris s relatin to ailure to compl it t e ific RU 1 6 ln oderate an re uirements o t e environmental t e total num er o claims on unfinished litigations in le islation o t e Russian Federation ode ra t ic FGC acts as a e Ris s related to t e political Ris s relatin to ailure to ac ieve t e tar et Environmental and economic situation in respondent stands at RU indicators o t e Pro ramme or t e ris s t e countr and t e re ion 1 6 illion as o 1 mplementation o t e Environmental Polic namics o Ris Relevance ecem er 2016 in t e Reportin ear Ris o implementin t e mport su stitution Ris s related to t e eo rap ical pro ramme Strate ic ris c aracteristics o a countr Gro t o ris relevance or a re ion perational and tec nolo ical ris
Reduction o ris relevance Ris o loss o usiness Financial ris reputation Ris relevance did not c an e e al ris s 2 A reduction in the relevance of financial risks is due to the fact that the level of inflation in 2016 demonstrated a downward trend and reac ed t e end o t e ear t e avera e annual value is 1 e polic o t e Russian Government and t e Central an o Economic Russia t at is aimed at reducin in lationar ris s allo s us to assess t is ris as sta ilisin Strate ic Priorit Relia ilit efficiency UNEG development e reduction o ris relevance related to c an es in le islation as t e result o t e approval o ne re ulator documents t e overnment o t e Russian Federation 1 Approved by the Resolution of the Board of Directors on 16 November 2015 (Minutes No. 291 on 19 November 2015). e reduction o ris relevance or t e implementation o mport Su stitution Pro ramme is due to t e act t at t e end o 2016 Updated by the resolution of the Board of Directors on 12 December 2016 (Minutes No. 347 on 13 December 2016). manu acturers o electrical e uipment ave or ed out alternative lo istics routes and esta lis ed contacts it t e suppliers o t e re uired components rom APEC is enerall miti ated t e ris o ti tenin sanctions t e USA and EU countries
38 PJSC FGC UES Annual Report 2016 39 Strategic Report OPERATING PERFORMANCE
Operating Performance Measures to reduce electric power losses for the — construction, reconstruction and development of reporting period as part of the Programme for Energy electrical grids, and commissioning of energy-saving Saving and Energy Efficiency of PJSC FGC UES were equipment (loss reduction has had a concurrent implemented in three key areas: effect). Strategic Report — optimisation of circuit and mode parameters in the As a result of implementing the above measures, process of operation and control of the electrical electric power losses were reduced in 2016 by 58.3 . Electricity Transmission grids; million kW h. — reduction of electric power consumption for auxiliary Strategic Priority supply of the substations; FGC for the State and the Entire Society: Financial Statements Corporate Governance Report Strategic Priority PROVIDES MORE THAN A HALF OF TOTAL Technological Connection Reliability ENERGY CONSUMPTION IN RUSSIA UNEG FGC for Consumers: development A CUSTOMER FOCUSED APPROACH
FGC operates the Unified national (all-Russian) OBJECTIVE 2016 ACHIEVEMENT 2016 OBECTIVE 2017 electrical grid (UNEG) and provides the services Electric power supply to of electric power transmission via the UNEG to consumers, million kW.h 527,719 540,540 533,753 OBJECTIVE 2016 ACHIEVEMENT 2016 OBECTIVE 2017 consumers. Such services are considered a monopoly operation and are regulated by the State. Payment for Electric power losses in the 24,756 25,033 24,890 UNEG, million kW.h Average level of customer electric power transmission services is a major revenue satisfaction with technological 1.1 1.0252 1.1 source for the Company (about 80% of total revenue). connection service, points The price of the power transmission services is The main consumers of FGC’s electric power determined by tariffs that are calculated by the transmission services are regional distribution commercial operator of the wholesale electricity companies, retail suppliers and large industrial Appendix market (JSC ATS) and set by the Russian Federal Anti- enterprises. QUESTION & ANSWER Monopoly Service (FAS of Russia). For further information Aleksey Molsky on the tariffs for electric power transmission Deputy Chairman of the Management Board, services, see the Member of the Management Board Shares of the Largest Service Consumers At the end of 2016, the total number of Strategic Report/ in FGC’s Sales Revenue from Power Analysis of the Financial Transmission Services in 2016 the Company’s counterparts in electric Performance Results What were FGC’s largest projects of connecting electric power generation facilities and power plants to power transmission service agreements section consumers and grids in 2016? 10 1 JSC umenener o 10 1 Measures were taken to connect such generation (110 kV SS Vorsh, SS IndustrPark SOKOL, etc.), JSC 2 PJSC ES 10 increased to 481. facilities as Huadian-Teninskaya CHP (450 MW); Tyumenenergo (110 kV SS Kechimovskaya, 110 kV SS PJSC IDGC of Centre 9 Chelyabinskaya GRES, CCGT-1, CCGT-3 (2x247.5 MW); Rosa), FSI Cosmodrome Vostocny directorate (220 kV 6 JSC GC In 2016, electric power supply to consumers of the Zelenchukskaya HPP-PSPP (2x70/82.2 MW) and others SS MSDS 2), PJSC NK Rosneft (500 kV SS Svyatogor, Ural Sverdlovener o 4 FGC grid increased by 2.8% compared to the previous were successfully and timely implemented. 220 kV SS Vektor), the Zvezda shipbuilding and ship 2 . PJSC enener o 4 year and amounted to 540.5 billion kW h. The long- A large project in the port of Kozmino was repair centre (220 kV SS Zvezda), the CJSC Antipinsky 6 JSC GC term indicator dynamics demonstrate a growing For further information implemented. The contractual obligations of refinery and many others were executed. Ural C el a ener o 3 trend –a growth of 4.5% for 2012—2016. on export and import of connecting such consumers as PJSC Rosseti IDGC PJSC u anener o 3 electric power pursuant JSC RS 3 to PJSC InterRAO JSC RUSA rasno ars 2 contracts, see the What factors will determine the dynamics of the technological connection of consumers to the grids of PJSC 10 PJSC IDGC of Centre and Appendix 1 hereto FGC UES in the near future? Privol ie i novener o 2 The key factor that will determine the dynamics Russia, which implies the creation of power-intensive of technological connection is bringing to life the production enterprises and the implementation of large forecast of the socioeconomic development of infrastructure projects in the regions of Russia. Number of the Company’s Counterparts in Electric Electric Power Supply From the UNEG to Consumers, Power Transmission Service Agreements illion
481 2016 540.5 What possibility does the Company see in terms of improving the quality of its technological connection services? 473 201 525.8 We are striving to improve the quality of our customer consumers to apply for technological connection and 416 201 515.3 service by providing customers with more convenient submit the required documentation (according to the 292 201 520.0 and efficient ways of interacting with the Company. rules of technological connection) in an electronic There is a new section under development in the format confirmed by a qualified digital signature. 207 2012 517.1 technological connection portal that will allow
40 PJSC FGC UES Annual Report 2016 41 Strategic Report OPERATING PERFORMANCE
The Company provides an integrated service of the development of technical requirements, the signing Strategic Priority Increasing the UNEG’s Reliability the technological connection of energy receiving of a contract, obtaining permission from the federal devices, power generating facilities and electrical body of the state energy supervision for the applicant’s grid facilities to FGC’s electrical grids. This service facilities, and the issuance of a connection report. includes the application for technological connection, FGC for Consumers: Strategic Report Reliability RELIABLE ELECTRIC POWER SUPPLY Categories of Consumers of Technological Connection Technological Connection Service Portal OBJECTIVE 2016 ACHIEVEMENT 2016 OBECTIVE 2017
1 2 Financial Statements Corporate Governance Report Technological connection service is provided at locations of the PJSC Specific accident rate, FGC UES branch offices – MES. Via the Technological Connection 1 up to 1 inclusivel 1 units/1000 c.u. 1.35 1.34 1.34 2 over 1 and up to 1 0 3 Service Internet Portal – http://portaltp.fsk-ees.ru/ – consumers have online access to up-to-date information on the state of over 1 0 and up to 7 6 0 FGC’s feeding centres, the load level of their equipment, as well as information on the implementation progress of their application for over 6 0 84 QUESTION & ANSWER technological connection to the Company’s electrical grid. electric po er eneration 5 facilities Vladimir Dikoy The payment amount for technological connection is FGC provides services of technological connection Deputy Chairman of the Management Board – calculated based on the maximum capacity value of to both new and existing consumers, if they need to Chief Engineer, (Advisor to the Chairman since April connected energy receiving devices while applying modify the parameters of energy facility operation. 2017), Member of the Management Board the standardised tariff rate established by the FAS The Company signs direct contracts with service For further information of Russia to a corresponding regulation period. The consumers in all the constituent of the Russian on the tariffs for payment amount for technological connection under an Federation where FGC’s grid facilities are located, Have the planned for 2016 measures on increasing grid reliability been accomplished? What are their results? technological connection individual project is approved separately by the FAS of taking into account the restrictions set by Federal Law services, see the Russia for each applicant. No. 35-FZ of March 26, 2003, «On the Electric Power The planned execution volume for the physical The share of works performed in-house (without Strategic Report/ Industry» and the rules of technological connection. maintenance and repair work of PJSC FGC UES for subcontractors) has increased, a growth of labour Analysis of Financial 2016 for the main spectrum has been accomplished productivity of repair personnel was ensured, and its Appendix Performance Results more than 100%. The actual cost for maintenance and workload efficiency was improved. section repair at the end of 2016 amounted to RUB 10.6 billion; Structure of Consumers of the Company s Dynamics of Connecting the FGC’s Consumer Technological Connection Services Capacities and Electric Power Generation Accordin to Contracts Si ned in 2016 Facilities1, 1 2 How successful has the Company been in terms of increasing the reliability and improving 1 2016 2,982 2,653 the quality of its repair work? For more information on 201 5,419 2,766 the largest technological In 2016, we were able to maintain our achieved season conditions ensure the reliable operation of 201 1,769 3,768 connection projects in reliability level, and the number of accidents at the the UNEG facilities during specific climatic periods 0 2 201 1,401 3,949 contracts 2016, see the Appendix Company’s facilities decreased from 1,879 to 1,848 – throughout the entire year. The Company obtained 1 Generatin Companies 7 2012 1,657 2,912 1 hereto a 2% decrease compared to the previous year (when a certificate of readiness for the fall-winter season 2 Grid Compan 46 taking into account the data of JSC SO UES). 2016/2017 from the Ministry of Energy of the RF, Electricit eneration Consumers without any special opinions or special permissions Consumers 47 facilities and rid companies In order to increase quality and decrease cost of repair, centralisation of the procurement of the main of the commission members. A high level of range of spare parts and materials was carried out, readiness for emergency recovery work was also ensured. A variety of measures aimed at increasing In 2016, FGC signed 308 contracts for providing The significant growth of technological connection For more information and the list of parts provided was expanded. reliability in regions with high risks of power supply technological connection with total connection in 2015 and its following decline in 2016 is explained on the dynamics of Multilevel preparation of the Company’s facilities for interruption were also accomplished. capacity of 6.7 GW. The total capacity of technological by the completion of a number of large-scale other key indicators thunderstorms, fire hazards, floods and fall-winter connections implemented in the reporting year technological connection projects at the generating of technological amounted to 5.6 GW. plants of Rosenergoatom in 2015. connection and large technological connection projects in OPINION OF THE STAKEHOLDERS According to the Consumer Questionnaire Results 2016, see the Appendix The main technical areas for increasing the reliability activities, the specific accident rate2 at FGC’s facilities 1 hereto and efficiency of the operation of FGC’s electrical grid declined by 1.3%. At the same time, the amount of are completely satisfied with the Company’s activity in terms system are set in the Unified Technical Policy that has equipment serviced increased by 0.8%. of technological connection been in force at the Company since 2013. 3 80% For provision on the The indicator for the undersupply of electric power Unified Technical Policy, The reliability of the Company’s grids increases to consumers is currently at a stable low level and The most important aspects Aspects that require additional attention For information on the see the website at www. every year. In 2016, thanks to the introduction of shows a downward trend. In 2016, this indicator value . — Ensuring the publicity of a contractual relationship — Ensuring the consideration of service consumers’ risk of the untimely fsk-ees.ru in the About new equipment, the improvement of the servicing decreased to 1,397 MW h, or by 20%, compared to with service consumers applications for signing the corresponding contracts execution of contractual the Company/Technical personnel’s skills and expertise and other such 2015. within the deadlines and in line with the procedure obligations for Policy section — Increasing the transparency of performing established by legislation technological connection technological connection contracts, see the — Increasing the transparency of performing Strategic Report/Risk technological connection Management section 2 The specific accident rate is a ratio of the number of accidents to the servicing volume. The servicing volume means the man-hours required for servicing equipment (man/hour). 1 The data of consumer technological connection in 2013 was adjusted by taking into account the re-distribution capacity in the consumer 3 The undersupply of electric power is the volume of electric energy that has not yet been supplied to the consumer because of interruption category. or restriction of the electric power supply as related to the regular mode disturbance (according to data from accident investigation reports).
42 PJSC FGC UES Annual Report 2016 43 OPINION OF THE STAKEHOLDERS Strategic Report OPERATING PERFORMANCE According to the Consumer Questionnaire Results
100%are completely satisfied with the Number of Accidents Dynamics Specific Accident Rate Dynamics Dynamics of Power Energy On 10 November 2016, the commission of at FGC’s Facilities at FGC’s Facilities (Number of Accidents Undersupply by FGC, Accordin More information on the Company’s operation on ensuring the per 1 000 Conventional Units the Ministry of Russia issued a certificate
to Data from Accident Investigation Reports) Strategic Report Company’s operation reliability of the electric power supply 2016 1,606 2.43 2016 1,397 during special periods in of readiness to the Company for operation 2.08 2016 is available in the 201 1,616 1 201 1,747 during the fall-winter season of 2016-2017. The most important aspects 1.72 Appendix 1 hereto 201 1 201 3,548 1,954 1.35 1.34 21 — accident rate reduction at the Company facilities 201 2,280 201 2,768 1 — rapid elimination of the consequences from 2012 2,596 2012 3,090 2012 201 201 201 2016 emergency and natural disasters oprt oenneRpr Financial Statements Corporate Governance Report — observance of the schedule of repair works related to electrical grid facilities power outages Information on Renovation, Modernisation and Technical Upgrade risks related to the geographical specifics of Fixed Assets of the country or region, including the risk of Development of Communication Networks Investment projects for renovation, modernisation Financing for the renovation, modernisation and Information on the increased hazard and technical upgrade have been included into technical upgrade projects amounts to RUB 117,177 operational and of natural disasters, and IT systems the adjustment of the PJSC FGC UES Investment million for the period of 2016—2017. technological risks, is available in the Programme for 2016-2020.1 including risks related Strategic Report/Risk to wear and tear and The renovation, modernisation and technical upgrade Management section the obsolescence of FGC for Consumers, Suppliers projects for 2016-2020 aim to achieve: The commission of a 2,627 MVA capacity the electrical grid’s and Company Employees: — Total commissioning capacity – 11,964 MVA; is planned as part of the renovation, assets, is available in the Strategic Report/Risk MANAGEMENT BASED ON MODERN — Renovation of 401.96 km of power transmission modernisation and technical upgrade Management section IT-SYSTEMS lines. projects for 2017, of which the financing will amount to RUB 21.9 billion. More information on the The operational reliability of the electrical grid The automatic process control system (APCS), the Appendix Repair Programme IT systems operating at infrastructure, the innovative development of the UNEG corporate information management system (CIMS), the Company is available and of FGC’s efficient business control all require the and the telecommunication infrastructure of the The Company performs maintenance and repair of In 2017, FGC plans to invest around More information on in the Appendix 1 hereto use of advanced telecommunication and information Energy System’s Unified Process Communications its energy facilities in order to keep the equipment of the implementation technologies. Network (ESUPCN), based on advanced information substations and high-voltage lines in good working RUB 11 billion into repair works at the results of the 2016 repair technologies, are being created and developed at the condition. grids. programme is available Company. in the Appendix 1 hereto In 2016, the Company accomplished its planned activities for repair and maintenance in full. Development of the Energy System’s Unified Process Communications Network The telecommunication infrastructure that the transition from an analogue to a digital communication Operational Process Control and Situational Management Company has created enables the effective operational method) and the intelligence of the network that is Operational process control is a system of measures Situational management is a system of measures taken control and dispatch processes of electric power achieved via its wide introduction to electrical grid carried out to ensure the reliable operation of the in correspondence to a contingency or emergency transmission and distribution. facilities of modern equipment and a new generation of More information on the UNEG’s facilities and to comply with operational situation on the electrical grid system via the analysis communication network technologies. activities of operational The general scheme of the creation and development of process modes set by the dispatch centres of the and assessment of situation occurrence risks and their process control and the Energy System’s Unified Process Communications System Operator. consequences, followed by taking and implementing situational management, Network (ESUPCN)2 plans for the digitalisation (the the appropriate management decisions. In the framework of the Company’s operational process as well as the dynamics control, situational management tasks are carried out. of efficiency indicators S are o omestic for the control of ESUPCN Structural Component evelopment Priorit 2016 Results E uipment Use operational process and situational management, Fi re optical communication Development of fibre-optical n 2016 more t an t ousand m o Operation During Specific Periods is available in the communication lines F C F C inputs F C ere uilt alon po er net or Appendix 1 hereto will allow us to improve the efficiency of transmission lines includin t e areas o 6 Weather and climatic conditions have a significant In 2016, the UNEG operated in the standard mode ncludin ca le asis or t e tec nolo ical process control or electrical rid acilities ES East ES Si eria ES ol a and impact on the Company’s operations. We ensure the during the specific periods as well. 46 duty teams, and t e relia ilit o t e po er suppl to t e ES Sout ranc es communication lines communication net or usin preparation of electrical grid equipment, buildings which ensured the facility’s reliable operation in the consumers in t e re ions ere fibre-optical cables placed on and structures in advance for their operation during conditions of an emergency or contingency occurrence, respective pro ects are implemented Total length of FOCL, t m over ead po er transmission specific seasonal periods: the fall-winter season (low operated continuously at the Company. There are 561 lines FGC utilises resources rom t e leadin 2016 70.5 temperatures and high load conditions), as well as for standby power supply sources with a total capacity of telecommunication operators on t e 201 66.8 floods, fire hazards and thunderstorm periods (natural 167.3 MW at the Company’s disposal. asis o lon term mutual lease relations anomaly conditions). 201 63.1
1 Adjustment of the PJSC FGC UES Investment Programme for 2016-2017 is approved by the directive of the Ministry of Energy of 2 Approved by the PJSC FGC UES Board of Directors on 14 December 2015 (Minutes No. 1352 on 15 December 2015). Russia No. 1432 as of 28 December 2016.
44 PJSC FGC UES Annual Report 2016 45 Strategic Report INVESTMENT ACTIVITIES
Dynamics of Commissioning Capacity The structure of capital investments (for financing) (setting for voltage) in 2016 0.42 S are o omestic 2016 5.69 ESUPCN Structural Component evelopment Priorit 2016 Results E uipment Use 0.66 201 2.32 1 illion ru les 201 9.52 3.12 1 ec nical Strategic Report odernisation and decommissionin Dynamics of input of carrier network 10.79 3.69 Carrier net or alon 201 re e uipment over ead lines o carrier net or e uipment ecause along overhead lines, pcs o t e commissionin o F C 2012 17.83 and reconstruction 24.49 3.64 2 e construction 58.99 Special t pes o communication 2016 212 Transformer Capacity, th. MVA 2 t er 7.21 ere p ase conductors and 201 393 over ead po er transmission Po er transmission lines t m 201 367 line ca les are used as a
si nal transmittin medium Financial Statements Corporate Governance Report OPINION OF THE STAKEHOLDERS According to the Consumer and Investor Questionnaire
elep one net or i italisation o t e net or t e di ital PA as ell as s stems or are completely satisfied with the Company’s operation introduction o o P voice speec recordin t e operation o personnel 2 in the investment activity area uilt on a point to point principle transmission over a pac et s itc in communication EC ireless 74% and providin interaction it net or P net or s in addition to t e communications s stems as ell as The most important aspects Aspects that require additional attention conventional services loudspea er and radio searc in t e tec nolo ical net or o t e communications s stems ere — transparency of the formation of the Investment — transparency of the formation of the Investment S stem perator and ot er introduced in 2016 Programme Programme participants o t e olesale electricit mar et Dynamics of input of telephone network, — reduction of the unit investment costs units 2016 47 QUESTION & ANSWER 201 50 201 113
Investment Activities Appendix
The Company performs the construction of new and increase of the operational reliability of the unified the reconstruction of existing electrical grid facilities. power system in order to ensure an uninterrupted We pay special attention to the modernisation and power supply to our consumers. Strategic Priority Roman Filimonov First Deputy Chairman of the Management Board, Member of the Management Board Investments into developing the electrical grid
infrastructure are the foundation of a reliable UNEG How does the Company’s management increase its value for shareholders (based on examples of development implementing the efficiency of its investment projects)? power supply and one of the important factors We strive to make investments that will increase the Currently, we are counter balancing the structure of the for economic growth Company’s competitiveness and provide growth in the sources for the Investment Programme’s financing with return on capital, which in turn raises the value of FGC’s PJSC FGC UES’s own funds, bonded loans, loans from shares. These objectives require the search for and the organisations and federal funds. The breakthrough selection of efficient investment solutions (projects). in this aspect was achieved thanks to the Russian 2016 ACHIEVEMENT 2017 OBJECTIVE In 2016, the Board of Directors approved the Government’s Decree No. 1265 on 30 November 2016, which was developed in close cooperation with PJSC Commissioning value, regulation on investing and operating efficiency and 1 FGC UES and allows us to ensure an alternative source Investment Programme RUB billion 103.7 137.3 cost reduction , including a system of measures for increasing the efficiency of investing activities. of financing for the project of power infrastructure Accomplishment for 2016 Commissioning capacity, development in area of Baikal-Amur and the Trans- 8,772 13,226 This system of measures is aimed at ensuring MVA Siberian railways without the attraction of financing the maximum efficiency of the pricing policy, Commissioning of power from the National Wealth Fund (NWF). Additional funds Dynamics of the ammount of investment financing, which requires a reduction of per unit indicators in transmission lines, km 827 2,303 generated from instalment payments for connection construction, the development of standard design illion ru les may be fully directed to the financing of this project solutions, and enhancing the project control system 2016 (thus budget support in form of NWF financing will not 90.7 in order to achieve the set objectives by investing less be required and PJSC FGC UES’s financial situation will 201 85.9 time and finances. 201 90.9 not worsen). Achieving good levels of economic indicators is often 201 149.7 connected to the optimisation of financing sources. 2012 179.9
1 Minutes No. 312 of the Board of Directors on 28 March 2016.
46 PJSC FGC UES Annual Report 2016 47 Strategic Report Strategic Report oprt oenneRpr Financial Statements Corporate Governance Report
2
Appendix PHOTOS:
Backbone electric grids of the Volga Key infrastructure projects 1 500 kV SS Krasnoarmeyskaya 2 i n ov orod Commissioning of 500 kV SS, Kuibyshevskaya, (Samara Region) 500 kV HVTL, Region (MES Volga) 2008–2016 rasnoarme s a a Ga ova a 1 upon compre ensive reconstruction 500 kV SS, Kuibyshevskaya Energy supply to more than 70% of the region's area, including the region's major FGC RA C industrial centres: Samara, Novokuibyshevsk, and Chapayevsk. The substation is involved in t e po er output sc eme o t e most important eneration acilities o t e Volga Region: Balakovo NPP, Zhigulevskaya HPP, Zainskaya SDPP.
SER CE AREA 2011–2015 Construction and commissioning of 500 kV HVTL, 8 constituent territories of the Russian rasnoarme s a a Ga ova a Federation in the Middle Volga Region and the Improvement of reliability of communications between the Ural and the Middle Volga i n ov orod Re ion it a population po er s stems and ensurin t e capacit output o t e ala ovo PP Electricity supply to railway facilities, the towns of Mednogorsk and Kuvandyk, as well as over 17 million people. to large industrial enterprises in the region: Mednogorsk copper-sulphur plant, Ural Steel plant as production enterprises o JSC Ga prom PERSONNEL A out 2 t ousand people o ensure t e tec nolo ical connection o t e inte rated enterprise Rusvinyl LLC engaged in PVC production (joint venture of Sibur and АSSETS 1 Belgian SolVin). HVTL 12 thousand km Construction of 220 kV switching substation (SSS), Zeletsino, reconstruction of OSG 220 87 substations, 220-500 kV kV at Kud'ma substation, installation of new relay protection and automatic equipment at Capacity – about 32 thousand MVA 500 kV Nizhny Novgorod and 220 kV Kud'ma substations, construction of 220 kV power transmission lines, Nizhny Novgorod-Zeletsino and Zeletsino-Kud'ma.
OPERATIONS 2013 Provision o tec nolo ical connection o po er plants o Electricit transmission e ranc provides metallurgical production enterprise, Severstal — Long-rolling plant electricit connection et een UES o ol a ala ovo and po er s stems o t e Central Re ion o An enterprise with the capacity of 1 million tonnes of rolled metal per year ensured some Russia and t e Urals 800 jobs for the inhabitants of Saratov Region.
1 accordin to annual per ormance reports 48 PJSC FGC UES Annual ReportReoprt 2016 49 Strategic Report INVESTMENT ACTIVITIES
Long-Term Investment Programme Key Investment Projects for the 2016—2020 Period
The Company’s Investment Programme — Development of an effective system for the UNEG’s Key Investment Projects Socio-Economic Significance for the period of 2016-2020 was operational management, and the improvement of Strategic Report observability of electrical grid facilities approved in 20151 and was adjusted in — Providing uninterrupted power supply while Development of Design and exploration work on the facilities of external power supply to 20162. maintaining the separate operation of UES of Russia eight booster stations was performed in order to ensure the pumping of Key Objectives of FGC’s Investment and the UPS of Ukraine power infrastructure oil through the ESPO-I pipeline system of up to 80 million tonnes a year, which will be performed in the framework of inter-state agreements with Programme — Providing an external power supply to the facilities of for the ESPO – I, II oil the People’s Republic of China.
the Power of Siberia of PJSC Gazprom Financial Statements Corporate Governance Report — Maintenance of the operational reliability of transporting system Unified Energy System that is necessary for the The previously approved Investment Programme for uninterrupted power supply to consumers 2016-2020 was adjusted in terms of financing for the facilities aimed at the development of electrical grid To ensure a reliable power supply to the Northwest part of the Rostov — Ensuring power supply to facilities of significant Compensatory infrastructure in the territory of the Eastern Siberia and energy system, the installation of a 125 MVA autotransformer on the nation-wide importance the Far East of Russia, including financing related to the measures for the Pogorelovo substation and the construction of a power transmission line between the cities of Shakhty and Donetsk (in the Rostov Oblast), with — Providing quality and the availability of power expansion of the traffic capacity of Baikal-Amur and separate operation of transmission service and connection for consumers the Trans-Siberian railways. The amount of financing length of 80 km, was performed. Commissioning of the facilities was to electrical grids for the projects that provide an external power supply the UES of Russia and completed in 2016. to the facilities of PJSC Gazprom in the framework of — Improvement of the operational efficiency of the IPS of Ukraine constructing gas, transporting gas and gas processing backbone grids via cost reduction and the capacities in the Far Eastern federal district (the Power implementation of energy efficiency programmes of Siberia system project) has also changed. To ensure the possibility of technological connection for consumers — Synchronisation of development programmes with Improvement of the in the city of Krasnodar, including a large-scale housing construction generation facilities and distribution networks availability of the project, construction of the Vostochnaya Promzona substation was provided. The commissioning of 560 MVA capacity and 16 km of Krasnodar Territory’s overhead lines has been planned for 2017. Key Parameters of the Approved Adjustment to the PJSC FGC UES Investment electrical grid PJSC FGC UES is also implementing, in the framework of the measures Programme for the 2016—2020 Period infrastructure of technological connection of JSC Oboronenergo, a project for
the construction of 220 kV SS Novo-Labinskaya with 220 kV OHL Appendix connections, with a capacity of 250 MVA, to be commissioned in 2017. Planned amount of financing, RU illion Planned commissioning capacity, thousand MVA
2020 75.3 2020 5.7 201 98.1 201 8.5 Providing the capacity Work is being performed to implement the capacity delivery circuits of Novovoronezhskaya NPP-2, Leningradskaya NPP-2, Rostovskaya NPP, 201 104.2 201 8.5 delivery of generating Nizhnebureyskaya HPP, Zagorskaya PSPP-2, and Zaramagskaya HPP. 201 105.6 201 13.2 facilities To ensure station capacity delivery, the commissioning of 901.6 km 2016 99.1 2016 8.8 of lines, as well as 1,002 MVA of transformer and 560 MVAr of reactor capacities, has been planned for the period of 2017—2022.
Planned commissioning transmission lines, The planned volume of capital investments For further details on t ousand m development (without the VAT), RU illion the main parameters In order to ensure the potential loads of the Eastern ground of JSC RZD, of PJSC FGC UES’s key Developing energy 2020 1.6 2020 44.5 PJSC FGC UES is implementing the Integrated investment project – investment projects, see a power infrastructure development in the area of Baikal-Amur and the 201 3.1 201 77.2 infrastructure in the the Appendix 1 hereto Trans-Siberian railways. The project will allow the provision of facilities to 201 3.3 201 114.2 area of Baikal-Amur the Eastern ground of JSC RZD with infrastructure. There will be positive 201 2.3 201 138.0 and the Trans-Siberian effect achieved for the large potential consumers (PJSC Transneft – 2016 1.2 2016 80.5 MPL ESPO-1, PJSC Polus, the LLC Baikal mining company – and the railways Udokan deposit ore processing plant) and for existing consumers in the territories of the project’s implementation (improvement of the power The Company’s Investment Programme requires the The planned commissioning of fixed assets of grid supply thanks to the commissioning of new and the reconstruction of commissioning of the Company’s fixed assets of 44.7 existing transformer capacities and OHL). capacity in 2016-2020, RU illion thousand MVA of capacity and 11.4 thousand km 2020 72.1 of power transmission lines in 2016-2020. The total 201 116.3 value planned for investment is RUB 482.28 billion. Developing an electric The applications for the technological connection of a number of 201 137.1 The financing of the Investment Programme for this compressor stations for Chayadinsky OGCF’s crude oil delivery and the 201 137.3 period is planned with PJSC FGC UES’s own funds, power infrastructure for acceptance point for crude handling and metering, as well as for the HPP bonded loans, in addition to loans from organisations 2016 100.3 the gas transportation Power of Siberia, were accepted in order to provide energy supply to the and federal funds. The Programme provides the even gas extracting centres of the Republic of Sakha (Yakutia) and the Irkutsk distribution of investment costs over a five-year period, system – the Power of Oblast, as well as the provision of a gas transportation through these which will allow the Company to a keep balanced Siberia stations to Khabarovsk, Vladivostok and the People’s Republic of China. structure of financing sources. The technical specifications were developed and coordinated with JSC SO UES and the design requirements and specifications were approved; the bidding procedures for design and exploration works were started based on these applications.
1 Order of the Ministry of Energy of Russia No. 980 on 18 December 2015. 2 Order of the Ministry of Energy of Russia No. 1432 on 28 December 2016.
50 PJSC FGC UES Annual Report 2016 51 Strategic Report INNOVATIVE DEVELOPMENT
QUESTION & ANSWER Key Objectives of FGC’s Innovative Development Programme
— Achieving global average indicators of the innovation tools reliability, safety, quality, efficiency and availability — Improving interaction with the subjects of the of the energy supply to consumers thanks to the innovative industry ecosystem Strategic Report introduction of new equipment, technology and — Enhancing of the innovative activity of the practices management system — Improving the Company’s customer focus via the — Creating a talent pool with advanced competencies enhancement of existing and developing new for innovative development services, including high-tech services — Creating conditions for the development of — Developing and introducing (rolling out) innovative promising scientific research, process operations equipment and practices and advanced production in the territory of the Financial Statements Corporate Governance Report — Transitioning to the adopter model of innovative Russian Federation solutions and technologies offered by the market, Dmitry Parishkura including through the development of open Director of Investments – Head of the Investment Planning and Reporting Department By taking into account the performed analysis on — Digital substation; For further details on the FGC’s technological and innovative level, as well as the — Energy efficiency and loss reduction; priority areas of PJSC assessment of the market and technology development — Digital designing; FGC UES’s innovative forecasts, the Innovative Development Programme — The quality of electric power; What areas will the Company’s Investment Programme focus on after 2020? What will be its average annual development, see the has set the following priority (base) areas for the — Reliability and management of assets; monetary value? Appendix 1 hereto Company’s innovative development: — Composite materials and superconductivity; The Investment Programme of PJSC FGC UES (IPR) — Executing of the Company’s obligations in terms — Remote control and safety. is developed in strict compliance with the Russian of technological connection of consumers and Government Resolution No. 977, which defines the generation facilities to grids IPR development period as 2016-2020. Currently, — Implementing schemes and programmes for the the investment volumes and sources of financing development of the UNEG – the increasing the QUESTION & ANSWER for 2021 and onwards have not been approved, and subjects of reliability and developing the backbone consequently, the volume and sources for financing the grids, IPR titles have not been defined for this period. — Implementing programmes that are of significance to the State (according to the instructions of the In spite of this, we expect that key areas for the IPR Appendix after 2020 to be: President the RF, the Russian Government, and the federal executive authorities). — Ensuring the reliability and safety of electric power and capacity transmission,
Pavel Korsunov Innovative Development Deputy Chairman of the Management Board
The PJSC FGC UES Innovative Development Programme for 2016-2020, with an outlook for 2025, was Strategic Priority approved at the Company in 2016. What are the specifics of this Programme? Innovative development is a driving force The PJSC FGC UES Innovative Development developing the Programme with maximum focus on for the improvement of the Company’s efficiency Programme for 2016-2020 is developed on the basis the most advanced and critical areas for innovative of a number of programmes and strategic, regulating activity. At the same time deadlines and the desired and the advancement of industrial science and legislative, documents including the new governing outcomes of the Programme’s projects and activities documents on the enhancement of innovative activities are set, and the qualitative and quantitative impacts Reliability for companies of which the State is a shareholder. of the implementation of key projects and activities The Programme provides the details for the goals, are assessed. The new Programme requires further We aim to increase the reliability, quality and efficiency education institutions, small and medium-sized objectives and areas of the Company’s innovative updates of the «open innovation» tools for working with of the power supply to our consumers by renovating businesses, foundations, and foreign partners. development. In order to improve the quality of planning partners in the area FGC’s innovative development. existing electrical grids and by following the innovative The application of the principles of this concept and the implementation of R&D activity, PJSC FGC development programme. The Company’s innovative allows each entity to leverage the strengths of their UES uses the project management principle when activities also contribute to the development of modern counterparts, as well as to select the best projects and industrial science and education as well. technologies in the external innovation marketplace, The PJSC FGC UES What processes of the Company’s operation do the activities of the Innovative Development Programme cover? The Company is focused on the creation of an when the most risky stages of the innovation process Innovative Development extensive infrastructure partnership, built on a model (fundamental research, early product and service The Innovative Development Programme includes a (improvement of the business processes of design, Programme is available of open innovation and aimed at engagement with development stages, etc.) are implemented by external system of measures that determine all the life cycle construction, operation; management of intangible on the Company website development institutions, research institutes, higher organisations. stages of technology and product innovation (general assets; the monetisation of new technologies; at www.fsk-ees.ru in the development, testing of new products and processes; development of innovative infrastructure, including Innovations/Innovative the regulatory and technical provision of implementing interaction with higher education institutions and Innovative Development Programme Development/Innovative the projects, the development of new services, etc.), development institutions). The Company’s innovation priorities are defined in the 2016-2020 with an outlook for 20251. Development Programme as well as organisational and process innovations PJSC FGC UES Innovative Development Programme for section
1 Approved on 27 June 2016 by the resolution of the Board of Directors of PJSC FGC UES, Minutes No. 328 on 28 June 2016.
52 PJSC FGC UES Annual Report 2016 53 Strategic Report INNOVATIVE DEVELOPMENT
R&D Programme Analysis of Financial Performance Intellectual Property Objects Registered Strategic Report R&D investments, RUB million by the Company at Rospatent in 2016 The analysis is prepared on the basis of PJSC FGC with IFRS Consolidated Financial Statements and are Strategic Priority UES’s annual accounting indicators for 2016 according accompanied by a corresponding note. OBJECTIVE ACHIEVEMENT GOAL to RAS. Individual indicators are provided in accordance 2016 2016 2017 593.93 414.4 656.3 4 3 patents for certificates Economic Financial Statements Corporate Governance Report efficiency FGC’s efficiency: inventions for computer software SUPERIOR FINANCIAL PERFORMANCE The research and development programme for the experimental development and technology works (R&D) of PJSC FGC UES for 2015-20171 is one of FGC’s tools for the implementation of the Innovative Development Value Dynamics of R&D Financing in 2012—2016, OBJECTIVE 2016 ACHIEVEMENT 2016 GOAL 2017 Programme. RU illion Adjusted EBITDA, 100,696 119,662 110,2602 In order to comply with the Investment Programme, the 2016 0.41 RUB million Company spent RUB 414.4 million on implementing the 201 0.48 Efficiency of implementing –41% –46% –45% R&D programme in 2016, which amounts to a fraction 201 0.42 the cost management 0.2% of FGC’s revenue. 201 1.7 programme vs. 2012 2012 2.9 QUESTION & ANSWER Intelligent Power System Concept
The potential result of the Innovative Development grid state, automated real time systems of maintaining
Programme’s implementation shall be creation of an the power system’s operation within the set parameters Appendix electric power system with an intelligent grid, which as part of the unified analysis and decision making differs from the existing grid by the presence of certain system. The basis principles for building the intelligent innovative components: automatic systems for electric grid and power system control and the priorities for the Sergey Terebulin power transmission control, active grid elements with system’s factors and conditions are the reliability and Deputy Chairman of the Management Board, variable parameters, a system for monitoring the current efficiency of the entire system. Member of the Management Board
Intelligent Grid Circuit In 2016, changes were introduced to the acts of the Government of the Russian Federation in terms of Microturbines establishing the price level for technological connection, in particular, by providing the possibility of making Generation and alternative energy and storages payments in instalments for technological connection over a period of 10 years. How will these changes sources impact the financial reporting of PJSC FGC UES? Regardless of payments in instalments, the Company’s an instalment plan will appear in accounts receivable revenue is recognised at the moment of signing the with a corresponding priority rank. Interest paid acts on the provision of technological connection. on instalment plans from the counterparts will be PTL Consumers Monetary claims to generating companies that have recognised within the revenue as it comes in.
At the year-end of 2015, the debt ratio of the fixed interest rate to the floating interest rate within the PJSC FGC UES’s credit portfolio was 1:1. How will this ratio change in the future? Is there an objective to change the current ratio by some deadline? Intelligent grid The majority of the debt, which is served with a floating no alternative on the market for such funding at the rate (CPI+1%), consists of revenue yielding bonds that moment. Intelligent grid element are issued in favour of Vneshekonombank, which are The formulated debt structure is balanced as it provides invested in such a way that pension savings that are very comfortable borrowing terms (with the average give under its administration. This is long-term debt of which time of 17.2 years) with a low interest rate of 7.84% per repayment falls in the period of 2045-2048; there is annum as of 31 December 2016. Industrial plants Energy transmission and storage
2 1 Approved by the PJSC FGC UES Order No. 133 on 19 March 2015. The indicator decline in 2017, compared to 2016, is the result of a receipt of lump-sum income in 2016, including penalties claimed for the improper execution of the contractual obligations, by the subcontractors.
54 PJSC FGC UES Annual Report 2016 55 Strategic Report ANALYSIS OF FINANCIAL PERFORMANCE
QUESTION & ANSWER 2 6 The debt to equity ratio is at a level that is comfortable 2 2 for FGC. The indicator declined according to the results 2 22 2 2 12 of 2016 by 0.04% compared to 2015. A slight growth 1 2 of the indicator is planned in 2017, although it will not What possibilities does the Company have left to reduce its operating costs, and what measures have been 1.87 exceed the level of the previous periods. Strategic Report taken? 1.64 1.53 The debt to EBITDA ratio corresponds to restrictions A system of measures to improve efficiency has been — Development of a standard design, and the repetitive 1.35 set by the credit policy of FGC (that is, not more than developed and implemented at PJSC FGC UES that use of design documentation; 3). According to the results of 2016, the decline of 1.03 1.02 0.98 covers all key aspects of the Company’s operation. The this indicator was observed. The forecasted ratio — Reduction of operating costs per servicing unit for following can be emphasised among the key measures: value for 2017 is similar to the previous periods but electric equipment by updating the operation process
slightly higher than the value in 2016. At the same time, Financial Statements Corporate Governance Report — Introduction of an integrated asset management flow chart; 0.37 0.4 0.39 0.37 0.38 0.33 the indicator will remain significantly lower than the system that includes an automated control system 0.29 — Improvement of the management efficiency of maximum values set by the FGC’s Board of Directors. for the processes of repair planning, diagnostics and accounts payable and accounts receivable, including the assessment of operating conditions; 2012 201 201 201 ar et 2016 ar et improvement of the IT systems for accounts 2016 201 — A project for improving labour productivity; receivable; — Identification of potential efficiency improvement and — Centralisation of the individual support functions. e t to e uit e t to ratio e uit ratio best practices by comparing the branches to each Сurrent liquidityСurrent ratioliquidity ratio other; et de t etto E A de t to E Aratio ratio
Does the Company have scenarios for the minimum and maximum expected tariff growth rates in 2017? The interest cover ratio demonstrates uneven dynamics, which is caused by the fact that the majority Interest cover ratio The 2017 tariff growth has already been set – it will account capacity changes and corresponds to RGR of the credit portfolio consists of floating bonds with increase by 5.5% as of 1 July 2017, which takes into growth by 3%, according to SES. ar et 201 5.41 interest calculated on the basis of the inflation index (CPI). The growth of inflation in 2014—2015 impacted 2016 4.32 the interest payments. As of 2016, the cover ratio ar et 2016 3.22 increases as the interest payments of the Company 201 3.39 decrease. 201 4.46 FGC’s credit policy provides the level of debt and its 201 5.59 Appendix servicing cost that is comfortable for the Company. Financial Ratios Describing the Efficiency of the Company’s Financial Policy 2012 7.11
Sales margin, 69.21
ar et 201 20.62 2 2 0 Dynamics of Key Financial Indicators 64.44 2016 62.38 1 0 32.19 61.51 6 6 ar et 2016 32.98 In 2016, the financial performance indicators affirm the of both revenue growth and cost optimisation during 60.14 60.66 1 59.43 201 17.59 increase in FGC’s performance efficiency that is a result the restriction of tariff growth. 1 1 1 2 2 201 16.98 1 60 1 1 201 14.42 2012 201 201 201 ar et 2016 ar et 2012 16.08 2016 201 2016 2016 2016/2015 2017 EBITDA profitability* mln RUB 2012 2013 2014 2015 Objective Actual Change, % Objective Return on invested capital*** Return on equity** In 2016, the sales margin stood at 32.2%, which is Revenue 138,836 155,352 168,941 173,266 228,994 218,366 26% 201,857 * When calculating the indicator, the revenue of the Company is less than the target indicator due to the extension adopted excluding the provision of services for technological of deadlines for the acceptance of technological connection to t e rid in order to ma e it compara le it E A connection services to 2017 and onwards by taking indicator into account the actual deadlines of technological Cost of sales and 116,510 132,948 140,259 142,789 153,479 148,071 4% 160,227 ** The indicator is calculated based on the adjusted net profit of the connection that are required for the consumer. The administrative cost* Company (excluding the accruals and recovery of the bad debts, decline in the planned sales margin for 2017 when and the appreciation of financial investments) and the compared to 2016 was caused by the planned corresponding adjustment of equity capital value. decrease of technological connection revenue, the Net profit -24,532 -25,898 5,137 17,870 55,021 106,071 494% 26,498 *** The indicator is calculated basing on the adjusted indicator of increase of depreciation (the commissioning of new E accordin to RSA reportin data excludin t e accruals and facilities as fixed assets) and by expenditures that recovery of the bad debts, the appreciation of financial investments are beyond Company’s control (a phased cancellation and tec nolo ical connection revenue of the property tax privilege, the purchase of electric power losses, etc.). The return on equity for 2016 Adjusted EBITDA** 82,847 96,297 99,603 103,667 100,696 119,662 15% 110,260 increased to 6.5% because of the recognition of technological connection service revenues (in a number of large-scale projects for technological Net debt connection at Rosenergoatom generating stations). 174,368 230,580 221,146 220,288 257,796 229,906 4,37% 244,599
* Taking into account the retrospective changes of the indicators. ** Excluding the accruals and recovery of the bad debts, the appreciation of financial investments and technological connection revenue.
56 PJSC FGC UES Annual Report 2016 57 Strategic Report ANALYSIS OF FINANCIAL PERFORMANCE
Revenue EBITDA and profit EBITDA Revenue structure, illion RU The revenue of PJSC FGC UES increased by 26% in Profit generation, RU million The adjusted profit before interest, profit tax and 2016 compared to 2015. The main growth factors depreciation (EBITDA) increased by almost RUB 16 Strategic Report were the recognition of revenue from the technological 119,662 2016 171.1 45.5 1.8 Adjusted EBITDA billion (15.4%) compared to the same period in 2015 connection of Rosenergoatom’s facilities and the 159.0 12.4 1.9 Amortisation -81,490 and amounted to RUB 119.7 billion. 201 indexation of the power transmission tariff. 26 nterest pa a le -6,231 201 159.9 7.0 2.1 Net Profit (Loss) Reserve alance 8,606 As a result of 2016, the net profit of PJSC FGC UES Revaluation of financial investments (Inter RAO) 39,770 amounted to RUB 106.1 billion, which was 5.9 times Balance revaluation of fixed assets -1,476 (or RUB 88.2 billion) higher compared to 2015. The Financial Statements Corporate Governance Report Revenue from Revenue from Revenue SS revenue 45,479 electricit tec nolo ical from other major factors for this increase were mainly the result -0.9 transmission connection operations Write-off of overdue accounts payable of other revenues (from the revaluation of PJSC Inter Earnings before tax 124,320 RAO’s share value that was caused by the growth of Profit tax -18,249 their market quotations and an increase in the recovery Net profit 106,071 amount of bad debts) and revenue growth from Costs services of technological connection to the grid.
The total cost (including production and administrative which was caused by the commissioning of costs) increased by RUB 5.3 billion in 2016 compared new fixed asset facilities in the framework of Cash Flow to 2015. implementation of the large-scale Investment Programme, as well as by the appreciation of the Information on the Cash Flow in 2016, RU illion Dynamics of cash flow from major operations, Cost of Sales RU illion facilities. major sources that The main factors that caused a change in the cost of make up the cash Сash flows from current Administrative Costs transactions 99.2 2016 99.2 sales in 2016 compared to the 2015 level are: flow is available in the Сash flows from investment 201 99.1 The increase of administrative costs was only 2.3% Appendix 1 hereto -55.2 — Increase of property tax expenses by RUB 1.6 transactions (RUB 182 million) in 2016 compared to 2015, which 201 101.0 billion (+22.5%), which was caused by the phased Net cash flows from financial -30.0 is significantly less than the inflation rate (7.1%) and operations 201 86.7 cancellation of the property tax privilege as of affirms the effectiveness of the measures aimed Cash flow 2012 100.5 1 January 2013 for property relating to power 14.0 at controlling the growth rate of administrative and alance transmission lines; management costs. Appendix — Depreciation increase by RUB 4.2 billion (+5.6%), Liabilities
Full cost dynamics, RU illion Full cost structure Information on accounts As of the end of 2016, the value of the debt portfolio RU illion receivable and accounts of PJSC FGC UES» (principal debt, excluding interest Bond portfolio structure, RUB billion* 1 Electric po er cost 14.7 payable, the net assets accrued as of the balance sheet date) was RUB 261.65 2016 148.1 1 103.9 2 a our and social 20.6 of the Company, and the million, which decreased by RUB 13 billion, or 5%, 2016 140 17.5 201 142.8 c ar es dynamics and capital compared to the previous year, RUB 261.39 billion 201 117.1 140 17.5 201 140.3 2 aintenance and repair 2.7 structure is available in of which are loans based on bonds with an average 201 140.3 100 17.5 201 132.9 Ra and ot er materials 2.8 the Appendix 1 hereto interest rate of 7.84%. 201 164.9 100 17.5 2012 116.5 Propert insurance 0.6 The structure of the credit portfolio is optimally 2012 150 17.5 6 6 Rent 1.2 balanced in terms of instruments, cost and currency. Propert securit 1.4 The debt portfolio is represented by mostly by long- 11 10 Electricit transmission services 2.5 term instruments; the interest rates are fixed for 2/5 onded loans Infrastructure bonds Euro onds t er production costs 5.1 of the portfolio and variable for 3/5 of the portfolio 10 Аdministrative costs 8.0 (slightly more than half of the debt consists of revenue *Principal debt, excluding interest accrued as of the 11 epreciation and propert tax 88.5 yielding bonds with a floating coupon rate linked to alance s eet date (for productive assets) inflation). The currency risk is totally absent, as all of the bonds are in rubles. Cost Optimisation. The above results were achieved thanks to a decrease The Company follows a moderately conservative policy In 2016, the Company executed all of its obligations on in procurement value, cost reduction in long-term that allows it to maintain the status of a highly reliable servicing the debt portfolio and debt repayment on time The decrease in operating expenses compared to 2012 contracts, and cost reductions in contracts for guarding borrower, complying with its commitments in terms and in full, including: was 46.03%. The cumulative effect of this decrease in facilities, IT services costs, and also as a result of of the implementation the large-scale Investment operating expenses was RUB 17.3 billion. headcount optimisation. Programme, its liabilities and dividend payments. To — an offer made in April for the bonds of the 12 series achieve these objectives, the Company clearly complies (of which the outstanding amount was RUB 10 with the following target indicators in terms the debt billion), with buy-back from the investors amounting to 99.5% of the placed bonds; Cost Reduction burden: — an offer made in October for the bonds of the 25 — Debt cover limit (net finance debt/EBITDA) of not 2012 2013 2014 2015 2016 series (of which the outstanding amount was RUB 15 more than 3; More information on cost billion), with buy-back from the investors amounting Reduction of unit operating expenses reduction is available in — Limit for debt service cover (net debt service cost/ to 88% of the placed bonds. vs. the 2012 level*, % Х –8.4% –22.8% –39.9% –46.0% the Appendix 1 hereto EBITDA) of not more than 0.25.
* The effect indicated takes into account the retrospective change in the quantity of served equipment, and has been calculated in accordance with new regulations on SF6 equipment and 330 kV, 500 kV cable lines (in accordance with PJSC FGC UES Order No. 482 on 3 December 2015 “On approval of Guidelines on calculation of the PJSC FGC UES service volume in conditional units”).
58 PJSC FGC UES Annual Report 2016 59 Strategic Report ANALYSIS OF FINANCIAL PERFORMANCE
In November, we placed Series BO-02 exchange bonds Bond offers with total amount of RUB 25 billion Tariff Regulation to the total amount of RUB 10 billion with a coupon rate are planned in 2017. When the Company executes Electric power transmission via the UNEG and The Company’s activity on providing the services of of 9.35% and an offer in 5 years. obligations in terms of the offers, the source of cash technological connection tariffs are approved by the electric power transmission via distribution grids is will be defined based on the financial conditions, as Further details on the The list of main standard Strategic Report In order to finance the Investment Programme for federal executive body in the area of tariff regulation, regulated at the regional level by the executive bodies well as by taking into account the Company’s current outstanding bond issues legislative acts that 2017-2020 and refinance existing debt, the Company the functions of which have been transferred to the of the constituents of the Russian Federation. liquidity on the date of the offer. The Company’s own of PJSC FGC UES are regulate the issues will consider the use of the bonds, Eurobonds and bank Federal Anti-Monopoly Service (FAS of Russia) since funds, as well as borrowed funds, may be used as a available in Appendix 1 of tariff formation for credits in the future. Amounts of attracted financing 20154 . source. hereto activity on electric power and the section on specific instruments will depend on transmission via the the 2017-2020-business plan and market conditions. UNEG is available in the
Appendix 1 hereto Tariffs for Services of Electric Power Transmission via the UNEG Financial Statements Corporate Governance Report Tariffs for services of electric power transmission via In order to set the tariffs for each year of the regulated Credit Ratings the UNEG are set on the basis of the return on invested period, the required gross revenue (RGR) is determined capital method (RAB regulation). by summing up the values of return, invested capital As of the end of 2016, the Company’s international rating scale of Standard & Poor’s and Moody’s in the income and the expenses required for the provision credit ratings (assigned by Moody’s, Standard & Poor’s, category of the least speculative shares, which is the of electric power transmission services via the and the Fitch ratings agencies) remain at the sovereign evidence of the Company’s status of a highly reliable UNEG. To prevent a sharp increase of the tariff, the Tariffs Set for Services of Electric Power level, the same as in the previous year on the rating borrower, as well as the high level of the Company’s RAB-regulation methodology provides an evening Transmission via UNEG provided by PJSC FGC UES scale of Fitch in the investment category, and on the solvency. Information on the main mechanism that redistributes the required gross for 2015—20195, RU mont long-term regulation revenue over the entire long-term period of regulation. parameters for the 01 0 201 174,073.60 0 In 2014, the FST of Russia approved the regulation services of electric 1 12 201 68,317.72 parameters and tariffs for the services of electric power Information on Credit Ratings as of 31 December 2016 power transmission via 01 0 201 169,011.36 0 transmission via the UNEG for the second long-term the UNEG set by the FST 0 06 201 66,330.96 regulation period of 2015-20196. Rating Value of Russia, as well as the Rating Agency International Scale National Scale adjustment introduced 01 0 201 164,095.64 The tariff rate to pay for standard technological losses 0 06 201 to the set tariffs and the 64,401.72 of electric power when transmitted via the UNEG is 7 ВВ+ regulation parameters in 01 0 2016 155,541.58 determined according to a formula . Standard & Poor’s ruAA+ 2016, is available in the 0 06 201 1 61,137.82 Outlook Stable Appendix 1 hereto 01 0 201 144,686.52 Appendix Ва1 0 06 2016 56,868.70 Moody’s Withdrawn3 Outlook Negative2 01 01 201 134,589.17 0 06 201 ВВВ- 52,923.13 Fitch Ratings Ltd AAA (rus) Outlook Stable For the constituents of the Russian Federation being a part of the North Caucasian Federal District
Mid-Term Outlook of the Company’s Financial Performance Tariffs for Services for technological connection to the UNEG and Financial Position The FAS of Russia defines two payment methods The standard C1 rate is set for FGC is at the same level for technological connection to the UNEG facilities: as the rate for consumers of all constituents of the Outlook for Key Financial Indicators, RUB million the approval of an individual payment for a specific Russian Federation, regardless of the electric power applicant (in case construction of electrical grid supply category, the range of the connected capacity or 2017 2018 2019 2020 facilities is required) and the approval of a payment per voltage level of the applicants. The only exception is for formula using the standard tariff C1 rate. consumers connected at less than 150 kW. In that case, the C1 rate does not include expenses for the presence Revenue 201,857 199,416 198,657 198,489 Dynamics of the Standard C1 Rate, of a Rostekhnadzor official during examination. The RUB/kW (excl. VAT) 2017 rate for this consumer category is set in the Cost of sales 151,808 159,047 167,134 171,588 amount of 23.15 RUB/kW. 201 23.64 Starting from 2013, the payment for the technological 2016 Net profit 26,498 19,221 11,624 7,521 25.16 connection of generating facilities to the UNEG, in 201 28.61 addition to expenses for new construction of «last mile» Adjusted EBITDA 110,260 112,384 112,808 115,621 201 27.56 electrical grid facilities, includes the cost of investment 201 27.56 for developing the existing grid infrastructure in order to Net debt 244,599 242,350 235,484 207,070 provide the delivery of capacity, regardless of the type of generation – HPP, NPP, or CHP. CAPEX* 105,587 104,208 98,137 75,269 The 2017 standard tariff rate for PJSC FGC UES was approved in the amount of 23.64 RUB/kW (excl. VAT) divided by the activity. The decrease in the tariff rate * The financing plan for the PJSC FGC UES Investment Programme (the investment plan adjustment was approved by the Order of the by 6.04% for 2016 is a result of a decrease in FGC’s Russian Ministry of Energy No. 1432 on 28 December 2016). headcount in the activity of technological connection.
1 The outlook for the rating was changed to positive on 21 March 2017. 4 Decree of the Russian President No. 373 on 21 July 2015 “On some issues of the state’s control and monitoring in the area of anti- 2 The outlook for the rating was changed to stable on 21 February 2017. monopoly and tariff regulation.” 3 This rating action is related to the termination of the agency’s rating activity in the Russian Federation at the national scale due to new 5 Order of the FST of Russia No. 297-e/3 on 9 December 2014. regulatory requirements introduced for credit rating agencies in Russia. The decision to withdraw the rating at the national scale will not 6 Taking into account the adjustments introduced by the Order of the FAS of Russia No. 1892/16 on 27 December 2016. affect the rating according to the international scale. 7 Resolution of the Russian Government No. 458 on 11 May 2015. 8 Order of the FAS of Russia No. 1830/16 on 23 December 2016. 60 PJSC FGC UES Annual Report 2016 61 Strategic Report ANALYSIS OF FINANCIAL PERFORMANCE
(RUB million, except ratios and the 2012 2013 2014 2015 2016 Dynamics of the Approved Total Payment Amount In 2016, the payment for technological connection by an individual indicators provided in %) for Technological Connection, RU illion project was set for 9 consumers with a total amount of RUB 37.3
billion (excl. VAT). The applicants with the highest payment amount Ratios and Other Indicators Strategic Report 2016 37.38 include: 201 22.38 RUB 32.3 billion JSC Kontsern Rosenergoatom – Kalininskaya NPP Return on assets 4 2.5% 2.1% 4.4% 4.8% 8.3% 201 34.48 201 1.43 RUB 1.9 billion PJSC RusHydro – Zelenchukskaya HPP Return on equity 5 3.3% 3.2% 7.3% 7.8% 12.9% 2012 1.39 2011 1.25 LLC Huadian-Teninskaya CHP
RUB 1.3 billion Financial Statements Corporate Governance Report Current liquidity ratio 6 1.36 1.22 0.93 1.22 1.19 2010 6.15 JSC Eniseyskaya Territorial Generating Company – RUB 1.0 billion Krasnoyarskaya CHP-3 Aggregate capital / aggregate assets 0.72 0.60 0.61 0.62 0.66
Gross debt 216,418 287,588 262,977 281,542 266,614
Government Support Floating debt 23,218 29,624 29,686 31,466 29,660
PJSC FGC UES did not receive any government support, 1.6 billion for the construction of 500 kV SS Ust-Kut Long-term debt 193,200 257,964 233,291 250,076 236,954 including subsidies, in the reporting period. At the same in Irkutsk Region, which were previously saved by the time, the Russian Federation Government decided to Company. Net debt 7 168,002 223,995 220,099 222,903 221,750 allocate budget investments in the amount of RUB
Net debt/adjusted EBITDA 2.0 2.4 2.0 2.1 1.9
Consolidated Information on the Financial Performance in IFRS Cash flow from operating activity 70,306 78,792 93,013 98,023 111,476
(RUB million, except ratios and the 4 2012 2013 2014 2015 2016 Return on assets is calculated as adjusted profit for the period divided by the average value of aggregate assets for the period; indicators provided in %) 5 Return on equity is calculated as adjusted profit for the period divided by the average equity value for the corresponding period. 6
The current liquidity ratio is calculated as the ratio of consolidated current assets to consolidated current liabilities (net of accounts Appendix payable to FGC shareholders). Consolidated Statement Indicators of Profit and Loss 7 Net debt is calculated as long-term and floating debt minus cash and equivalents, short term bank deposits and short-term notes. and Other Comprehensive Income Revenues 140,313 157,970 175,968 187,041 255,603
Other operating income 3,543 6,155 5 618 4,001 6,039
Operating expenses (110,031) (133,811) (126,137) (130,963) (155,508)
Profit / (loss) for the year 7,238 (234,771) (20,601) 44,098 68,382
Financial Information Not Regulated by IFRS Sustainability Results EBITDA 1 49,978 (234,196) 25 804 98,149 120,347
Adjusted EBITDA 2 82,732 92,551 107,676 104,338 116,660 The development of human capital, social responsibility and environmental safety, along with economic efficiency, remain unalterable priorities for our Company Adjusted profit for the period 3 30,150 23,405 40,841 46,378 86,645
1 EBITDA is a profit / (loss) for the period before any taxes, interest, depreciation or amortisation. OBJECTIVE 2016 FACT 2016 GOAL 2017 The adjusted EBITDA for 2015-2016 is calculated as EBITDA minus the net loss from the depreciation and revaluation of the assets, gains on the de-recognition of a subsidiary (only until 2016), revenue from technological connection, the cost of the provision of doubtful debts (excluding the amount of receivables impairment reserve calculated as a difference between the book value of the accounts For more information on Labour productivity ≥ 3,869 4,264 growth ≥ 5.9% receivable and the present value of the estimated future cash flows), and by taking financial income into account; the Company’s strategic RUB/man hour RUB/man hour compared to 2016 The adjusted EBITDA for 2012-2014 is calculated as EBITDA minus the net loss from the depreciation and revaluation of fixed assets, the goals in the area of devaluation of financial investments available for sale, the devaluation of the short-term notes, the reversal of impairment loss from the Accident frequency <0.221 0.137 <0.137 devaluation of investments into associated companies, and by taking financial income into account . sustainability, please see rate 2 per 1,000 persons per 1,000 persons The adjusted profit for 2015-2016 is calculated as profit for the period minus the net loss from the depreciation and revaluation of fixed the Strategic Report – per 1,000 persons assets, gains on the de-recognition of a subsidiary (only until 2016), including respective deferred income tax; Market Review, Strategy 3 The adjusted profit for 2012-2014 is calculated as profit/loss for the period minus the depreciation of fixed assets, loss from the Environmental protection costs 242.9 193.98 253.78 and KPIs/Sustainability and investments revaluation of the fixed assets, gains on the de-recognition of a subsidiary (only until 2016), the devaluation of financial investments RUB mln RUB mln RUB mln available for sale, reversal of impairment loss from the devaluation of investments into associated companies, the impairment of short- Strategy section term notes, including respective deferred income tax; The share of procurements of Russian main 51% 70% 54% electrical equipment
62 PJSC FGC UES Annual Report 2016 63 Strategic Report SUSTAINABILITY RESULTS
The development of human capital, social The main principle of the Company’s sustainability QUESTION & ANSWER responsibility and environmental safety, policy is to maintain the balance of implementing the social and economic interests of our activities and along with economic efficiency, remain to focus on sustainability aspects that are of primary For a list of FGC UES’s Strategic Report unalterable priorities for our Company importance for our stakeholders. stakeholders and an understanding of the Every year when preparing the Report on social We consider the retention of the levels of reliability and Company’s responsibility responsibility and corporate sustainability, FGC UES technological progress achieved over the years of large- to them, please see the holds a questionnaire in order to determine the priority scale investments to be one of the main development Strategic Report/ In Brief aspects of our Company and interested parties. tasks for PJSC FGC UES for 2015—2019. oprt oenneRpr Financial Statements Corporate Governance Report
The most important sustainability aspects for our stakeholders are Natalia Ozhegina For more information on Deputy Chairman of the Management Board — Economic performance results — Fighting corruption social responsibility and — Power — Non-prevention of competition sustainability principles, — Employment — Compliance with legal requirements basic and specific business directions — Ecology — Consumer health and safety Which policy does the Company follow in order to optimise the composition of its staff and what are its results? in the sustainability — Relationships between employees and — Compliance with product liability area, interaction with The Company pays special attention to raising the office was approved in 2016, which enabled the management requirements interested parties, and labour productivity of its employees in compliance reduction operational costs, and established clear — Occupational health and safety the Company’s key with the requirements for the reliable operation of and transparent functional management verticals performance results in the electric grid complex, as well as the optimisation that expand the span of control and increases the the area of sustainability of staff composition by reducing the quantity of efficiency of the Company’s performance in general. for 2016, please see administrative and managerial staff. As a result, the average headcount was reduced and the respective sections labour productivity increased in terms of value. The Regular and open communication with interested and exhibition arrangements, multilateral discussions, We continued to optimise the staff structure and of the Report on Social number of management levels was optimised; the parties provides a better understanding of their raising awareness through mass media – the Company centralisation of the managerial functions of Responsibility and share of administrative and managerial staff in the total expectations and gives the Company a chance to use regularly uses all of these communication channels and management units at MES and PMES branches in Corporate Sustainability headcount was reduced from 19% to 16% in 2016. a targeted approach in preparing the corporate social they provide us with the possibility for dialogue with 2016. In addition to that, the new organisational and A high level of staffing was achieved. responsibility agenda. Participation in congresses reference audiences. functional structure of the Company’s executive Appendix
HR and Social Policy Which modern professional standards has PJSC FGC UES introduced into its activities? The HR and Social Policy of FGC UES represents a of the Company’s strategic goals and the provision of For information on the unified human resources management system oriented social benefits and guarantees that meet the needs and participation of PJSC We perform systemic analysis and efficiency In order to strengthen the staff’s potential and establish at the achieving a balance between the optimal use of expectations of the employees. FGC UES in congresses assessment of organisational and functional an optimal professional and qualified staff structure, the employees’ professional results, the achievement and exhibitions, please structures at all management levels (the Executive the Youth Succession Pool, the Succession Pool for see Appendix 1 hereto Office, MES and PMES), in addition to introducing a the Technical Facilities and the Managerial Succession unified production unit methodology and management Pool have been established and successfully operate HR Policy structure based on best industry practices. within the Company. There is a system for attracting and retaining of young professionals with a profile in The main targets of the Company’s HR Policy are as Moreover, the Company executes the complex electrical education, and those future professionals follows: introduction of professional standards in accordance Average Headcount in PJSC FGC UES, emplo ees who will implement all of UNEG’s modernisation and — control of staff efficiency; with the requirements of the Federal Law No.122-FZ innovative development programmes that we have — headcount control; as of 02 May 2015 “On Amending the Labour Code of planned today. — staff development control. 2016 22,150 the Russian Federation” and Articles 11 and 73 of the 201 23,358 For more information Federal Law on Education in the Russian Federation. The Company uses different mechanisms to establish 201 24,362 on the Company’s staff, professional and career growth conditions for its 201 please see the respective employees, as well as the efficient motivation and 25,123 sections of the Report on strengthening of a unified corporate culture with 2012 24,460 Social Responsibility and consideration for the social and economic development Corporate Sustainability and specifics of regions where the Company has a presence. Social Policy For more information on the Company’s The Company’s benefits package is a tool for employee In order to ensure commitment to the Company’s social and youth policy, Average salary of the Company’s personnel, RU The Company’s employee turnover rate, motivation and their social security; it includes corporate values and promote a healthy lifestyle, effective employee For additional voluntary medical insurance, accident insurance, a different corporate events are held every year, including support programmes 2016 information on the non-governmental pension, financial assistance to sporting events, “open doors” days, events for power 2016 69,835 4.92 and corporate events 201 8.66 Company’s awards employees in need (concerning marriage, childbirth, sector veterans, painting competitions for children and 201 66,573 held in 2016, please see 6.50 policy, please see the etc.) and a wage/salary advance. many others. 201 64,091 201 the respective sections 201 7.80 Appendix 1 hereto 201 62,042 of the Report on Social The Company runs different programmes for employee 2012 6.30 2012 58,032 Responsibility and support. Corporate Sustainability
64 PJSC FGC UES Annual Report 2016 65 Strategic Report SUSTAINABILITY RESULTS
Charity Energy Saving and Energy Efficiency
The Company provides charity support to individuals The Company initiated sponsorship contracts in the In 2016, the Company continued to implement the Energy Saving and Energy Efficiency and companies in different directions, including support following directions in 2016: 1 Programme of PJSC FGC UES for 2015-2019. Strategic Report for education, science, culture, art, public awareness, — support for professional and amateur sports; physical culture and sport; support for low-income and disabled persons, for the protection of facilities — support for events of social and economic of historical, cultural or environmental importance; importance; Goals of the Energy Saving and Energy Efficiency Programme support for orphaned children; assistance for those — promotion of projects for the popularisation of who have suffered from natural disasters and other energy efficiency and energy saving. For more information on For more information catastrophes, the victims of repression, refugees
the Company’s charity on the implementation Financial Statements Corporate Governance Report and forced migrants; and support for individuals who — To ensure the saving and rational use of of operations based on the requirements activities, please see of the Energy Saving require medical treatment of a serious disease. fuel and energy resources and reduce the of the ISO 50001:2011 energy the respective sections and Energy Efficiency consumption of electricity for corporate management systems requirements with of the Report on Social Programme, please see Responsibility and the respective sections needs during electricity transmission a guide for use via UNEG grids by improving the energy Corporate Sustainability of the Report on Social — To improve the energy efficiency of the Responsibility and efficiency of the Company’s facilities and Company’s electric grid facilities and The Company spent The total financing amount of Corporate Sustainability equipment 21 on charity in 2016 152 sponsorship contracts in 2016 equipment RUB mln RUB mln — To put in a system in place for electric power management and the certification
Industrial Safety For information on the Operational benefit of Economic benefit of measures Our health and safety measures are aimed at the use of energy resources measures of reducing energy/ of reducing energy/fuel elimination of workplace injuries and occupational by FGC UES in 2016, 7,560 Accident frequency rate tonnes of fuel consumption in 2016. 75 consumption diseases, the promotion of safe conduct and the For more information please see the Appendix RUB mln ex development of accident-prevention skills among the on industrial health and hereto equivalent fuel 2016 VAT employees, as well as at the improvement of working 0.137 safety, please see the 201 0.221 conditions. respective sections of Appendix 201 0.125 the Report on Social The Company has regulations on health and safety 201 0.315 Responsibility and Procurement Activities management that define the health and safety 2012 0.284 Corporate Sustainability policy and operational order of the health and safety The Company carries out procurement aimed at purchasing the necessary equipment management system. and services on the competitive market within its Investment Programme, and at Environmental Safety fulfilling its annual repairs and target programmes. The Company’s environmental policy is guided by — Compliance with the environmental protection law principles established by the state environmental and reduction of the adverse impact on environment; development policy of the Russian Federation and the Principles and Main Tasks of the Company’s Procurement Activities — Efficient operation of the environmental management Energy Strategy of Russia for the period until 2030. system; The environmental policy of FGC UES is aimed at minimising any adverse impact on environment in the — Minimisation of any adverse impact on environment OPENNESS Optimise the procurement management system on the basis of best practices course of electricity transmission and distribution. by the application of innovative solutions and the Reduce the Company’s expenses by cutting the cost of procured goods, works and The main targets of the Company for environmental introduction of the best available technologies. COMPETITIVENESS services and minimising intermediary services protection and environmental management are as follows: Provide goods, works and services of high quality at minimum cost and in a timely JUSTIFICATION manner
Costs and investments for environment protection, Payments for adverse environmental impacts, For more information RU million RU million on the Company’s Following the Company’s procurement results for 2016, environmental 2016 194 2016 3.10 1.35 procurements were made in the amount of RUB 109.2 responsibility, please see 201 248 201 3.94 2.58 bn. The share of procurement procedures executed on suppliers the respective sections 7,500 201 4.27 2.55 a competitive basis accounted for RUB 101.3 bn, or 129 201 of the Report on Social The Company attracted for the purchase 4.77 2.77 92.7%, of total procurements. The economic effect of 201 136 201 Responsibility and of goods, works and services in 2016 procurement activities amounted to RUB 2.7 bn. 2012 142 2012 4.23 2.89 Corporate Sustainability
it in t e limits A ove limit pa ments
1 A new version of the Programme was developed in accordance with requirements of the order of the FTS of Russia No.525-e as of 26 March 2015 and the order of the Ministry of Energy of Russia No.398 as of 30 June 2014 and was approved by the resolution of the Company’s Management Board on 31 July 2015 (Minutes No.1326 of 04 August 2015).
66 PJSC FGC UES Annual Report 2016 67 Strategic Report SUSTAINABILITY RESULTS
QUESTION&ANSWER Procurements from Small And Medium-Sized Enterprises The Partnership Programme between PJSC FGC UES The list of goods, works and services planned and small and medium-sized enterprises has been for purchase from only small and medium-sized
approved by PJSC FGC UES and a register of small and enterprises was expanded at the end of 2015. Strategic Report medium-sized enterprises that joined the Partnership Moreover, the composition of the advisory body was Programme is being kept. An advisory body to improve broadened to include the representatives of: PJSC the efficiency of procurements made by PJSC FGC UES, Rosseti, the Chamber of Commerce and Industry of including the procurements from small and medium- the Russian Federation, the Association of Energy Anastasia Tselovalnikova sized enterprises, was established at the Company. Constructing Enterprises, the Compliance Assessment and Monitoring Directorate of JSC Federal Corporation Procurement Director and Head of the for the Development of Small and Medium-Sized Financial Statements Corporate Governance Report Consolidated Planning and Procurement Enterprises, the Innovations Committee of the National Department The «Road map for cooperation with small and medium-sized Association of Procurement Institutions, the Procurement enterprises» section was developed on the Company’s official and Sales Management Institution named after A.B. Does the trend for localising the production of your main suppliers (import substitution) impact the quality of website: www.fsk-ees.ru/suppliers/ Solovyev of the National Research University – Higher the products procured? dorozhnaya_karta_po_sotrudnichestvu_s_msp/ School of Economics, the Energy Committee of the The import substitution policy is mainly targeted at the lines and the introduction of modern production All-Russian Public Organisation of SME OPORA ROSSII, production and application of domestic products with technologies that enable the solving of tasks for the and LLC RUSENERGOSBYT. their respective (or higher quality) import analogues. development promotion of domestic power engineering The foreign capital is capable of increasing the and adjacent industries obviously result in a higher technical level and production efficiency by means of quality of manufactured products and improved The number of contracts The cost of contracts new technologies and the replacement of out-dated technical parameters. signed with SME with SME equipment. 7,219 in 2016. 29.7 in 2016. It should be additionally noted that all equipment and contractsa RUB bn The increased localisation of electrical equipment materials, including the ones localised on the territory including VAT production that is manufactured by domestic of the Russian Federation, undergo a standard product companies under the licenses of foreign producers, quality inspection procedure for compliance with the or in the framework of joint ventures with foreign technical requirements of PJSC FGC UES when it is participation, leads to the modernisation of the supplied to the UNEG’s facilities. technological park. The launch of new technological Import Substitution Programme PJSC FGC UES carries out its activities related to import The main assessment criterion for the implementation What was the share of small and medium-sized enterprises as part of the Company’s total procurement volume Appendix substitution in accordance with the Import Substitution efficiency of the Import Substitution Programme is the in 2016? For more information on Programme for Equipment and Materials and Systems growth of the share of domestic electrical equipment the main parameters of In 2016, the Company signed more than 7,200 cost of contracts signed by FGC UES following the Technologies for 2015—20193. procurements made by FGC UES consisting of 9 groups the import substitution contracts with small and medium-sized enterprises results of procurements from SME is shared on the of main electrical equipment with voltage classes 110- programme, please see with a total amount of some RUB 30 bn, which website of the Unified Procurement Information System 750 kW, of which the purchases depended on import to the website at www. accounted for 27% of all completed procurement (www.zakupki.gov.ru). The share of domestic products a large extent. fsk-ees.ru in the About procedures. Information on the number and the total in the procurement of main Company/Import 70% electrical equipment by FGC UES Substitution section in 2016.
Procurement C ain Share of domestic electric equipment in procurements ain procured oods or s and services in RU illion o t e total procurement amount made by FGC UES Share of domestic electric equipment in procurements tar et values or pac a e includin t e desi n made by FGC UES 201 tar et 60 documents and specifications, actual values 57 construction and installation For information on 201 tar et 2016 actual actions taken in the 70% 201 tar et 54 RUB 67.4 bn 61 201 actual 75 framework of the 2016 tar et 51% Company’s import 201 actual 44.5 201 tar et 48 E uipment and materials substitution activities, RUB 15.8 bn 1 please see the Appendix 1 hereto esi n Construction Electricit FGC UES continues to implement the series of its long- providing quality in line with international standards. RUB 3.3 bn 0 and reconstruction transmission Consumers term supply contracts with the leading manufacturers The launch of domestic electrical products into of electrical equipment and plans for the localisation international markets is actively supported. of its production within the territory of the Russian The import substitution actions planned for 2016 and Federation. The Company promotes the establishment Repair and maintenance For more information included in the Long-Term Development Programme of ec nolo ical of cooperative relationships between electrical on the Company’s PJSC FGC UES were fully completed. RUB 9.4 bn 6 connection product manufacturers and domestic producers of procurement activities, Repairs units, materials and components that are capable of please see the respective Financial le al communication sections of the Report on and insurance services Social Responsibility and RUB 5.1 bn Corporate Sustainability
t er procurements Electricit transmission and Consumers RUB 8.2 bn tec nolo ical connection services 1 As part of implementing the Russian Federation Government Resolution No. 867-r of 29 May 2013, as of now, the resolution has been fulfilled. 2 In accordance with the Russian Federation Government Resolution No.1352 as of 11 December 2014. 3 Approved by the order of PJSC FGC UES No.455 on10 October 2014.
68 PJSC FGC UES Annual Report 2016 69 Strategic Report Strategic Report oprt oenneRpr Financial Statements Corporate Governance Report
2
Appendix Backbone electric grids of the Urals PHOTOS: Key infrastructure projects (MES Urals) 1 500 kV aerial line 1 Severnaya–BAZ 2008 500 kV substation Emelino in Sverdlovsk Region FGC RA C Ensurin t at ne loads o industrial consumers can e connected to t e po er s stem 2 CJSC Mikheevsky GOK (Seversky Pipe Plant, Pervouralsk New Pipe Plant, Sredneuralsky Copper Smelting Plant, 500 kV substation Emelino Revdinsky Metalware and Metallurgical Plant). mprovement o relia ilit o electricit suppl to t e e aterin ur Pervourals po er 500 kV aerial line area o Sverdlovs Re ion in terms o po er s orta es ensurin uninterrupted SER CE AREA Severnaya–BAZ sustaina le electricit suppl to t e consumers constituent territories o t e Russian Federation in t e Urals and ol a Federal 2013 Construction of 500 kV aerial line Severnaya–BAZ, with expansion Districts with a population about 17 million people of 500 kV BAZ substation Strengthening of 500 kV backbone grid of UES of Urals, as well as increasing the relia ilit o po er suppl to consumers in t e ere ni i Soli ams district o t e Perm erritor and t e Serovo o oslovs istrict o Sverdlovs Re ion PERSONNEL Connection o t e ne consumers to t e po er centres o FGC UES in t e Perm About 2.5 thousand people erritor and Sverdlovs Re ions АSSETS 1 HVTL 16.943 thousand km 2014—2015 Construction o complex electric rid acilities o U EG or capacit 106 substations, 35-500 kV output o PP 2 Capacity — about 42.949 thousand MVA Control o po er s orta es in Sverdlovs and C el a ins Re ions Construction of new electric grid facilities, 220 kV and 500 kV, of UNEG, linking them to t e existin po er s stem o t e Urals OPERATIONS Construction of a new 500 kV substation Kurchatovskaya on the territory of the BNPP-2. Electricit transmission e ranc maintains electricit connection et een UES o Urals Ensuring the technological connection of CJSC Mikheevsky GOK to and t e po er s stems o t e central re ions t e rids o FGC UES of Russia, Western Siberia, the Middle Volga Reconstruction of 220 kV Kartaly substation, with a 220 kV line cell Re ion and a a stan to connect 220 kV technological substation Mikheevsky GOK, with 220 kV HVTL, Mikheevsky GOK – Kartaly, 25 km long.
1 accordin to annual per ormance reports 70 PJSC FGC UES Annual Report 2016 71 Corporate Governance Report GENERAL INFORMATION ON THE COMPANY'S CORPORATE GOVERNANCE
Corporate Strategic Report
Governance Corporate Governance Report Report The development of a corporate governance system to improve the confidence of shareholders and investors Statement from the Chairman of the Board of Directors Financial Statements
Dear shareholders and investors, Moreover, several internal instruments related to General Information on the Company's corporate governance were approved and certain The Company's Corporate Governance system documents were revised in 2016. Much attention was meets the requirements of the Russian legislation, paid to the internal control, risk management, and Appendix Corporate Governance the rules of the Moscow Stock Exchange listing, openness and transparency of the activities of the the key recommendations of the Russian Corporate Company and Board of Directors, as well as to the Governance Code, international corporate governance development of the corporate governance system in and business ethics standards and practices and The Russian Corporate Governance — The accountability of the Board of Directors' to the Further details on the order to meet the interests of the Company and its openness and transparency principles. Code defines the Corporate Governance General Meeting of Shareholders; key elements of FGC's stakeholders. corporate governance In 2016, the Company actively continued to improve — The required efficiency, professionalism and In general, the Company's activities related to improving as a system of interactions between system are available in the corporate governance system, deploying the independence of the Board of Directors in order the corporate governance system received high marks the charter and by-laws recommendations introduced in line with the Russian the Company's executive authorities, to meet the interests of the shareholders and the from experts, in particular from the Russian Institute of FGC UES published in Corporate Governance Code, by revising certain clauses Company; of Directors that have been monitoring the Company's the Board of Directors, its shareholders the Investors / Corporate of the by-laws and quickly reacting to changes of the corporate governance practices within the framework — The Company's executive authorities ability to Governance / Corporate external market situation. and other interested parties. Corporate of the National Corporate Governance Rating since manage the Company's day-to-day operations Documents section on In 2015-2016, in addition to the "road map" for the 2012. Governance is a tool that the Company’s reasonably and in good faith and that they are held the corporate website at introduction of the main principles of the Corporate accountable to the Company's Board of Directors and www.fsk-ees.ru/eng/ Based on the new methodology of the National uses to set objectives and a means for Governance Code into FGC UES's corporate governance to the General Meeting of Shareholders; Corporate Governance Rating, the Company received a system, the Company's Board of Directors approved the achieving these objectives. Furthermore, corporate governance rating of 7++ for Well-Developed — The timely disclosure of the Company's information, Plan of Activities for FGC UES's corporate governance Corporate Governance Practice. it also ensures that the shareholders and including the Company's financial situation, development for 2016. economic indicators, ownership and governance As a result, FGC UES's Board of Directors has every other interested parties have efficient The implementation of this plan was a good starting structure; reason to declare the high level of the Company's point for defining a direction for further improvement control over the Company's operations. corporate governance and compliance with the — Efficient operation of the internal control and risk to corporate governance, including an extension of the key recommendations of the Russian Corporate management systems to ensure supervision and Company's principles to its subsidiaries. Governance Code. control over the Company's financial and operating The Company's Corporate Governance, which is FGC UES is continuously monitoring the applicability activities, and reasonable confidence in the based on the principles of accountability, fairness, and relevance of by-laws and executive directives and achievement of the Company's objectives; transparency, and responsibility, is aimed at their improvement in compliance with the Company's maintaining: — The independence of the assessment of risk requirements and needs related to corporate management and internal control systems, as well governance practices. — Equal conditions for shareholders in exercising as the corporate governance practices, during the their rights related to participation in the Company's course of the Company's internal audit. activities; Oleg Budargin — The Board of Directors' strategic management of Chairman of FGC UES's Board the Company, as well as efficient supervision and of Directors control over the activities of the Company's executive authorities;
72 PJSC FGC UES Annual Report 2016 73 ASSESSMENT OF THE QUALITY Corporate Governance Report OF CORPORATE GOVERNANCE
Assessment of the Quality Results of the Self-Assessment of Corporate Governance Practices for Compliance with Principles and Recommendations from the Russian of Corporate Governance Corporate Governance Code2 Strategic Report
- 2015 2016 Independent Assessment Made by the Russian Institute of Directors
In October 2016, proceeding from results of the assessment of the quality of corporate governance The Russian Institute of Directors granted FGC UES
by using a new methodology, the Russian Institute a corporate governance rating level of Corporate Governance Report of Directors granted FGC US the national corporate governance rating at a level of 7++. This rating confirms Compliant Partially compliant Non-compliant Compliant Partially compliant Non-compliant Corporate Governance Principles Principles Recommend the Code by ed that the Company meets the requirements of Russian legislation on corporate governance and generally Rights of shareholders and equal 13 8 3 2 9 3 1 follows the recommendations of the Russian Corporate opportunities for shareholders to Governance Code. The owners’ risk of loss related to the exercise their rights corporate governance quality is assessed as being quite Well-Developed Corporate low. The Board of Directors Governance Practice 36 20 13 3 28 6 2 Corporate Secretary of the Company 2 2 — — 2 — — Assessment of the Elements of Corporate Governance Practice Financial Statements System of remuneration to the Board 9 8 — 1 8 — 1 Activities of Supervision Information Corporate Social Responsibility members and senior management of Shareholders' Rights and Control Authorities Disclosure and Sustainable Development the Company Risk management and internal control 6 6 — — 6 — — GOOD GOOD HIGH HIGH system
The Company's information disclosure 7 5 2 — 5 2 — Appendix Assessment of the Quality of Corporate Governance
In April 2016, the Company's Board of Directors The structure of the document comprises the Significant corporate activities 5 2 3 — 3 2 — approved guidelines for the self-assessment of the assessment of corporate governance quality, A full report on corporate governance. This document was developed in particular compliance with principles and compliance with on the basis of methods approved by the order of recommendations of the Corporate Governance Code OVERALL ASSESSMENT 78 51 21 6 61 13 4 the principles and Rosimuschesvo No. 306 of 22 August 2014 for the self- as approved by the Bank of Russia. This document recommendation of the evaluation of corporate governance at companies with proposes certain assumptions related to the Corporate Governance 100% 65% 27% 8% 78% 17% 5% state participation in order to ensure the comparability Company's activities. Code and a report on of the annual evaluation performed by the Company. compliance with the The wording of Clause 4.2.2. of the Corporate Governance Code does no apply to the Company's operations since FGC's existing key principles of the UK policies do not specify the provision of the Company's shares to Board members. Corporate Governance Results of self-assessment of the corporate The Company achieved a compliance Code are shown in Since the Company's global depositary receipts governance standards, including the UK Corporate governance level by component*, Appendix 3 hereto are traded at the London Stock Exchange, FGC is Governance Code. S are olders rig ts level of 84% with the guidelines for the committed to meeting high international corporate oard o irectors self-assessment of corporate governance, Executive management which affirms a high level of corporate Improvement of the Corporate Governance System ransparenc and disclosures o in ormation governance quality. Within the development of the action plan (“road map”) and the priority activities of the Board of Directors Ris management related to introducing the provisions of the Corporate and its Committees for the next corporate year and a internal control and internal Governance Code, the Company created and the submission for their approval to the Board of Directors. audit Board of Directors approved2 an action plan aimed at Analysis of corporate governance practice based on Corporate Social Responsi ilit developing FGC UES's corporate governance for 2016. the implementation of the “road map” was declared and usiness et ics as the key priority of the plan. The Company has fully The plan determined a number of key activities for the e Compan s sel assessment o t e corporate governance completed all of the activities defined in the plan. level as made in t e 1st uarter o 201 reporting period, including an analysis of the necessity to update internal documents issued by the Company Having achieved significant results in this field, and standard documents issued for the needs of its the Company continues to develop its corporate Assessment of Compliance with the Principles of the Corporate subsidiaries. Additionally, the following documents governance practices. Further improvements take any have been planned for development: guidelines for amendments to the legislation, the expertise of Russian Governance Code the corporate governance assessment of FGC UES and international organisations and recommendations In 2016, as a result of implementing the "road map" Corporate Governance Code that FGC UES followed and its subsidiaries, provisions on the assessment from independent consultants into consideration. for the introduction of the Corporate Governance Code increased from 65% in 2015 to 78% in 2016. of the activities of the Company's Board of Directors, as approved in 2015, the share of principles in the
1 Minutes No. 318 on 28 April 2016. 2 Statistics are provided based on the Report on the compliance with the principles and recommendations of the Corporate Governance Code compiled in accordance with the Recommendations of the Bank of Russia No. IN-06-52/8 as of 17 February 2016. 3 Minutes No. 318 of 25 April 2016.
74 PJSC FGC UES Annual Report 2016 75 ASSESSMENT OF THE QUALITY Corporate Governance Report OF CORPORATE GOVERNANCE
QUESTION & ANSWER The Company's Management Authorities
Management Strategic Report Authority Competences Regulatory Documents Frequency of Activities
General Meeting of The supreme governing body of the Company. It Russian Legislation The Annual General the Shareholders is entitled to resolve the most important issues, The Company's Articles Meeting of Shareholders including: of Association is held once a year. Extraordinary General
Provisions on the Corporate Governance Report — The approval of annual reports and annual Meeting of Shareholderss procedure for preparing accounting (financial) statements, are held upon the and holding the FGC decision of the Board of — The election of members to the Board of Directors UES' General Meeting of Directors. In 2012-2016, and the Audit Commission, Shareholders Extraordinary General — Taking decisions on dividend payments, Meeting of Shareholderss — Selecting an external auditor. were held twice. Maria Tikhonova Deputy Chairman of the Management Board, The Board of FGC UES's Board of Directors performs the general Russian Legislation The Board of Directors Member of the Management Board Directors strategic management of the Company and plays a The Company's Articles holds about 8-10 joint key role in the Federal Grid's corporate governance of Association presence meetings per Financial Statements system. It is entitled to take decisions on general annum. Provisions on the Board issues concerning the Company's management, In 2015, the Company developed and approved a plan of action (a "road map") for the introduction of the of Directors of Federal In 2016, 48 meetings of including: key provisions of the new Russian Corporate Governance Code. The Company has actively introduced Grid Company the Board of Directors recommendations of the Corporate Governance Code into its activities. How would you describe the results of — Shaping the Company’s strategy and monitoring was held, including 9 joint the Company's operations in this field proceeding from the results of 2016? its implementation; presence meetings. — Ensuring the exercise and protection of the In fact, we started to implement the "road map" in 2015. issues of assessing the efficiency of the internal control rights and legal interests of the Federal Grid’s We made amendments to the Articles of Association system and the other key aspects. Appendix shareholders and protecting the Company’s and certain key internal documents and we approached As a result, in 2016 the Company's activities in this assets; the year 2016 with a fully completed plan. We did not field were positively assessed by external experts. stop at the formal achievement of the set objectives, — Ensuring control over the activities of the The Russian Institute of Directors granted FGC understanding that we have reserves required for Company's executive authorities and introducing UES a corporate governance rating at a level of 7++ future development. Proceeding from results of 2015, an efficient stimulation system; Well-Developed Practice of Corporate Governance, we made an analysis and assessed our perspectives and the Expert Council of the Russian Government — Ensuring the establishment and maintenance of with consideration to external situation changes and announced positive dynamics proceeding from a sound internal control and risk management continued developing to develop in this direction based results of monitoring over the introduction of the system; on the results of self-analysis and the assessment of Corporate Governance Code to companies with a state external experts. — Monitoring the Company’s corporate governance participation, ranking the Company in the fifth place for practice. We continued to develop practices for the assessment this rating. for the activities of the Company's Board of Directors, Board Committees Special-purpose advisory bodies to the Board of Russian Legislation The frequency and Of course, the Company is not only governed by and developed provisions for the assessment for the Directors. They provide preliminary consideration on format of the meetings external evaluation results, but also by an internal The Company's Articles activities of FGC UES's Board of Directors. It helped matters and recommendations for the Board. of the Board Committees self-assessment, which was first introduced in 2016 of Association us to formalise the process and to define the main depends on the functions proceeding from the results of 2015. During the Provisions on the Board assessment requirements made by an independent of each Committee. reporting period, we developed our own methodology of Directors of Federal institution. Particular attention was paid to internal of self-assessment based on the recommendations Grid Company control and risk management. The Board of Directors of Rosimuschestvo. The results affirm a high level of approved the amendments to the Provision on the Risk Provisions on corporate governance quality. Management System of FGC UES and reviewed the Committees Held by the Board of Directors
What are the Company's plans for improving the corporate governance in 2017? Management Collective executive body. The functions comprise The meetings of the Board the Company's day-to-day operations management Management Board are In 2017, we have set two key priorities. First of all, the Company's Corporate Governance Code by based on the Articles of Association, decisions of held either in absentia with consideration of the corporate governance incorporating a provision on the activities of the Board the General Meeting of Shareholders and the Board or in person. In 2016, development priorities set by the Russian Government of Directors and the General Meeting of Shareholders. of Directors. Russian Legislation 82 meetings of the and amendments to Russian legislation, we plan Furthermore, the development of corporate governance The Company's Articles Management Board were to amend our internal documents on the procedure at our subsidiaries with an introduction of the of Association held. for interested party transactions, large transactions, Company's corporate governance principles is one of The sole executive body. He is responsible for and information disclosure; we also plan to revise our key priorities for the year.v Chairman of the Provision on the Management all aspects related to the Company's day-to-day Management Board of Board operational management, except for the issues Federal Grid Company — belonging to the competence of the General Meeting of Shareholders, the Board of Directors and the Management Board.
76 PJSC FGC UES Annual Report 2016 77 ASSESSMENT OF THE QUALITY Corporate Governance Report OF CORPORATE GOVERNANCE
Corporate Governance Sc eme S are olders agreement o FGC UES Rosimusc estvo 0.59% Strategic Report voting s ares PJSC Rosseti 80.13% inorit voting s ares s are olders 19.28% voting s ares
Election Corporate Governance Report General eeting Findings o S are olders Election Findings
External independent auditor Financial Statements Audit Election Reports Commission and recommendations Approval o t e ead
Findings Appendix Findings E ective or Election assistance oard o irectors Committees o t e Findings oard o irectors Election Reports and Audit Committee recommendations Compan s R and Remuneration Corporate Committee Secretar Election Election o t e Strateg Committee o t e anagement oard Reports and control C airman o t e nvestments Committee Compan s anagement oard Findings C airman o t e Findings
anagement oard Findings Reports Approval o candidates t e anagement oard ead and signing o t e contract nternal irectorate Audit o nternal Approval epartment Control
* As of 31 December 2016, the Russian Federation, represented by the Federal Agency of State Property Management and Ris (Rosimuschestvo), owned 0.59% of FGC UES’s shares. In this context, an agreement has been signed between the anagement Company’s major shareholders ROSSETI and Rosimuschestvo regarding management and voting at Federal Grid Company. Reports and The above agreement regulates the shareholder’s relationship with regard to the implementation of their rights with respect recommendations to Federal Grid Company for the purposes set forth in the Decree of the Russian President No. 1567 on 22 November 2012. The Company’s interaction with the State as a shareholder has a specific procedural character that is determined by the regulatory acts of the President and the Government of the Russian Federation. In particular, the State representatives within the Company’s governing bodies are required to vote on certain matters as instructed by the Government.
78 PJSC FGC UES Annual Report 2016 79 Corporate Governance Report GENERAL MEETING OF SHAREHOLDERS General Meeting of Shareholders Report of the Company's Board
The General Meeting of Shareholders is the supreme governing body of the Company. of Directors Strategic Report
The Board of Directors of FGC UES performs the The activities of Federal Grid Company’s Board of The Company is committed to creating the most internal documents with existing versions. All materials general strategic management of the Company and Directors are governed by the Company's Articles of favourable conditions for its shareholders in order to are disclosed on the Company’s website, in both plays a key role in Federal Grid Company's corporate Association, the Regulations on the Board of Directors enable them to participate in the General Meeting and English and Russian, not later than 30 days prior to the governance system. of Federal Grid Company1, and the Federal Grid's to develop sound positions on the items in its agenda, date of the General Meeting of Shareholders.
Corporate Governance Code. Corporate Governance Report as well as to provide them with the opportunity to Federal Grid Company’s Regulations on the General coordinate their actions and express opinions on the Meeting of Shareholders provide clear procedures items discussed. for holding the GSM, including an opportunity for Activities for Improving the Company's Corporate Federal Grid Company defined a list of additional shareholders to ask questions on items in the agenda. Governance System materials to be provided to shareholders when Shareholders are able to put questions directly to the As a key governing body of the Company that is issues of developing the corporate governance system, preparing for a general meeting to enable them to take members of governing and control bodies, the Chief responsible for creation and development of the to improving internal control and risk management well-founded decisions. Such materials include, among Accountant and the Company’s auditors, who shall be Company's corporate governance system, in 2016 the procedures, and defining remuneration to members of other things, the positions of the Board of Directors mandatory invited to attend the meeting. Board of Directors paid close attention to the general the Company's governing bodies. regarding all items on the meeting agenda, extended In 2016, a live video broadcasting system of the information about the candidates for governing and General Meeting of Shareholderss was introduced on control bodies, tables comparing amendments to be the Company's website. made to the Company’s Articles of Association and Aspect of the Corporate Financial Statements Governance System Items Considered
Improving the corporate — Consideration of the evaluation results on the efficiency of the Board of Directors and the self- governance system and assessment of FGC’s corporate governance quality. practices of the Board of — Approval of the Regulations on the protection of FGC’s insider information and the Directors’ activities Regulations on the consideration and settlement of disputes and conflicts of interests in the Rosseti Group.
Annual General Meeting of Shareholders — About the Corporate Secretary of Federal Grid Company Appendix — The arrangement of the activities of FCG’s Board of Directors. — The creation of Board Committees and a plan of action for FGC’s Board of Directors. — Making amendments to the Provisions on the HR and Remuneration Committee of FGC’s Board of Directors.
To exercise internal control — Approval of the Regulations on the assessment the efficiency of FGC's internal control and and risk management risk management. — Consideration of the report on FGC’s key risks for 2015. — Consideration of the 2015 report of the Chairman of the Management Board and the members of FGC’s Management Board on the operation of the risk management and internal control system. — Consideration of the results of FGC’s anti-corruption monitoring for 2015 and for the first six months of 2016. — Approval of the "road map" for arranging the risk management and internal control procedures to prevent and fight against corruption. Internal audit — Approval of the plan of activities and the budget of the Internal Audit Department for 2016. — Consideration of the report on the execution of the plan of activities for FGC’s Internal Audit Department for 2015. The minutes of the AGM — Consideration of the report from FGC’s internal auditor on the efficiency of the Company’s The Annual General Meeting of Shareholders of — To pay remuneration to the members of the are available on the internal control and risk management system proceeding from the results of 2015. Federal Grid Company was held on 29 June 2016. In Board of Directors of Federal Grid Company; accordance with the AGM agenda, the shareholders website www.fsk-ees.ru/ — Consideration of the results of the audit of the following business processes: Procurement decided on the following: — To elect members to the Company's Board of eng/ in the Investors / Activities, Project Management, and Capital Construction. Directors and Audit Commission; Corporate Governance / — Approval of the guidelines on the calculation and assessment of implementing quarterly KPIs — To approve the Company’s annual report and Shareholders Meeting Remuneration to the — To approve the external auditor for 2016; by FGC’s senior management. annual financial statements, including the Profit section members of governing and Loss Account of Federal Grid Company for — To approve a new version of the thr Federal bodies — Inclusion of an indicator for the reduction of operating costs (expenses) into the list of KPIs 2015; Grid Company’s Articles of Association and the for the management to be taken in consideration for the definition of remuneration. Provision on the Board of Directors. — Approval of the report on the implementation of KPIs by the Company's senior management. — To pay dividends to the Company's shareholders — Making amendments to the FGC’s Long-Term Development and to the guidelines on the proceeding from the results of the 2015 fiscal calculation and assessment of the implementation of KPIs by the Company’s senior year; management.
1 In the revision that was approved by the decision of the General Meeting of Shareholders of Federal Grid Company on 29 June 2016 (Minutes No. 17 of 04 July 2016).
80 PJSC FGC UES Annual Report 2016 81 Corporate Governance Report REPORT OF THE COMPANY'S BOARD OF DIRECTORS
In 2016, the Board of Directors considered a range of key items concerning priority directions for the Company's operations: Strategic Report Strategic Objective Key Items Considered by the Board of Directors in 2016
— Definition of the priority directions for the Company's operations: checking the quality of the Company’s equipment, materials and systems. — Implementation of the requirements of normative regulations to ensure the safe and
sufficient anti-terrorism security of power facilities. Corporate Governance Report Reliability — Consideration of the plan and status of the implementation of activities for the Company's Reliability of electricity automated electricity control and the accounting system’s compliance with the technical supply to consumers requirements of the wholesale electricity and capacity market. Assessment of the Activities of the Board of Directors — Introducing professional standards and practices within the Company's operations. for the Reporting Year — Consideration of the report on handling applications for the technical connection and At the beginning of 2017, the independent company The assessment was conducted by the use of execution of contracts for process connection to the Company's electric grid facilities. VTB Registrator conducted an assessment of the questionnaires that were filled out by the members of — Approval of the Regulations on improving the Company’s investment and operating Board of Directors’ activities for 2016. The assessment the Board of Directors and its committees and by the efficiency and cost reduction. procedure includes the assessment of activities of the members of the Company's Management Board and by Board of Directors as a whole, the assessment of each interviewing certain members of the Board of Directors, — Development (upgrading) the plans (programmes) for operating cost reduction by 10%. committee and the assessment of the individual work the Board Committees and the Corporate Secretary of — Consideration of the consolidated business plan (RAS) and the consolidated business plan EconomicEconomic efficiency Financial Statements (IFRS) for the Federal Grid Group for 2016 and the forecasts for 2017-2020. of each member of the Board of Directors. the Company. andefficiency financial — Management of interest and currency risks, including the usage of derivative financial sustainability instruments. 4.8 The quantitative assessment of the operating efficiency of the Board of Directors of 5 as a governing body — Approval of Federal Grid Company's Investment Programme for 2016-2020. — Consideration of the draft version of revised Federal Grid's Investment Programme for 2016- 5 The quantitative assessment of the activities of the Chairman of the Board
2020. Appendix of 5 of Directors UNEG — Consideration of a plan of activities up to 2019 to reduce the volume of construction in Development and progress in line with the annual reduction rate. 1 development 93% The participation amount of Board members in meetings functioning of the UNEG to — Consideration of the annual report on the technological and price audit of the Company's meet the needs of national investment projects in 2015. 84% The presence of Board members at joint presence meetings2 economy and population Report of the Board of Directors on the Results of the Company’s Development in Priority Business Directions
During the reporting period, Federal Grid Company's Number of meetings of the Board of Directors Board of Directors regularly considered items on 3 the maintenance and development of the UNEG’s Membership of the Board of Directors 2016 infrastructure, improving the efficiency of the In accordance with Federal Grid Company’s Articles of — The members of the Company's Board of Directors 201 Company’s management and the Company’s 10 Association, the Board should include 11 members. The shall meet the requirements with respect to their sustainable development in the long run. 48 meetings 201 2 6 membership of the Board of Directors is well-balanced skills, experience, knowledge and business qualities; were held, including 9 in person meetings and 39 and corresponds to the scale of the Company's — The election to the Company's Board of Directors in absentia meetings. The total number of items n person meetings eetings in a sentia Further details from operations, the interests of its shareholders and the of at least three independent directors4 and one considered amounted to 482, two-thirds of which were the minutes of the Board requirements of Russian legislation and the listing representative from the Non-profit Partnership transaction approval items. meetings are available rules of the Moscow Stock Exchange. Candidates Market Council; in the Appendix 1 hereto for the Company's Board of Directors are elected Items considered by the Board Number of items considered based on their personal and professional skills and in — Executive directors may not constitute more than of Directors by the Board of Directors accordance with the independent criteria specified by 25% of the composition of the Company's Board of the listing rules of the Moscow Stock Exchange. As of Directors. 31 December 2016, the Board of Directors comprised 1 2016 482 The company also strives to ensure that the Board 1 Strateg and priorit 38 3 independent directors (27% of the total number of 2 development 201 1 of Directors includes representatives of minority Board members). 2 Surveillance and accounta ilit 35 201 2 shareholders in order to maintain a balance of the best Corporate governance 16 The main requirements for the composition of the interests of all of the Company’s existing shareholders anagement o su sidiaries 31 6 Company's Board of Directors are as follows: within the Board. R and Remuneration 18
6 6 Approval o t e transaction 313 6 t er items 31 6
1 From 29 June 2016 until 29 December 2016. 3 Here and elsewhere, personal information about the members of the Federal Grid Company’s governing and control bodies has been 2 From 29 June 2016 until 29 December 2016. disclosed with their consent. 4 The independent criteria are defined in accordance with the recommendations of the Russian Corporate Governance Code and the listing rules of the Moscow Stock Exchange.
82 PJSC FGC UES Annual Report 2016 83 Corporate Governance Report REPORT OF THE COMPANY'S BOARD OF DIRECTORS
Executive Attendance of Board Members at Board Meetings and Committee Meetings in 2016 director 1 Independent The Board of Directors IC SK HR&RC AC directors S
3 t <1 year r 5 Active members of the Board of Directors during the entire year of 2016 ate g From 1 to 6 years 4 i >6 years c 2 Re po r Oleg Budargin 47*/48 98%
Non-executive 47*/48 98% 100% 89% t 7 director Pavel Grachev Length of service in the electric power sector Co rp o Andrey Dyomin 47*/48 98% 83% r < 5 years 3 a te
From 5 to 15 years G 6 38*/48 79% 50% 100% 100% Sergey Mironosetsky o
> 15 years 2 v e r nanc e Andrey Murov 46*/48 96% Re p Members who left the Board of Directors as of 29 June 2016 o r t
Mikhail Kolesnikov 24*/25 96% 100% 100% Finan c Board Members Key Competences Vyacheslav Kravchenko 22*/25 88% 100% ial S ) s tate m y y s st r st r ea r 24*/25 96% 100%
e Nikolay Shulginov y ent s atte r ithin th e (in y
at e es an d w M nan c e r r s Ind u gy Ind u gy 20*/25 80% 100% e Maxim Bystrov al v ate g ditin g g r App endi x o orpo r u t ea r ne r ne r en u e E Y T S Finan c A Board Members Compliance E L C G Boris Kovalchuk 20*/25 80% Chairman of the Board Oleg Budargin 6 years 7 years of Directors Sergey Shmatko 23*/25 92%
Pavel Grachev Independent Director 3 years 3 years Members elected to the Board of Directors as of 29 June 2016
Andrey Dyomin Non-Executive Director 3 years 18 years Igor Kamenskoy 23/23 100% 100% 100% 100%
Sergey Mironosetsky Non-Executive Director 2.5 years 17 years Egor Prokhorov 23/23 100%
Andrey Murov Executive Director 2.5 years 4 years Nikolai Roshchenko 19/23 83%
Sergey Sergeyev 23/23 100% 86% Egor Prokhorov Non-Executive Director 8 months 7 years
Pavel Snikkars 21/23 91% 100% Nikolai Roshchenko Non-Executive Director 8 months 8 years Ernesto Ferlenghi 23/23 100% 100% 100% 75% Sergey Sergeyev Non-Executive Director 8 months 8 years
Igor Kamenskoy Independent Director 8 months 8 months The Company strives to provide its Board members, especially its new members, with every opportunity to collect all the information required to Ernesto Ferlenghi Independent Director 6 years 8 years execute their duties. For that purpose, information meetings are held with the participation of the members of the Management Board and the new Pavel Snikkars Non-Executive Director 8 months 12 years members of the Company's Board of Directors.
* One meeting (4 April 2016) was not taken into account. Pursuant to article 68 of Federal Law No. 208-FZ of 26 December 1995 and clause 18.12, article 18 of the Articles of Association of PJSC FGC UES, the meeting was recognized as invalid due to the lack of quorum.
84 PJSC FGC UES Annual Report 2016 85 Corporate Governance Report REPORT OF THE COMPANY'S BOARD OF DIRECTORS
Independent Directors Since 2016 – General Director of LLC UC Polyus Since 2016 – General Director of PJSC Polyus Independent directors provide the independent monitoring of its execution, the evaluation of the evaluation of the Board’s activities based on their own activities of executive bodies, the assessment of the External Appointments: Board Member of Polyus Gold International Limited, PJSC knowledge, experience and skills. The fairness of the efficiency of the risk management, internal control, Polyus and PJSC RusHydro. Strategic Report independent directors and their justified criticisms and internal audit systems, and also in the evaluation No participation share in the share of the Company’s capital. are very valuable to the Board of Directors and to the of the activities of the Board and its committees. whole Company. As of the end of 2016, the Board of Directors Our experience of cooperating with these independent consisted of 3 independent directors, and the Audit directors proves that they demonstrate high levels Committee and HR and Remuneration Committee
of professionalism when issuing independent consisted of only independent directors. It is a Corporate Governance Report statements and voting independently on agenda sufficient amount for the significant impact that they items. Independent directors contribute to the taking have on the decision making process. Andrey Dyomin Born in 1974 of decisions in the interests of the stakeholders’ The Company highly appreciates the contribution Non-Executive Director Graduated from Zaporozhye State University, majoring in Applied Mathematics various groups and to improving the quality of of independent directors to the improvement of the and from the Zaporozhye Institute of Economics and Information Technologies managerial decisions. Member of the Strategy efficiency of the Board of Directors. with a degree in Finance. Committee Independent directors play a major role in definition Experience: of the Company's strategy development and the Board member since 2014 2007–2010 – Deputy Chairman, Member of the Management Board of Federal Biographies of the Board Members Grid Company 2010–2012 – Advisor to the General Director on Strategic Development, LLC Personal information about the members of Federal Grid Company’s governing bodies has been disclosed Mezhregionsbyt Financial Statements with their consent. 2013–2015 – First Deputy Director General for the Economic Affairs and Oleg Budargin Born in 1960 Finance of PJSC Rosseti Chairman of the Board Graduated from Norilsk Industrial Institute with an honours degree in Industrial Since 2013 – Member of the Management Board of PJSC Rosseti 1 and Civil Engineering and a PhD in Economics. of Directors External Appointments: Member of the Board of Directors of PJSC Moscow Experience: United Electric Grid Company. Non-Executive Director Since 2013 - General Director of Rosseti; Chairman of the Management Board, No participation share in the share of the Company’s capital. Board Member since 2010 and Board Member Appendix Since 2012 - Member of the Presidential Commission for the Strategic Development of the Fuel and Energy Sector and Environmental Security Igor Kamenskoy Born in 1968 External appointments: Member of the Supervisory Board of JSC Russian Regional Development Bank, FSAEI for Higher Professional Education North- Independent Director Graduated from the Moscow State Pedagogical Institute with a degree in Caucasus Federal University, the Chairman of the Supervisory Board of Non- Chairman of the Audit Russian Language and Literature. Profit Partnership Association of Solar Energy Enterprises, the Chairman of Committee2 Experience: the Board of Directors of PJSC Moscow United Electric Grid Company, PJSC Chairman of the Investment of Energy and Electrification – Lenenergo, Member of the Board of Trustees Committee 2009–2015 – Managing Director of LLC Renaissance Capital - Financial and Board of Academics of FSAEI for Higher Professional Education National Consultant Member of HR and Research University: the Moscow Power Engineering Institute, Member of the Remuneration Committee Since 2015 – Managing director of LLC Renaissance Capital Broker Board of Trustees of the State Academic Mariinsky Theatre. Primorsky Stage, Vice-chairman, Senior Advisor, responsible for the regional development of the Board Member since 2016 External appointments: Board Member of PJSC Open Investments, Insurance World Energy Council, member of the Council, Vice-president for ecology of the Company Soglasie LLC, PJSC Aeroflot – Russian airlines, and PJSC Corporation Interregional Public Organisation - Association of Polar Explorers. VSMPO-AVISMA. No participation share in the share of the Company’s capital. Participation share in the share of the Company’s capital: 0.0006403563%
Sergey Mironosetsky Born in 1965 Pavel Grachev Born in 1973 Non-Executive Director Graduated from Novosibirsk State University with a degree in Economic Independent Director Graduated from Saint Petersburg State University and the University of Trieste Member of Investment Cybernetics. Member of the Audit Committee (Italy) with degrees in law. Committee Member of HR and Experience: Experience: Board Member since 2014 Remuneration Committee 2005–2011 – Deputy Director General, Member of the Management Board of 2010–2013 – Chief Executive Officer of JSC Uralkaly and of the Far East and Baikal JSC SUEK Board Member from 2013—2014, Region Development Fund. and again since 2015 2009–2013 – General Director, Chairman of the Management Board of JSC 2011–2013 – Head of the representative office of Alpina Capital, A.C.L. Ltd. SUEK (since 07 September 2011 – LLC Siberian Generating Company) 2013 – General Director of the JSC Far East and Baikal Region Development Fund External Appointments: Board Member of the LLC Siberian Generating Company 2013–2014 – Acting Senior Executive Director of Polyus Gold International Limited No participation share in the share of the Company’s capital. 2014–2016 – President of JSC Polyus 2014–2016 – Senior Executive Director of Polyus Gold International Limited,
1 Decision taken by the Board of Directors as of 19 August 2016 (Minutes No. 335 of 22 August 2016). 2 Decision of the Board of Directors of 12 July 2016 (Minutes No. 331 of 15 July 2016) 3 Decision of the Board of Directors of 12 July 2016 (Minutes No. 331 of 15 July 2016)
86 PJSC FGC UES Annual Report 2016 87 Corporate Governance Report REPORT OF THE COMPANY'S BOARD OF DIRECTORS
Andrey Murov Born in 1970 Sergey Sergeyev Born in 1976 Executive Director Graduated from St. Petersburg State University majoring in Jurisprudence; Non-Executive Director Graduated with distinction from the Novocherkassk State Polytechnic University underwent a retraining programme in Financial Management at the Inter- majoring in Industrial and Civil Construction. Board Member since 2013 Member of the Investment
disciplinary Institute of Executive Staff Refresher Training and Retraining; Strategic Report Committee Experience: graduated from the State University of Civil Aviation majoring in "Organisation of transportations and management on transport (air transport)"; PhD in Economic Board Member since 2016 2009–2013 – Deputy Chairman of the Management Board of FGC UES Experience: 2012–2013 – General Director of JSC CECM UES 2007–2012 – General Director of JSC Airport Pulkovo Since 2013 – Deputy CEO for Capital Construction of PJSC Rosseti 2012–2013 – Deputy General Director, Acting General Director, Executive External Appointments: Board member of PJSC Lenenergo, Chairman of the Director, and Member of the Management Board of JSC Holding of Interregional Board of Directors of NIIC MRSK. Corporate Governance Report Distribution Grid Companies (since 04 April 2013 - JSC Rosseti) No participation share in the share of the Company’s capital. Since 2013 – Chairman of the Management Board of PJSC FGC UES Since 2015 – Chairman of the Russian National Committee of CIGRE Non-Profit Partnership (RNC CIGRE). External appointments: Member of the Board of Directors of PJSC Rosseti, Pavel Snikkars Born in 1978 PJSC Inter RAO, JSC SO UES, Member of the Board of Trustees of the National Research University: the Moscow Power Engineering Institute, Saint Petersburg Non-Executive Director Graduated from the Siberian Academy of Public Service majoring in Public and State University, Saint Petersburg State University of Economics, Member of the Municipal Administration and the Siberian University of Consumer Cooperation Chairman of the Strategy Supervisory Board of the Non-Profit Partnership Global Energy. majoring in Jurisprudence. Ph.D. in Economics Committee1 Financial Statements No participation share in the share of the Company’s capital. Experience: Board Member since 2016 2010–2012 – Deputy Director General for Development and Deputy Director General for Market Operations at JSC United Energy Retailing Company. 2012–2013 – Vice Chairman of the Management Board of the Non-Profit Partnership Market Council Since 2013 – Director of the Electric Power Industry Development Department Born in 1982 of the Ministry of Energy of Russia
Egor Prokhorov Appendix Non-Executive Director Graduated from Saint Petersburg State University majoring in Mathematical External Appointments: Board Member of JSC Institute ENERGOSET PROJECT, Board Member since 2016 Methods in Economics. Ph.D. in Economics. PJSC Lenenergo, PJSC Inter RAO UES, JSC IDGC of Ural, PJSC TDC; Chairman of the Board of Directors of JSC Financial Settlements Centre. Experience: No participation share in the share of the Company’s capital. 2009–2012 - Head of Corporate Finance of PJSC FGC UES 2011–2013 - General Director of the LLC Index of Energy – FGC UES (concurrently) 2011–2013 - Finance Director of JSC IDGC Holding (concurrently) 2012–2013 - Finance Director of PJSC FGC UES In 2016, no Ernesto Ferlenghi Born in 1968 2013 – Finance Director of PJSC Rosseti transactions Independent Director Graduated from the University of Rome Tor Vergata in the Faculty of Since 2013 – Deputy General Director for Finance of PJSC Rosseti Mathematics, Physics and Natural Sciences. with any of FGC Chairman of HR and 2 External Appointments: Member of the Boards of Directors of PJSC Lenenergo, UES's shares Remuneration Committee Experience: JSC RDC UES, PJSC IDGC of Siberia. were made Member of the Audit Committee 2005–2014 – Head of the Representative Office of Eni in Russia, since 2009 – No participation share in the share of the Company’s capital. Vice-President of Eni by any Board Member of the Strategy Committee 2010–2014 – Deputy General Director of the JSC Arctic Gas Company Members. Board Member from 2008–2014. 2014–2014 – Advisor to the Chairman of the Management Board of the Renova Elected to the Board in 2016. Group 2014–2015 – Advisor for the business development of Tecnimont S.p.A. Since 2013 – President of Confindustria Russia: Association of Italian Nikolai Roshchenko Born in 1981. Entrepreneurs in Russia Non-Executive Director Graduated from the Tax Academy of the Russian Federation majoring in Since 2014 – Senior Advisor of the ENI Group in Russia Board Member since 2016 Jurisprudence. Since 2015 – Senior Advisor for the business development of Saipem S.p.A. Experience: Since 2015 – Consultant of SIIRTEC NIGI Spa Since 2008 – Head of the Legal Department, Member of the Management Board, and Head of the Legal Department of the Market Council Non-profit Partnership Since 2016 – Consultant of LLC SIAD RUS External Appointments: Board Member of JSC TSA. Since 2016 – Senior Advisor of Snap S.p.A (oil servicing company) No participation share in the share of the Company’s capital. No participation share in the share of the Company’s capital.
1 Decision taken by the Board of Directors on12 July 2016 (Minutes No. 331 of 15 July 2016). 2 Decision taken by the Board of Directors on 12 July 2016 (Minutes No. 331 of 15 July 2016).
88 PJSC FGC UES Annual Report 2016 89 Corporate Governance Report Strategic Report Corporate Governance Report
2
Financial Statements Appendix Backbone electric grids of Western Siberia Key infrastructure projects (MES Western Siberia) PHOTOS: 1 Vankor oil and gas field 1 2011 500 kV SS Peresvet Reduction o grid restrictions and ena ling ne ugra consumers to connect to t e po er 2 220 kV HVTL, Urengoy HEPP – FGC RA C s stem Mangazeya ncrease o output capacit o Surgut po er unit an important segment o umen po er 500 kV SS Peresvet s stem Njagan'sk SDPP 2014–2016 220 kV SS Mangazeya with 220 kV HVTL, Urengoy HEPP – SER CE AREA Mangazeya constituent territories o t e Russian Ensuring the development of critical infrastructure projects – permanent electricity supply Federation in t e Ural Federal istrict it to Vankor oil and gas field of PJSC Rosneft, implementation of the next stage of Urengoy a population over 3.5 million people. SDPP's capacity output scheme; Control o po er s ortages in a ovs and rasnosel ups districts elimination o grid restrictions PERSONNEL A out 2 t ousand people 2016 500 kV SS Svyatogor with 500 and 220 kV HVTL feeders Control o t e s ortage o autotrans ormer capacities in t e e te ugans po er area development and reclamation the Malobalyksk and Prirazlomnoye fields of PJSC Rosneft, АSSETS 1 Vadelypsk and Salym clusters of oil fields of Salym Petroleum Development oil company; HVTL 12.747 thousand km Provision o t e possi ilit o additional po er ta e o and tec nological connection to t e energ s stem o po er receiving devices re uired or t e development o t e social and 86 substations, 220-500 kV utilit sector o e te ugans district Capacity — about 38.716 thousand MVA 2012 500 kV HVTL, Il'kovo – Njagan'sk SDPP and Njagan'sk SDPP – Lugovaya; 220 kV HVTL, Il'kovo-Njagan'sk SDPP and Njagan'sk OPERATIONS S PP rasnolenins GPP Electricit transmission e ranc provides Arrangement of electric grid infrastructure for Nyagan SDPP's capacity output scheme electricit connection et een UES o Si eria prevented growing power shortages in the Khanty-Mansiysk Autonomous District–Yugra, increased reliability of Urajsk–Njagan' power unit and allowed for intense industrial and UES o Urals development in t e region
1 according to annual per ormance reports 90 PJSC FGC UES Annual Report 2016 91 Corporate Governance Report BOARD COMMITTEES
Board Committees Audit Committee
The role of the Audit Committee is to assist the Board of Directors in providing efficient Strategic Report At the end of 2016, the four Board Committees that worked to increase the control over the Company’s financial and business operations. effectiveness of the resolutions taken by the Board of Directors by providing preliminary consideration of the most important issues and by preparing recommendations for the Board, included: The key functions of the Committee are: external auditors, to make recommendations to the Board of Directors regarding their appointment and — controlling the completeness, accuracy, and fairness remuneration, and to control the quality of the audit
of the accounting (financial) statements; Corporate Governance Report and the auditors' report; — controlling the reliability and effectiveness of the — controlling the efficiency of the potential fraud risk management and internal control system and Audit Committee Strategy Committee reporting system on the part of the Company’s of the corporate governance system, including employees and third parties, as well as any other an assessment of their effectiveness and violations, at the Company. recommendations on for how they can improve; The Committee’s activities are governed by the — ensuring the independence and objectivity of the Regulations on the Audit Committee of the Board HR and Remuneration Company’s internal audit of Directors of PJSC FGC UES, a revised version of Investment Committee which was approved by the Board of Directors on 16 Committee — assessing the independence of external auditors, their objectivity and the absence of any conflicts of November 2015 (Minutes No. 291 of 19 November interest, to evaluate candidates for the Company’s 2015). Financial Statements
Committee Members in 2016 The key role of each Committee is to provide In 2016, the Company introduced the practice of (Positions as of the Date Elected by the Board of Directors on Elected by the Board of Directors on preliminary consideration of the most important engaging independent consultants to work with of Election) 12 July 2016 (Minutes No. 331 of 15 21 July 2015 (Minutes No. 279 of 24 issues reserved for the Board, and to develop the Audit Committee and Investment Committee July 2016) July 2015) recommendations that the Board follows when taking of the Board. Thus, corresponding regulations were resolutions on relevant issues. prepared and approved that are now being tested for I. A. Kamenskoy – Chairman, possible implementation into the work of the other Appendix The Committees are completely subordinate to the Independent Director committees. In addition, some updates were made Company's Board of Directors. The Committees are to the Regulations for the HR and Remuneration made up of Board Members and persons suggested Committee, the Investment Committee and the Strategy E. Ferlenghi – Independent Director by the Board Members whose competence and Committee. experience are essential to the work of the Committees. For details on the In accordance with best practices and the requirements minutes of the P.S. Grachev – Independent Director of the listing rules of the Moscow Exchange, only Committees Meetings, independent directors can be nominated to the see the Appendix 1 Audit Committee and to the HR and Remuneration S.N. Mironosetsky – Chairman, hereto. Committee. This ensures objective and balanced Independent Director recommendations. M.A. Kolesnikov – Non-Executive Director Statistics of the work of the Board Committees Issues considered by the Commitees in 2016 2016 SC Strateg Committee AC Structure of issues considered R RC 1 10 Audit Committee In the reporting period, the Audit C 12 R and Remuneration by the Audit Committee in 2016 20 2015 Committee Committee considered 48 issues SC 1 nvestment Committee 2 6 1 Accounting Financial AC 2 5 and gave the corresponding Statements R RC 1 2 2 Ris anagement nternal recommendations to the Board of C 6 8 Control and Corporate 2014 Governance Directors. SC 1 1 issues AC External Audit 4 R RC nternal Audit 20 C Preventing Fraud o t e 3 Compan s Emplo ees and oard meetings eetings in a sentia ird Parties 6 rganisational issues o t e 8 Committee
92 PJSC FGC UES Annual Report 2016 93 Corporate Governance Report BOARD COMMITTEES
The key issues: In March 2017, the work of the Audit Committee Internal Audit Assessment was assessed by the independent company JSC In the reporting period, the Committee often Accounting (Financial) Statements VTB Registrator as part of the Board’s activities considered the performance of the Company's Internal assessment. The assessment was conducted by the Audit Department, the methodological support for — Preliminary approval of the accounting statements system of monitoring and control of the contractors' Strategic Report use of questionnaires that were filled out by members for 2015 by the Board of Directors. financial stability. evaluating its performance, as well as the reports on its of the Board of Directors and its Committees, and performance, in particular. — Recommendations on the Report by the Internal — Review of IFRS’s financial statements for 2015 and by members of the Company's Management Board, As a result, the Audit Committee (Minutes No. 47 of 20 Audit Commission of PJSC FGC UES based on the subsequent auditor's report. as well as by interviewing certain members of the For more details on April 2016) recommended that the Company's Board the results of the audit of financial and business Board of Directors, Board Committees and the the assessment of the recognise that the performance of the internal audit operations for 2015. Corporate Secretary of the Company. The work and external audit of the met the requirements of the Corporate Governance characteristics of the Audit Committee’s members — Review of the plan of measures to improve the actual Audit Committee, see Code and the methodological recommendations on the Corporate Governance Report receive the highest grades. However, it should be noted the Management organisation of the work of internal audits at joint-stock that the Committee is quite objective in its ability to see Report – the External companies with state participation.1 Risk Management, Internal Control and Corporate Governance opportunities to further improve its work. Auditor section
— Review of the Report on the Company’s key — Review of the report on the Company's key operational risks for 2015. operational risks for H1, 2016. — Review of the Report on the risk management and — Recommendations on the approval of the Company's internal control system for 2015. internal document “Regulations on The Internal Control System of PJSC FGC UES” — Approval of the “road map” for arranging the risk management and internal control procedures to Strategy Committee prevent and fight corruption. Financial Statements
External Audit The role of the Strategy Committee is to assist the Board of Directors in improving the Company's performance efficiency for the long term. — Review of the external auditor's report on the Company's auditor Company's statements and the audit’s results — Recommendations on the auditor's remuneration in — Assessment of the effectiveness of the external audit 2016. The Committee's key responsibilities include the — determining the Company’s business priorities;
of the Company's accounting statements preliminary consideration, analysis and elaboration of Appendix recommendations to the Company's Board of Directors — developing recommendations for the determination — Recommendations on the candidate for the on the following items: of the Company's dividend policy; — evaluating the Company's performance efficiency for — approving the business plan (the adjusted business the long term; plan); Internal Audit — approving the Company’s Long-Term Development The Committee’s activities are governed by the Programme, making amendments thereto and Regulations on the Strategy Committee of the Board — Review of the internal auditor's reports on the — Review of the reports by the Company's Internal Audit reviewing its progress reports; of Directors of PJSC FGC UES, a revised version of effectiveness of the Company's internal control Department which was approved by the Board of Directors of PJSC and risk management system and of its corporate — setting out strategic objectives, monitoring the — Recommendations on a candidate for the Head of FGC UES on 12 July 2016 (Minutes No. 331 of 15 July governance in 2015. delivery of the Company’s strategy and adjusting the the Company's Internal Audit Department 2016). exiting development strategy; — Recommendations on the approval for the — Approval of criteria for the assessment of the arrangement policy of the Group's internal audit effectiveness of the Internal Audit Department in function (system) 2016 Committee Members in 2016 — Review of the results of the audit of the Company's — Recommendations on the approval of the budget for (Positions as of the Date Elected by the Board functional areas: the Internal Audit Department for 2017 of Election) Elected by the Board of Directors — Major construction of Directors on 12 July on 20 August 2015 — Recommendations on remuneration to the Head of 2016 (Minutes No. (Minutes No. 280 of — Managing the projects financed from technological the Company's Internal Audit Department for 2016 331 of 15 July 2016) 24 August 2015) connection funds
— Procurement activities 2 P.N. Snikkars – Chairman, Member of PJSC FGC UES Board of Directors
D.S. Bulgakov – Deputy Head of the Department Expert Centre in the Fuel and Energy Industry of the FSBO Russian Energy Agency (Analytical Centre in the Fuel and Energy Industry) Preventing Fraud on the Part of the Company's Employees and Third Parties A.E. Vikhansky –Director of the Department for the Natural Monopoly Relations of LLC MC Polyus — Review of the results of the Company's anti- Company's Code of Corporate Ethics corruption monitoring in 2015. A.A. Germanovich – Advisor to the General Director of CJSC Investment — Recommendations on the approval of the list and Management — Recommendations on the results of the Company's map of the Company's corruption risks A.A. Demin – Member of PJSC FGC UES Board of Directors, and Member anti-corruption monitoring for H1, 2016. of the Management Board of PJSC Rosseti — Recommendations on a new version of the
1 Order No. 249 by Rosimuschestvo dated 4 July 2014. 2 Was not the Chairman of the Strategy Committee before 12 July 2016.
94 PJSC FGC UES Annual Report 2016 95 Corporate Governance Report BOARD COMMITTEES
Elected by the Elected by the Board Board of Directors The key issues: of Directors on 12 on 20 August 2015 July 2016 (Minutes (Minutes No. 280 No. 331 of 15 July of 24 August 2015) Determining Business Priorities 2016)
— Standard scenarios for financial and economic — Amending the terms of contracts for technological Strategic Report interaction with investors in the framework of connection of electricity generation facilities to O.Yu. Isaev – General Director of PJSC IDGC of Centre implementing the investment project on co-financing electric grids principles S.Yu. Lebedev – Director of the Strategic Development Department of PJSC — Report of PJSC FGC UES on the results of work on Rosseti — Developing (upgrading) the plans (programmes) for capital markets and interaction with rating agencies E.A. Olkhovitch – Deputy Director of the Department of State Regulation reducing operating costs by 10 per cent, including for for 2015 of Tariffs, Infrastructure Reforms and Energy Efficiency of the Russian 2016-2020. — Sponsorship Fund and Charity Fund of PJSC FGC Corporate Governance Report Federation’s Ministry of Economic Development and Trade UES M.G. Tikhonova – Deputy Chairman of the Management Board of PJSC FGC UES, Member of the Management Board of PJSC FGC UES* Determining the Long-Term Development Programme M.V. Rusakov – Member of the Management Board, Head of the Department — Amending the Company's LDP 2019 and the forecast until 2030 for the Competitive Pricing of Non-Profit Partnership Market Council O.V. Shatokhina – Deputy General Director for Economic Affairs of PJSC — Audit results in 2015 of the Company's LDP for 2015- Rosseti A.A. Erdyniev – Deputy Director of the Electric Power Industry Development The Company's Business Planning Department, Ministry of Energy of Russia — Business Planning Standard of PJSC FGC UES the consolidated business plan (IFRS) for the Group of Companies FGC UES for 2016 and the forecasts — Scenario conditions for the preparation and approval Financial Statements E. Pherlengi - Independent Director for 2017-2020 of the Company's business plan for 2017 and V.K. Yavorsky – General Director of LLC Tori – Audit forecasts for 2018-2021 — Reports on the implementation of the consolidated business plan (RAS) and the consolidated business — Reports on the implementation of the Company's plan (IFRS) for the Group of Companies FGC UES for M.S. Bystrov – Chairman, Member of the Board of Directors of PJSC FGC UES business plan in 2015 for the first quarter of 2016 various time periods — Approving the consolidated business plan (RAS) and N.G. Shulginov – Independent Director Appendix A.M. Borisov – General Director of LLC SIP-Energo Management of Subsidiaries and Associates — Determining the Company's position on items (representatives of PJSC FGC UES) on items for the S.I. Zhuravlev – Vice-President for the Government Relations of JSC Polyus for the Meeting of the Board of Directors of JSC meeting of the Board of Directors and the General Elektrosetservis UNEG Meeting of Shareholders of JSC R&D Centre of FGC E.N. Miroshnichenko – Director for the Strategic Development of the Strategy UES and Investment Block of PJSC Inter RAO — The new version of the restructuring concept of JSC Kuban Trunk Grids and JSC Tomsk Trunk Grids — Participation of PJSC FGC UES in JSC R&D Centre A.N. Kharin – Deputy Director of the Department for Corporate Governance, of FGC UES Pricing Environment and Auditing of the Fuel and Energy Industries of the — Determining the position of PJSC FGC UES Russian Ministry of Energy P.V. Shpilevoy – Director for the Strategic Development of PJSC FGC UES, Head of Determining the Company's Policy for Transactions with Derivatives and Dividend the Strategic Development Department of PJSC FGC UES Policy — Determining Interest and currency risk management — Approving the new version of the Regulation on the actions, including the usage of derivative financial dividend policy of PJSC FGC UES Structure of issues considered In the reporting period, the Strategy instruments by the Strategy Committee in 2016 Committee considered 43 issues and 1 etermining usiness 7 1 Priorities gave corresponding recommendations Non-Core Assets Management 2 etermining t e ong erm 3 to the Board of Directors. 2 evelopment Programme — Approving the updated Management Programme for participation in JSC Stend, JSC Centrenergoholding, e Compan s usiness Planning 11 Non-Core Assets of PJSC FGC UES (hereinafter as CJSC EnergoRynok and JSC Energotekhkomplekt; anagement o Su sidiaries issues NCA) and the register of non-core assets updated in 6 and Associates 4 accordance with NCA (the new version); — Approving the Non-Core Assets Disposal Programme Ensuring t e Compan s participation in 4 of PJSC FGC UES and its Subsidiaries and the ot er organisations — The report on NCA progress and the results for the updated register (implementation plan) of non-core 6 etermining t e Compan s Polic 2 period of 2013-2014 and 9 months of 2015; or ransactions it erivatives and assets of PJSC FGC UES ividend Polic — The report on NCA progress and the results for 2015; on Core Assets anagement and 6 ransactioning — Issues on termination of PJSC FGC UES’s nternational and t er Cooperation 1 Agreements ot Related to t e Compan s Standard usiness perations International and Other Cooperation Agreements Not Related to the Company’s rganisational issues o t e Strateg 5 Standard Business Operations Committee — The report of PJSC FGC UES on applying of the management with the largest foreign electric grid results of the comparative analysis report of the companies in operation of PJSC FGC UES Company’s key performance indicators for UNEG’s
* Elected by the Board of Directors on 24 November 2016 (Minutes No. 346 of 28 November 2016).
96 PJSC FGC UES Annual Report 2016 97 Corporate Governance Report BOARD COMMITTEES
HR and Remuneration Committee HR Issues — Recommended consideration of the issue on the — Recommended election of a person authorised The HR and Remuneration Committee assists PJSC FGC UES’s Board of Directors Company's Management Board and the approval of to approve labour contract conditions, to sign the
candidates for positions in the Company's executive labour contract, as well as any amendments and Strategic Report with the development of an efficient and transparent remuneration system and the office supplements to the labour contract, on behalf of the Company together with the Chairman of the development of HR and succession policies, in addition to carrying out preliminary — Recommended approval of the candidate for the Management Board consideration of issues related to HR planning (succession planning) and the position of Deputy Chairman of the Management Board of PJSC FGC UES — Recommended introduction of professional professional composition and efficiency of the Board of Directors. standards and practices into the Company's — Recommended consideration of the issue on operations
candidates for nomination to the management and Corporate Governance Report The HR and Remuneration Committee’s activities on 03 October 2016 (Minutes No. 341 of 05 October control bodies of PJSC FGC UES in the framework of — Recommended approval of the organisational are governed by the Regulations on the HR and 2016). Amendments made to the last version brought implementing the Russian Federation Government structure of the Company's executive office Remuneration Committee of the Board of Directors the document in compliance with the Corporate Order No. ISh-P13-7597 of 29 October 2011 of PJSC FGC UES, a revised version of which was Management Code. approved by the Board of Directors of PJSC FGC UES
Improvement of the Corporate Management System and Practices Committee Members in 2016 Elected by the Board (Positions as of the Date Elected by the Board of Directors — Recommended amendments to the Regulation on of Directors on 12 July of Election) 2016 (Minutes No. on 21 July 2015 the HR and Remuneration Committee 331 of 15 July 2016) (Minutes No. 279 of 24 July 2015) Financial Statements E. Pherlengi – Chairman, Independent Director Investment Committee
I.A. Kamenskoy – Independent Director The role of the Investment Committee is to assist the Board of Directors in improving and developing the Company's investment policy. S.N. Mironosetsky – Chairman, Independent Director The Committee's key responsibilities include the M.A. Kolesnikov – Non-executive Director of FGC UES, including the R&D programme, and
preliminary consideration, analysis and elaboration Appendix reviewing progress reports on its implementation; of recommendations for the Company's Board of P.S. Grachev – Independent Director Directors on the following items: — determining the Company's procurement policy; — approving the Company's investment programme, — considering the schemes and development including its adjustment, and reviewing progress programmes for UES of Russia; Structure of issues considered reports on its implementation; — considering issues related to technological by the HR & Remuneration Committee in 2016 In the reporting period, the HR and — considering internal documents on investment connections to electric grids. Remuneration Committee considered activities, including the standards of the The Committee’s activities are governed by the 20 issues and gave the corresponding technological and price audit of investment projects; Regulations on the Investment Committee of the Board 1 of Directors of PJSC FGC UES, a revised version of recommendations to the Board of — reviewing the progress of the Company's specific investment projects; which was approved by the Board of Directors on 12 1 Remuneration Pa a le to em ers 7 July 2016 (Minutes No. 331 of 15 July 2016). 20 o t e Compan s anagement and Directors. issues — approving the innovative development programme Control odies 2 R ssues 6 mprovement o t e Corporate 2 2 anagement S stem and Practices Committee Members in 2016 Elected by the Board rganisational issues 5 (Positions as of the Date Elected by the Board o t e Committee of Directors The key issues are shown in the table of Election) of Directors on 12 July 2016 (Minutes No. on 20 August 2015 331 of 15 July 2016) (Minutes No. 280 of below: 24 August 2015)
I.A. Kamenskoy – Chairman, Board member of PJSC FGC UES, 1 Remuneration Payable to Members of the Company's Management and Control Bodies Independent Director — Recommended approval of the Report on KPI — Recommended approval and introduction of implementation by the senior management of PJSC methods for the calculation and evaluation of S.A. Balaeva – Deputy General Director for Investments of PJSC Rosseti FGC UES for 2015 the implementation of quarterly KPIs by senior management V. Gritsenko F. – Member of the Presidium of NP OPORA ROSSII — Recommended approval of the Reports on KPI implementation by the senior management of PJSC — Recommended amendments to the Company's LDP V.A. Domnich – Head of the Department of the State Regulation of FGC UES for the first, second and third quarters of — Recommended amendments to the Methods for the Tariffs, Infrastructure Reforms and Energy Efficiency of the Ministry of 2016 calculation and evaluation of the implementation of Economic Development and Trade of the Russian Federation — Recommended consideration of the results of the KPIs by senior management S.I. Zhuravlev – Vice-President for Government Relations of JSC MC evaluation of the Board of Directors’ efficiency and — Recommended approval of the Regulation on the Polyus the self-assessment of the Company's corporate performance assessment of the Company's Board of A. Ilienko B. – Member of the Management Board of JSC SO UES, governance quality Directors Director for UES Development of JSC SO UES
1 Was not the Chairman of the Strategy Committee before 12 July 2016.
98 PJSC FGC UES Annual Report 2016 99 Corporate Governance Report BOARD COMMITTEES
The key issues: Elected by the Board Elected by the Board of Directors Approving and Adjusting the Investment Programme of Directors on 12 July on 20 August 2015 2016 (Minutes No. — Approving the Long-Term Investment Programme of — Reviewing the reports of the Company's management 331 of 15 July 2016) (Minutes No. 280 of 24 August 2015) PJSC FGC UES for 2016-2020 on the approval of the adjusted Investment
Programmes for 2015 and for 2016-2020 Strategic Report V.N. Kisilev – Chairman of the Consumer Council of the Government — Approving the adjustment of the Company's Commission for the Electricity Industry Investment Programmes for 2015 and for 2016-2020
R.R. Magadeev – Deputy Chief Engineer of PJSC Rosseti Implementing Separate Investment Projects
S.N. Mironosetsky ¬– Board member of PJSC FGC UES — Reviewing the progress of certain investment projects — Considering the quarterly reports of PJSC FGC UES on the implementation of the investment programme
— Considering the results of on-site audits by the Corporate Governance Report I.A. Selivakhin – Financial Director of JSC TSA, Advisor of the Chairman Ministry of Energy of Russia — Considering information on the organisation of work of the Management Board of the Non-Profit Partnership Market Council with accounts receivable and accounts payable, as — Reviewing the reports of the Company's management S.A. Semerikov – Deputy General Director for the Development and well as with bank guarantees in the framework of on the commissioning of facilities Services of PJSC Rosseti implementing the Company's Investment Programme S.V. Sergeev – Board Member of PJSC FGC UES, Deputy General Director for Capital Construction of PJSC Rosseti V.C. Skulkin – Deputy Director of the Electric Power Industry Determining the Procurement Policy Development Department, Ministry of Energy of Russia — Approving the Regulations on procurement of goods, introducing amendments and supplements thereto R.E. Filimonov – First Deputy Chairman, Member of the Management works, services for the Company’s own needs and Board of PJSC FGC UES Financial Statements V.M. Kravchenko – Chairman of the Committee, Chairman of the Board of Directors Approving the Innovative Development Programme A.E. Vikhansky – Director of the Department for the Natural Monopoly — Approving the Company's Innovative Development — Reviewing the annual report for 2015 on the Relations of LLC MC Polyus Programme for 2016-2020 with an outlook for 2025 implementation of the Innovative Development and introducing adjustments thereto Programme V.A. Goncharov – First Deputy Chairman, Member of the Management Board of PJSC FGC UES I.I. Mirsiyapov – Member of the Management Board, Head of the Strategy Considering Internal Documents on Investment Activities, including the Standards for the and Investment Unit of PJSC Inter RAO Technological and Price Audits of Investment Projects Appendix E.A. Olkhovitch – Deputy Director of the Department for State Regulation — Approving Scenario Conditions for the preparation of — Approving the Annual Report on the technological and of Tariffs, Infrastructure Reforms and Energy Efficiency of the Russian the Company's investment programme price audits of the Company's investment projects in 2015 Ministry of Economic Development and Trade — Approving the Regulations on the investment activities P.N. Snikkars – Deputy Chairman of the Committee, Director of the of PJSC FGC UES — Considering the necessity to update other executive documentation of PJSC FGC UES regulating the Electric Power Industry Development Department, Ministry of Energy — Approving the registration procedure of the investment preparation and implementation of Investment of Russia projects included in the list of investment projects for Programmes and projects 2013-2017 with an outlook for 2020 V.K. Yavorsky – General Director of LLC Tori – Audit — Reviewing the audit results of business processes: — Approving the Standard of Public Technological and Procurement Activities, Project Management, and Price Audits of the Company's investment projects Capital Construction Structure of issues considered In the reporting period, the Investment — Approving the list of investment projects of PJSC FGC by the Investment Committee in 2016 Committee considered 82 issues and UES subject to technological and price audits in 2016 10 1 1 Approving and Ad usting t e nvestment 9 Programme gave corresponding recommendations Developing the Asset Management System 6 2 mplementing Separate nvestment 37 to the Board of Directors. Pro ects — Approving the Action Plan until 2019 for reducing the — Considering the execution of the resolution of the etermining t e Procurement Polic 5 amount of construction in progress Company's Board of Directors on the participation of 2 PJSC FGC UES in CJSC Phoenix Energo issues Approving t e nnovative evelopment 3 — Approving the Development Plan of PJSC FGC UES’s Programme productive asset management — Restructuring of the JSC Kuban Trunk Grids and the JSC Considering nternal ocuments 13 Tomsk Trunk Grids 2 on nvestment Activities including — Approving the Report on the compliance of PJSC FGC t e Standards or t e ec nological and Price Audits o nvestment UES with the Procedure for the operational acceptance Pro ects of completed construction facilities of PJSC FGC UES 6 Corporate anagement 2 eveloping t e Asset anagement 3 S stem Developing Automated Electricity Metering Systems eveloping Automated Electricit 2 — Considering implementing actions to bring the compliance with the technical requirements of the etering S stems automated information and measurement system wholesale electricity and capacity market Executing ec nological Connections 3 to Electric Grids of electricity fiscal metering of PJSC FGC UES in 10 Practical arrangements and activities 5 o t e nvestment Committee Executing Technological Connections to Electric Grids — Considering and approving reports on the connection and the implementation of contracts for consideration of applications for technological technological connection
100 PJSC FGC UES Annual Report 2016 101 Corporate Governance Report Strategic Report Corporate Governance Report
2
Financial Statements Appendix Backbone electric grids of Siberia PHOTOS:
(MES Siberia) 1 rasno ars 1 Key infrastructure projects 2 rasno ars a a PP FGC RA C 500 kV substation Enisey
500 kV substation Enisey 2008 Power line 500 kV, Zarya – Barabinskaya – Tavricheskaya Integration of Omsk power system with UNEG in the territory of Russia. In the process of SER CE AREA the line construction, a complicated transition across the Irtysh Waterway of 1985 metres 10 constituent territories of the Russian long as een per ormed Federation on t e territor o Si erian Federal District with a population over 19 million 2015—2017 500 kV substation Enisey Control o electricit s ortage in t e cit o rasno ars people Ensuring a ig level o po er securit in t e region during pea load periods
PERSONNEL 2006 Construction of 500 kV SS Aluminievaya ura ilit o e uipment and uildings o t e su station is designed to survive eig t points More than 3.3 thousand people eart ua es on t e Ric ter scale e su station as ig voltage electric e uipment rom leading orld producers АSSETS 1 Po er suppl o a as aluminium plant HVTL 21.855 thousand km mprovement o po er suppl relia ilit o t e Si erian po er s stem 118 substations, 35—1150 kV 3 TSS, 6-10 kV 2006 Technology connection of 110 kV SS Universitet Development of the Siberian Federal University with over 40,000 students. 220 kV SS Capacity — about 44.194 thousand MVA Oktyabrskaya, capacity of 400 MBA, supplying electricity to residents of the Oktyabrsky district o rasno ars including t e student uarter o SFU ecame t e po er centre o t e ne acilit OPERATIONS Electricit transmission e ranc provides inter state transmission o electricit to Kazakhstan and Mongolia.
1 according to annual per ormance reports 102 PJSC FGC UES Annual Report 2016 103 Corporate Governance Report CORPORATE SECRETARY Corporate Secretary
In the framework of implementing the "road map" for introducing the provisions of the Strategic Report Corporate Governance Code into the Company's practice in 2015, the position of the Corporate Secretary was established in the corporate management system of PJSC FGC UES.
The Corporate Secretary’s activities are subject to — Participating in implementing the Company's Corporate Governance Report the provisions of the Regulations on the Corporate information disclosure policy, including control of the Secretary of PJSC FGC UES1. The Corporate Secretary information shared on the Company’s official website is functionally subordinate to the Board of Directors on corporate management and its interaction with and is administratively subordinate to the Chairman shareholders and investors; of the Management Board ensuring his/her sufficient Key Matters Reserved for the Management Board independence from the Company’s management. — Arranging the Company's interaction with its shareholders, in particular, by participating in the — Developing and submitting the Company’s reports of the Company’s subsidiaries and Responsibilities of the Corporate Secretary: organisation of timely consideration of shareholder business priorities and Long-Term plans for their associates, as well as information on other — Participating in implementing the procedures related statements by the Company's bodies and structural implementation for the Board’s consideration enterprises that the Company participates in, for the to operation of the General Meeting of Shareholders, units, in case of the receipt of respective statements Board’s consideration — Preparing the report on implementing the resolutions including control of their implementation; to the address of the Corporate Secretary. of the Company’s General Meeting of Shareholders — Addressing other issues of managing the Company’s Financial Statements — Ensuring the efficient performance of the Board of and the Board of Directors day-to-day operations in accordance with the Directors and assisting in organising the operation of resolutions of the General Meeting of Shareholders, — Exercising the powers of the General Meetings of the Board of Directors and its Committees, as well as the Company’s Board of Directors, as well as matters Alexey Ozherelyev has been performing the functions Shareholders (participants) of the Company’s wholly- coordinating the exchange of information between referred to the Management Board by the Chairman of the Company's Corporate Secretary since July 2016. owned subsidiaries them; of the Company's Management Board — Submitting business and financial performance — Participating in improving the Company's corporate management system and practices;
Key Matters Reserved for the Chairman of the Management Board Appendix Alexey Ozherelyev Born in 1986 — Disposing the Company's property and making — Ensuring implementation of the Company's Corporate Secetary Graduated from the Moscow State University of Economics, Statistics and transactions on behalf of the Company work plans required to solve its tasks, as well as of PJSC FGC UES Informatics (MESI) in 2006 with a degree in Finance and Credit. submitting progress reports on the implementation Experience: — HR issues of the Company's work plans to the Board of 2009–2011 – worked at the Ministry of Energy of Russia and occupied the — Organising accounting and reporting procedures at Directors positions of the Advisor, Deputy Division Head, Division Head of the Department the Company for Economic Regulation and Property Relations in the Fuel and Energy Complex. — Solving other issues of the Company's day-to-day — Publishing and approving the Company’s internal operations, except for matters falling within the 2011–2013 – worked at PJSC FGC UES in the position of Deputy Head of the executive documents on matters related to his/her competence of the General Meeting of Shareholders, Corporate Management Department. competence the Board of Directors and the Management Board of 2013–2016 – worked at PJSC Rosseti in the position of the Head of the the Company Department for Operation Organisation of Management Bodies. Since 09 January 2017 until the present, has been working at PJSC Rosseti Interaction Between Executive Bodies and the Board in the position of the Head of the Performance Organisation Department of Management Bodies, the Board of Directors and interaction with shareholders of Directors and investors. Executive bodies report to the Company’s Board of Directors and the General Meeting Executive Governance of Shareholders. The election of the Chairman of the Company's — election of members of the Company's Management Bodies Management Board and the early termination of his/ Board (except the Chairman of the Company's her powers falls within the competence of the General Management Board) and the early termination of their Meeting of Shareholders of the Company. powers; The Chairman and Members of the Company's The Company's day-to-day operations are managed by both collective and single Management Board cooperate closely with the Board — applying disciplinary measures against the Chairman executive bodies, the Management Board and the Chairman of the Management Board of Directors, including on the submission of regular of the Company's Management Board and incentives in accordance with the applicable law; of PJSC FGC UES, which ensures the effective implementation of the Company's tasks reports on their performance results. For subordination and the efficient monitoring of work of the Company's — setting the amount of remuneration and and its development strategy. executive bodies, in accordance with the Company's compensation payable to the Chairman and the Articles of Association, the following matters related Members of the Company's Management Board; The executive bodies are entitled to take decisions on General Meeting of Shareholders and the Board of to the Members and the Chairman of the Management — coordinating the holding of positions in the all matters of the Company's day-to-day operations, Directors. Board are reserved for the Company's Board of management bodies of other companies, as well as except in matters related to the competence of the Directors: other paid positions at other companies.
1 Approved by the Board of Directors, Minutes No. 279 of 27 July 2015, and Minutes No. 330 of 08 July 2016.
104 PJSC FGC UES Annual Report 2016 105 Corporate Governance Report EXECUTIVE GOVERNANCE BODIES
Performance Results of the Management Board for 2016 Since 2015 – Chairman of the Non-Profit Partnership Russian National Committee of CIGRE (RNC CIGRE). In 2016, the Company's Management Board held 82 meetings, in which 747 items External Appointments: Member of the Board of Directors of PJSC Rosseti,
PJSC Inter RAO, JSC SO UES, Member of the Board of Trustees of the National Strategic Report were considered (592 of which were recommendations made to the Company's Research University: the Moscow Power Engineering Institute, Saint Petersburg Board of Directors). State University, Saint Petersburg State University of Economics, Member of the Supervisory Board of the Non-Profit Partnership Global Energy.
The number of Board Meetings The number of issues considered Does not hold any shares in PJSC FGC UES. 2016 2016 82 747 Corporate Governance Report 201 201 201 6 201 2 Alexander Vasiliev Born in 1958 Deputy Chairman of the Education: In the framework of its operation, in the reporting period — implementation for the concept of the General Management Board the Company's Management Board considered the Service Centre was approved; Graduated from the Leningrad Mechanical Institute with a degree in Mechanical following key items: Areas of Responsibility: Security Engineering. Graduated from the St. Petersburg State University of Economics — equipment replacement programmes of PJSC FGC and Internal Control and Finance majoring in Economics. Graduated from the St. Petersburg Institute — a new version of the Set of Activities ensuring Long- UES were approved; of Foreign Economic Relations, Economics and Law majoring in Jurisprudence. Term financial sustainability and the liquidity of the Management Board Member — development strategies for a number of the Company was approved; since 2014 Experience: Company's subsidiaries and associates for 2016- Financial Statements — the report on the implementation of the Action 2020 were approved; 2011–2014 – Deputy Head of the Federal Customs Service Programme to ensure financial sustainability and — implementation of the maintenance and repairs Since 2014 – Deputy Chairman of the Management Board of PJSC FGC UES enhanced economic efficiency of JSC FGC UES for programme, as well as the Company’s non-core 2014-2015 was considered; Does not hold any shares in PJSC FGC UES. assets management programme, was monitored; — a consolidated plan for maintenance and repairs for — resolutions on the social security of the Company's 2017-2021 approved; employees and charitable support were made. Vladimir Dikoy Born in 1954 Appendix Composition and Biographies of the Management Board’s Deputy Chairman of the Education: Management Board — Chief Graduated from the Moscow Power Engineering Institute majoring in the Electric Members Engineer Power Supply of Industrial Enterprises, Cities and Agriculture. PhD in Technical Areas of Responsibility: Sciences. As of the end of 2016, the Management Tenure of the members of the Management Maintenance and Repairs Experience: Board Board of PJSC FGC UES consisted of Management Board Member 2010–2013 – Deputy Chief Engineer of PJSC FGC UES since 2013 nine members. All persons comprising 1 ear 2013–2017 – Deputy Chairman of the Management Board - Chief Engineer of part of the Management Board have the From 1 to ears PJSC FGC UES ears required experience and competences for Since April 2017 – Advisor to the Chairman of the Management Board of FGC UES the performance of their functions at the Share held in the Company’s ordinary stock – 0.0000219%. senior level. Personal information on the members of the Management Board of PJSC FGC UES has been Alexander Zagaratsky Born in 1976 disclosed with their consent. First Deputy Chairman of the Education: Management Board Graduated from the St. Petersburg Law Institute of the General Prosecutor Office Andrey Murov Born in 1970 Areas of Responsibility: with a major in Jurisprudence. Graduated from the St. Petersburg Institute for Chairman of the Management Education: Legal and general administrative Management and Economics, majoring in State and Municipal Management. Board, Member of the Board of matters, Staff Management and Ph.D. in Economics. Graduated from the St. Petersburg State University with a major in Directors Development, Corporate and Jurisprudence. Underwent a retraining programme in Financial Management Experience: Strategic Management Areas of Responsibility: at the Interdisciplinary Institute of Executive Staff Refresher Training and 2007–2013 – Chief of Staff of the Chairman of the St. Petersburg Legislative Management of the Company's Retraining. Graduated from the State University of Civil Aviation, majoring in Management Board Member Assembly day-to-day operations, Organisation of transportations and management on transport (air transport). since 2014 organisation of work of the PhD in Economics. Since 2013 – Deputy Chairman of the Management Board of PJSC FGC UES Management Board Experience: Since 2016 – First Deputy Chairman of the Management Board of PJSC FGC UES Management Board Member 2007–2012 – General Director of JSC Airport Pulkovo Does not hold any shares in PJSC FGC UES. since 2012 2012–2013 – Deputy General Director, Acting General Director, Executive Director, Member of the Management Board of JSC Holding of the Interregional Distribution Grid Companies (since 04 April 2013 - JSC Rosseti) Since 2013 – Chairman of the Management Board of PJSC FGC UES
106 PJSC FGC UES Annual Report 2016 107 Corporate Governance Report EXECUTIVE GOVERNANCE BODIES
Alexey Molskiy Born in 1980 Members of the Maria Tikhonova Born in 1980 Deputy Chairman of the Education: Management Deputy Chairman of the Education: Management Board Management Board Graduated from the Moscow Power Engineering Institute, majoring in Electric Board did not Graduated from the Volga-Vyatka Academy of Public Service, majoring in Public Areas of Responsibility: Strategic Report Areas of Responsibility: Energy Systems and Grids and Economics and Company Management. and Municipal Administration. Holds an MBA in Finance from the Higher School make any Corporate and Strategic Development and Customer of Economics. Ph.D. in Economics Experience: Management Relations transactions Experience: 2010–2012 – Head of the Reconstruction Department of PJSC FGC UES. Management Board Member Management Board Member with the shares since 2013 2008–2012 – Head of the Corporate Management and Economic Analysis since 2016 Since 2012 – Deputy Chief Engineer of PJSC FGC UES of PJSC FGC UES Unit of the Department for Economic Regulation and Property Relations, the Since 2012 – Deputy Chairman of the Management Board of PJSC FGC UES Deputy Director of the Department, the Director of the Department for Economic in 2016. Corporate Governance Report Regulation and Property Relations in the Fuel and Energy Complex of the Since 2016 – Member of the Management Board of PJSC FGC UES. Russian Ministry of Energy External Appointments: Member of the Supervisory Board of JSC IPS Since 2013 – Deputy Chairman of the Management Board of PJSC FGC UES SakRusenergo, Non-Profit Partnership Market Council, Chairman of the Board of Directors of JSC CIUS UES, JSC APBE, JSC Kuban Trunk Grids, JSC Tomsk Trunk Does not hold any shares in PJSC FGC UES. Grids, the Board Member of Non-Profit Union ENERGOSTROY, Member of the Board of Directors of CJSC TaigaEnergoStroy. Members of the Roman Filimonov Born in 1968 Does not hold any shares in PJSC FGC UES. Management Board were not First Deputy Chairman of the Education: Management Board Graduated from the Military Engineering Institute named after A.F. Mozhayskiy Nikolay Pozdnyakov Born in 1979 provided with any Areas of Responsibility: holding the Order of the Red Banner, with a major in engineering. Received Financial Statements General Director of the Education: loans (credits) Development and additional vocational education at the North-Western Academy of State Service, Subsidiary of JSC CIUS UES that Customer Relations, majoring in State and Municipal Management. Graduated from the Moscow State University majoring in Physics. Also holds a in 2016. is of high importance to PJSC Investments and Innovative degree in Economics from the Higher School of Economics. Experience: FGC UES Development,IT operation and Experience: development,Procurement 2009–2012 – Vice-Governor of St. Petersburg Management Board Member management, and Operational since 2014 2009–2013 – Head of the Investment Programme Monitoring and Support 2012–2013 – Deputy Chairman of Government of the Moscow Region Control Division of the Investment Planning and Reporting Department, Head of the 2013–2015 – Director of the Construction Department of the Russian Ministry Investment Planning and Reporting Department of PJSC FGC UES Management Board Member of Defence Appendix since 2016 2013–2014 – Deputy General Director for Investments of JSC Rosseti 2015–2016 – Head of the Central Department for Track Maintenance of JSC 2014–2016 – Deputy Chairman of the Management Board of PJSC FGC UES Russian Railways Since 2014 - General Director of JSC CIUS UES 2016 – Advisor to the Chairman of the Management Board of PJSC FGC UES External Appointments: General Director, Member of the Board of Directors of Since 2016 – First Deputy Chairman of the Management Board of PJSC FGC JSC CIUS UES. UES Share held the Company’s ordinary stock – 0.0000938%. Does not hold any shares in PJSC FGC UES.
In accordance with the Company's Articles of years and the labour contract with the Chairman of the Association, the labour contract with members of the Management Board on behalf of the Company is signed Sergey Terebulin Born in 1978 Company's Management Board is signed for three for five years. Deputy Chairman of the Education: Management Board Graduated from the Financial Academy under the Government of the Russian Changes to the Membership of the Management Board Areas of Responsibility: Federation, majoring in Finance and Credit. Ph.D. in Economics. Economy, finance and in 2016 subsidiaries Experience: Management Board Member 2006–2014 – Head of the Corporate Finance Department of JSC MC HydroOGK Following the resolution of the Board of Directors on the Company's Management Board. since 2016 and JSC RusHydro 02 September 2016 (Minutes No. 337 of 05 September Following the resolution of the Board of Directors on 27 2016), the powers of the following members of the 2014–2016 – Director of the Corporate Finance Department of PJSC RusHydro October 2016 (Minutes No. 344 of 31 October 2016), Company's Management Board were terminated early: a labour contract for the new term was signed with 2016 – Advisor to the Chairman of the Management Board of PJSC FGC UES Maria Pichugina, Valery Goncharov, Dmitry Shishkin. the Company's Management Board Member Maria Since 2016 – Deputy Chairman of the Management Board Following the resolution of the Board of Directors on 27 Tikhonova. October 2016 (Minutes No. 344 of 31 October 2016), Following the resolution of the Board of Directors on External Appointments: Member of the Board of Directors of PJSC RAO Energy Roman Filimonov and Alexey Molskiy were elected Systems of the East, JSC Power Distributing Company RusHydro, Member of 02 September 2016 (Minutes No. 337 of 05 September as members of the Company's Management Board. 2016), a labour contract for the new term was signed the Board of Trustees of the GALCHONOK Charity Fund supporting children with Following the resolution of the Board of Directors on organic lesions of the central nervous system. with the Company's Management Board Member 21 December 2016 (Minutes No. 349 of 23 December Vladimir Dikoy. Does not hold any shares in PJSC FGC UES. 2016), Sergey Terebulin was elected as a member of
108 PJSC FGC UES Annual Report 2016 109 REMUNERATION FOR MEMBERS OF THE BOARD Corporate Governance Report OF DIRECTORS AND GOVERNING BODIES
Remuneration for Members of the Board Compensations. Regulation on the payment of The total remuneration paid to committee members of remuneration and compensation to the Board Members the Board of Directors of PJSC FGC UES (who are not of Directors and Governing Bodies of PJSC FGC UES also includes the payment of any simultaneous members of the Board of Directors) for actual expenses to Board Members, including travel 2016 amounted to RUB 3,728.2 thousand. costs to an from the location of the meeting of the Compared to 2015, the significant growth in the Strategic Report Remuneration System for Members of the Board of Directors Board of Directors and committees, accommodation remuneration amount paid to committee members In accordance with recommendations of the and Remuneration Committee provides increased costs, and any other expenses related to the Company's of the Board of Directors in 2016 was the result of an Corporate Management Code, the Company's policy efficiency and transparency to the existing policy. operation. No compensations were paid to the Board increase in the numerical composition of committees for remuneration and the reimbursement of expenses The key aspects of the remuneration system are as Members in 2016. (compensation) of Board Members is set by the follows: Regulations on Remuneration and Compensation Remuneration Payable to Certain Committee Remunerations of the committee members of the Payable to Members of the Board of Directors of PJSC — Remuneration is paid in a lump-sum payment Members of the Board of Directors. Regulations on Board of Directors*, RU t ousand Corporate Governance Report FGC UES1. following the results of the work of the Company's the payment of remuneration and compensation to Board Members for the corporate year, from their the committee members of the Board of Directors The practices applied in the Company for the 2016 3,728.2 election until the termination of their powers; of PJSC FGC UES that concern remuneration 1 determination of remuneration and compensation 201 payments to committee members who are not Board payable to Members of the Board of Directors comply — The decision to pay remuneration is made by the 201 10 6 Members, to persons with whom the Company has with the transparency and reporting principles and Company's annual General Meeting of Shareholders. signed employment contracts, and to any persons for consider the roles of the above-stated persons in the whom the receipt of any payments from commercial o are not simultaneousl mem ers o t e oard o irectors Company’s overall performance. Operation of the HR organisations is legally restricted or prohibited, was approved in 2015. held by the Company's Board of Directors and the Remuneration Calculation. In order to increase the Revenue for the Amount of the Basic Part Remuneration for participation in each meeting is paid number of committee meetings of more than 1.5 involvement of the Board members in the Company's Financial Year of Remuneration to the stated committee members on a quarterly basis. times, as well as the result of the quarterly indexation operation and their motivation to achieve the high Financial Statements The amount of remuneration is equal to three minimum of the minimum monthly rate for first category financial indicators set by the Company, the amount over RUB 200 bn RUB 1,000,000 monthly wage rates for a first category worker as workers, forming the basis for the calculation of the of remuneration payable to members of the Board of over RUB 30 bn RUB 900,000 set by the sectoral tariff agreement of the Russian remuneration amount. Directors depends on the Company's financial results. Electric Energy Complex on the date of the meeting. Remuneration is calculated on the basis of the basic over RUB 10 bn RUB 800,000 Remuneration to the Committee Chairman increased part of remuneration (RBAS), which is determined by 50%. depending on the Company's revenue2 for the financial over RUB 1 bn RUB 700,000 year, and is prior to the year of the remuneration over RUB 600 mln payment to a Board Member. RUB 600,000 Remuneration System of the Chairman and Members Appendix of the Management Board Actual remuneration payable to a Member of the Remuneration Payable to Members of the Board of Company's Board of Directors, following the results of the Directors for 2016 for Participation in the Operation corporate year, is calculated by the following formula: of the Board of Directors (RUB thousand)3 For more information In accordance with the best practice, the remuneration Remuneration is comprised of both fixed (salary) about KPI system, the system for members of the Company's executive bodies and variable (bonuses) parts. The bonus amount R = R × 100/130 × (a / b), ACT BAS Oleg Budargin 466.0 fulfilment of KPIs in the is comprised of both fixed and variable parts that are predominantly depends on the top managers' in which: reported year and the related to the fulfilment of top managers' KPIs. Such an achievement of KPIs. The variable part is comprised of Maxim Bystrov 766.9 RACT – Actual remuneration; targets for 2017, please approach motivates the members of the Management quarterly and yearly bonuses (according to the results of Pavel Grachev see the Strategic Report, Board to achieve their strategic goals and thus achieved quarterly and yearly KPIs correspondingly). If R – Basic remuneration; 814.8 BAS Market Review – Key contribute to the growth of the Company's value. any KPI is not achieved, the bonuses of all members of Andrey Dyomin a – The number of meetings of the Board of Directors 746.9 Performance Indicators the Management Board, including that of the Chairman The remuneration system for the Company's executive (irrespective of their form), in which the Board Member section. of the Management Board, are reduced by a certain per Boris Kovalchuk 519.2 bodies is stipulated by the Provision on Employment attended and of which were held in the corporate year; cent depending on the KPI’s weight. Mikhail Kolesnikov 814.8 Agreements and the Payment of Remuneration and b – Total number of meetings of the Board of Directors Compensation to Senior Management of PJSC FGC The conditions of the labour contract with the Chairman 4 held in the corporate year. Vyacheslav Kravchenko 0 UES.8 of the Management Board, on behalf of the Company, are established by the person authorised by the Board Remuneration payable to each Member of the Board of Sergey Mironosetsky 858.7 The major quarterly KPIs taken into consideration when the amount of of Directors of FGC UES. The conditions of the labour Directors for their participation in one meeting for the 5 remuneration to the senior management is set include: Andrey Murov 0 contracts for Members of the Management Board are corporate year 2015-2016 amounted to: R = 900,000 ACT KPI Weight determined on behalf of the Company by the Chairman × 100/130/52 = RUB 13,313.61 Sergey Shmatko 612.4 Quarterly KPIs of the Management Board, as instructed by the Board of Increments. The remuneration of the Chairman of the Nikolay Shulginov 717.6 Directors. Board of Directors increased by 30%. The following Absence of increase in major accidents 40% TOTAL 6,317.3 The Board of Directors approves the Company's KPI increments were set to be paid to the Members of the Absence of increase in the number injured in 40% targets (adjusted values) and reports on their fulfilment, Board of Directors for their work in committees: 20% to accidents on the basis of which bonuses are awarded to the CEO the chairman of the committee, and 10% to members of Remunerations of the members of the Board 6 and Members of the Management Board. In 2016, the the committee. The maximum amount of remuneration of Directors , RU t ousand Yearly KPIs Board of Directors made resolutions on the approval payable to each Member of the Board of Directors, in 2016 Reduction of operating expenses (costs) 100% (essential condition of the quarterly fulfilment of KPI reports (1st and 2nd consideration of different increments, was set at RUB 6,317.3 6 1 for bonus payment) quarters: Minutes No. 342 of 13 October 2016 from 900,000. The decision on the payment of remuneration 201 the meeting of 10 October 2016; 3rd quarter: Minutes to the Board Members following the results of 2016 201 Innovation activity efficiency 20% No. 350 of 28 December 2016 from the meeting of 26 will be made by the Annual General Meeting of Return on invested capital (ROIC) 15% December 2016). Shareholders. Total shareholder return (TSR) 15% 1 Approved by the Resolution of the Annual General Meeting of Shareholders of PJSC FGC UES on 26 June 2015 (Minutes No. 16 of 30 June 2015). 2 Calculated under RAS. 3 Other types of remuneration, including the reimbursement of expenses, were not paid. 7 4 Approved by the Resolution of the Board of Directors, Minutes No. 280 of 24 August 2015. Remuneration was not paid due to the fact that this Board Member is a public servant. 8 Approved by the Board of Directors, Minutes No. 105 of 17 June 2010. 5 Remuneration was not paid due to the fact that this Board Member is also the Chairman of the Company's Management Board.
110 PJSC FGC UES Annual Report 2016 111 RISK MANAGEMENT, INTERNAL CONTROL Corporate Governance Report AND INTERNAL AUDIT
Risk Management Remuneration of the Chairman of the Management Remuneration of the members of the Management The Risk Management System is an element of the and property interests of shareholders and investors. Board, RU t ousand Board, including the Chairman of the Management Company's risk management and internal control 1 The Risk Management System unifies mechanisms Board , RU t ousand Information on
2016 2 200 6 01 0 system. The target of the Risk Management System and instruments for the development, introduction, Strategic Report remuneration to the 2016 10 6 6 1 0 201 2 1 1 6 1 is to ensure the Company’s stable and continuous monitoring, review and continuous improvement of members and Chairman 201 110 601 1 2 1 2 0 201 functioning and its development by means of the timely risk management processes. The activities in this area 26 06 2 1 00 of the Management identification, assessment and efficient management are guided by the Regulation on the Risk Management 201 1 0 1 2 2 Board are disclosed on of risks that threaten the Company’s efficient business System2. Salar onuses t er t pes o remuneration the website of PJSC FGC Salar onuses t er t pes o remuneration operation and reputation, employee health, environment UES in the Annual Report. Corporate Governance Report
QUESTION & ANSWER Key Principles of Risk Management System: — continuity and integrity; — assignment of risk management — goal orientation; responsibilities; — integration into management; — efficiency; — balance between risks and earnings; — cross-functional networking; — uncertainty; — reasonable confidence; — consistency; — adaptability; Financial Statements — information quality; — continuous improvement. — involvement and leadership; Alexander Zaragatsky First Deputy Chairman of the Management Board, Member of the Management Board Organisation of the Risk Management Process at the Company Appendix What mechanisms for motivating the management are applied in the Company in order to add to the Company’s overall value and ensure the Long-Term growth of shareholder value? First Stage: Identification of the Situation We use a management motivation system based on the dividends accrued on the shares, and exceeds the achievement of KPIs set by the Board of Directors. It is amount of change in the MOEX RCI index (the share environmental actors worth mentioning that the fulfilment of most indicators index of companies with regulated operations) for provides an influence on adding to the Company’s the respective period by a positive amount set by the overall value and the Long-Term growth in shareholder Company's Board of Directors. value. However, the most significant indicators in this ROIC reflects the operating profit and return on capital direction, with a total weight of 30% of the annual invested into the Company's core activities (as by Second Stage: bonus paid to the Company's management, are the determined by the ratio of the annual operating result to indicators of Total Shareholder Return (TSR) and Return Ris Assessment the amount of equity and non-current borrowings as of On Invested Capital (ROIC). the beginning of the period). 1. Risk Identification TSR reflects the relative annual growth of the weighted average price of the Company's shares, with Fourth Stage: n ormation 2. Risk Analysis Fifth Stage: nterc ange and onitoring Consulting Risk Management, Internal Control 3. Risk Estimation and Internal Audit
The Risk Management and Internal Control System — The Company’s compliance with legal requirements is an important component of the Company's and by-laws; corporate management system, including a number of procedures, methods and mechanisms aimed at the — Preventing any illegal actions taken by the Company's Third Stage: provision of reasonable guarantees for the achievement employees or third parties in relation to the Company Ris reatment Response of the Company's goals in the following directions: and its assets; — The effectiveness and efficiency of activity — The reliability, completeness and timely preparation arrangements; of all types of the Company's statements; — Achievement of the Company's strategic goals.
1 The information includes the remuneration of all the Board members, taking into account changes in membership of the Management 2 Approved by the Resolution of the Board of Directors of 16 November 2015 (Minutes No. 291 of 19 November 2015). Changes were Board in 2014, 2015, 2016. introduced by the Resolution of the Board of Directors of 12 December 2016 (Minutes No. 347 of 13 December 2016).
112 PJSC FGC UES Annual Report 2016 113 RISK MANAGEMENT, INTERNAL CONTROL Corporate Governance Report AND INTERNAL AUDIT
Response to the risks Internal Audit Performs the regular and independent review of the reliability and effectiveness Department of the Risk Management System. Strategic Report Risk Owners Develop, record, implement, monitor and improve the Risk Management System, including the identification and assessment of risks and the Acceptance or (Heads and development and application of risk response measures; increase o ris to Ris aversion itigation or Structural Units) Report on the operation of the Risk Management System to the Management realise avoura le assignment o ris Board and its Chairman through the Internal Control and Risk Management Department.
opportunities Corporate Governance Report
Development Areas of the Risk Management System The response depends on the relevance of the risk (in accordance with its identified risk priority), the Key Development Activities of the Risk Management System in 2016 Development Plans for the Risk impact on the likelihood and the effect of a given risk, the costs of risk materialisation, and the benefits Management System of the risk. — Methodology documents on risk management approved1; — Development of the risk management Participants of the Risk Management System system at branches and subsidiaries — Guidelines for the planning and implementation of risk Participant of the Risk of the Company; management measures approved2; Management System Their Key Responsibilities in the Risk Management System — Integration of anti-corruption risks — The operational risk register3 was approved; operational risk Financial Statements into the Company's Risk Management management measures were identified, assessed and developed The Board of Directors Determines the principles and approaches to the organisation of the Risk System; in accordance with the effective methodology; Summary of Management System; operational risk is considered by the Management Board on a — Assessment of risks included into the Approves the approaches to identifying the risk’s priority, its values and their quarterly basis; Long-Term Development Programme review frequency; with the introduction of indicated risks — Standard regulations on the interaction of the Internal Control into the risk register (risk map) of the Considers matters concerning the operation of the Risk Management System, and Risk Management Department and the subsidiaries of PJSC Company; including on the basis of the reports: on the operation of the Risk Management FGC UES for the organisation of the Internal Control and Risk
System by the Chairman and Members of the Management Board; on the Management System’s operation were approved;4 Subsidiaries — Training in the operation of the Appendix assessment results of its actual status, and the reliability and efficiency of the develop action plans for the Internal Control and Risk Management Risk Management System for the Risk Management system by the Internal Audit Department. System (on a yearly/ quarterly basis). Company's management.
Audit Committee of the Considers matters on the operation of the risk management system prior to their Internal Control Board of Directors consideration by the Board of Directors. The Internal Control System is part of the risk — Effectiveness and efficiency of the Company's management and internal control system and covers activities and protecting the Company's assets; all of the Company’s business directions. Control Chairman of the Ensures the establishment and maintains the sound operation of the Risk procedures are executed on a regular basis for all of — Compliance with the legal requirements applicable to Management Board and Management System; the Company’s processes (business directions) at all the Company and its internal regulations, including for management levels and are aimed at the provision of business facts and accounting purposes; the Management Board Responsible for implementing the resolutions of the Board of Directors on the Risk Management System; guaranteeing the reasonable achievement of goals in — Reliability and the timely submission of accounting the following directions: (financial) and other statements. Submits operation reports on the Risk Management System to the Board of Directors after their preliminary consideration by the Audit Committee; Shares responsibility for the particular risk management procedures among the heads of the Company's structural units. Internal Control System Operation Scheme Internal Control and Performs the general coordination and operational control of the risk Risk Management management processes; Preliminar Department Develops methodology documents and arranges risk management training for the Company's employees; preventive onitoring Follo up control Performs analysis of the Company's risk portfolio; control Compiles consolidated reports on risks; Coordinates risk management to prevent and fight corruption; Creation o process control environment e control procedures implementation nternal audit revisional control o Consults executive bodies, the heads of the structural units and the Company’s including: check of sufficiency of control t at are uilt in usiness processes and relia ilit o t e reporting preservation o employees on the risk management process and anti-corruption matters; procedures or ris prevention or mitigation aimed at ac ieving o ectives o usiness assets compliance control external and ac ievement o o ectives o usiness processes audit sel assessment Assists risk owners in the development of internal documents and measures processes development and deplo ment o aimed at preventing and fighting corruption; control procedures Arranges risk management training for the Company's employees.
1 PJSC FGC UES Order No. 86 of 21 March 2016. 2 PJSC FGC UES Order No. 373 of 12 October 2016. 3 PJSC FGC UES Order No. 428 of 24 November 2016. 4 PJSC FGC UES Order No. 300 of 29 August 2016. 114 PJSC FGC UES Annual Report 2016 115 RISK MANAGEMENT, INTERNAL CONTROL Corporate Governance Report AND INTERNAL AUDIT
Regulation on the Internal Control System of PJSC participants and the efficiency assessment procedure QUESTION & ANSWER FGC UES1 as approved by the Board of Directors is for the Internal Control System. currently in effect at the Company. The Regulations In order to implement the Regulations on the Internal on the Internal Control System determines the goals, Control System, a Programme (“road map”) for
operational principles and elements of the Company's Strategic Report improving the quality of the Internal Control System Internal Control System, its main functions and of PJSC FGC UES until 2018 has been developed and the responsibility of the Internal Control System’s implemented by the Company2.
Interaction Between the Participants of the Internal Control System Corporate Governance Report S are olders pinion on t e relia ilit o data contained in t e Annual Report and t e annual accounting Igor Feoktistov statement For a detailed description of the key Internal Control Director Providing Audit in ormation oard o irectors responsibilities of the Commission Committees Internal Control System’s participants, please refer Approving t e Regulations to the Appendix 1 hereto Did the assessment carried out in 2016 comply with the standards for assessing the effectiveness of the on t e nternal Control S stem Internal Control and Risk Management System approved in the end of 2015? How were the assessment results Supervising t e nternal Control S stem Financial Statements a ing proposals or t e nternal Control Su mitting reports used? Providing in ormation S stem s improvement Preparing recommendations or t e The internal auditor carried out the efficiency audit When developing the action plan aimed at the nternal Control S stem s Executive of the Internal Control and Risk Management System development and improvement of the Internal Control odies improvement following the results of 2016. The assessment was and Risk Management System, the results of the Recommendations or t e nternal conducted in five components: the control environment, assessment of the Internal Audit were taken into Control S stem s improvement risk management, control procedures, information and consideration; the action plan may be adjusted, if Accounta ilit Approving la s Accounta ilit Preparing proposals or t e communication and monitoring procedures. necessary. Implementation of the plan is monitored on Ensuring t e operation o t e Preparing recommendations or nternal Control S stem s a monthly basis.
nternal Control S stem t e nternal Control S stem s improvement in relation to preventing Appendix improvement and fighting corruption
nternal Control Anti Corruption and nternal Audit Structural Units and Ris anagement Economic Securit epartment epartment epartment Development Directions for the Internal Control System The following main development actions for the Following the results of the independent efficiency Company's internal control system were implemented assessment of the Internal Control System for in 2016: 2016, the maturity level was estimated at 4.3. An independent internal efficiency assessment of — Requirements for formalising control over the et odological the Internal Control System was conducted by the nteraction et een t e Company's business processes were developed; support Compan and its su sidiaries Company's internal auditor and no external independent in t e rame or — Control procedures for the processes of capital assessment was made. The efficiency of the Internal o corporate legislation e Compan s construction, the management of projects Control System following the results of 2016 was Su sidiaries financed by means of technological connection considered at the Meeting of the Board of Directors3, and procurement activities were developed and with prior discussion of this item by the Audit formalised; Committee of the Board of Directors4. — Efficient control procedures over business process The following measures aimed at the improvement The Company's Internal Control System is operated 2nd defence line – Consists of risk management, accounting, tax accounting and the preparation of of the Internal Control System have been planned for in accordance within the model of "three defence legal review, economic security, quality control, and accounting (financial) statements were implemented; further implementation of the Internal Control System lines": compliance control. Development Strategy in 2017: — An analysis of the core activity and management 1st defence line – Consists of the management The Company's structural units that perform the processes for their effectiveness and the sufficiency — Approval of the control matrices by all business bodies, the management bodies of branches, the functions of the second defence line exercise additional of their control procedures was started. processes (business directions) of the Company by Company's units and divisions for implementing control over all structural units of the Company in areas their process owners; control procedures by virtue of their responsibilities requiring special attention (that is, those especially The Company performs an internal and job duties; the Heads of the Executive Office prone to risks). — Approval and introduction of the implementation and the Company’s branches are responsible for the efficiency assessment of the Internal procedure for the Regulation on the Company's 3d defence line – The Internal Audit, whose function is achievement of results, the efficiency of the Internal Internal Control System; to present the Board of Directors and top management Control System, its conformance with Control System, their procedures by means of their with an independent and objective assessment of the — Training of the Company's management on building proper organisation and the formalisation and the target state and maturity levels. The risk management, internal control and the corporate the Internal Control System. supervision of their implementation by subordinates; management systems using a risk-based approach. Company determined six levels of maturity and executors of control procedures who implement The Internal Audit monitors the activities at the 1st and them in accordance with their job descriptions and the for the Internal Control System 2nd defence lines. set regulatory documents. (from 1 "zero" to 6 "high").
1 Decision of the Audit Committee of the Board of Directors of 08 December 2016 (Minutes No. 52 of 12 December 2016). 3 Minutes No. 362 of 14 April 2017. 2 Approved by the Order No.16 of PJSC FGC UES on 20 January 2016, updated by the Order No. 388 of PJSC FGC UES on 25 October 2016. 4 Minutes No. 58 of 07 April 2017.
116 PJSC FGC UES Annual Report 2016 117 RISK MANAGEMENT, INTERNAL CONTROL Corporate Governance Report AND INTERNAL AUDIT
Internal Audit on 03 March 2016 and provided for the execution of 52 results of the performed audit and the submission of audits. the Company's drafted internal audit documents for consideration. The purpose of the Internal Audit is to assist the The Internal Audit Department functionally reports to The work plan for the Department for 2017 was Board of Directors and the Company's executive the Company's Board of Directors, meaning that the approved by the Board of Directors of PJSC FGC UES Following the results for 2016, a questionnaire survey Strategic Report bodies with increasing the efficiency of the Company's Board of Directors controls and arranges the operation on 20 February 2017 and provided for the execution of among the members of the Audit Committee of the management, improving its business by means of using of the Internal Audit Department, including the approval 49 audits. Board of Directors was held for the first time in order to assess the Internal Audit’s performance. Following the a systemic and sequenced approach to the analysis and of the Regulation on the Internal Audit, approval of the In 2016, the Internal Audit Director attended the results of the questionnaire, the areas for improving assessment of the risk management, internal control work plan and budget for the Internal Audit Department, meetings of the Board of Directors, the Audit the interaction between the Internal Audit Department and corporate management systems as instruments to the approval of a candidate for the position of Head Committee of the Board of Directors, and the and the Audit Committee of the Company's Board of ensure reasonable assurance that the Company’s goals of the Internal Audit Department and the termination Company's Management Board on the Internal Audit,
Directors were determined. Corporate Governance Report will be achieved. of his/her powers, the determination of remuneration including the submission of reports following the The Internal Audit Department is a unit responsible for arrangements for the Internal Audit Department Head, all internal audit functions at the Company. as well as the consideration of significant limitations that might adversely affect the performance of the The number of employees performing the functions of Internal Audit’s function. How often do the Board of Directors and the executive bodies receive Internal Audit reports? the internal audit amounted to 16 persons in 2016. In accordance with the Regulation on the Internal and defects previously revealed and the headcount Audit of PJSC FGC UES, the reports on the results and expenses of the Internal Audit Department, are of the Department's operation are mainly submitted submitted to the Audit Committee of the Board of to the Company's Board of Directors only after their Directors on a quarterly basis. preliminary consideration by the Audit Committee. The report on the execution of the Internal Audit QUESTION & ANSWER For example, in 2016 the Internal Audit Department work plan and its performance results following the Financial Statements submitted 5 audit works for consideration to the yearly results is considered by the Company's Board Board of Directors of PJSC FGC UES, with their prior of Directors after its preliminary consideration by the consideration by the Audit Committee of the Board of Audit Committee of the Company's Board of Directors. Directors of PJSC FGC UES. In 2016, the Internal Audit Department also Apart from that, the reports on the execution of conducted 4 audit works on instructions for the the work plan and the performance results of the Company's executive bodies. As the audit information Internal Audit Department, including, amongst others, was initiated by the Chairman of the Company's
information on execution of the work plan for the Management Board, the audit results were submitted Appendix Internal Audit, the most significant violations and for the consideration of the Chairman of the defects revealed by the internal auditor, the execution Company's Management Board. of corrective actions for the liquidation of violations
Svetlana Kovaleva Internal Audit Director and Head of the Internal The main documents regulating the function of the Internal Results of Control Actions executed Audit Department Audit: by the Internal Audit in 2016 — Regulation on the Internal Audit Department of PJSC FGC UES2; How is interaction between the Internal Audit Department and the Management Board/Board of Directors 1 1 perational audit 10 — Internal Audit Guidelines of PJSC FGC UES3; arranged in the Company? 2 Fiscal audit 3 — Ethics Code of Internal Auditors of PJSC FGC UES4; Сompliance-audit 1 The Internal Audit is an activity for the provision The Company's Board of Directors approves the annual n o s stem audit of independent and objective guarantees and work plan for the Department and the budget of the — Regulations on the assessment of the internal control 2 1 Control Actions consultations to the Board of Directors and the Internal Audit Department, it also appoints a candidate and risk management efficiency of PJSC FGC UES5; Revisions 16 Company's executive bodies aimed at improving the to the position of the Head of the Internal Audit 6 6 Progress monitoring 1 — Internal Audit Assessment and Quality Improvement efficiency of the Company's management. Department and the termination of his/her powers, o Corrective Action Plan Programme of PJSC FGC UES6. as well as considers key reports on the results of the t er activities 15 The powers of the Internal Audit Director – the Head of audit performed by the Department. The internal auditor executed 47 audit works in 2016. the Internal Audit Department for interacting with the Following the results of these audit works, 138 corrective Company's management bodies – are determined in In order to consider the opinion of the Company's actions aimed at the liquidation and future prevention the Regulation on the Internal Audit of PJSC FGC UES management, requests for work plan proposals are of violations and defects revealed were instructed for 1 as approved by the Company's Board of Directors . sent to the Members of the Company's Management execution. 58 corrective actions out of 67 actions, with um er o implemented actions Board when preparing the draft for the work plan for In accordance with the Regulation on the Internal Audit deadlines for the reported year, were executed. Actions it deadlines the Internal Audit Department. The draft work plan due 6 of PJSC FGC UES, determining the principle goals and The execution of corrective actions is controlled by the for the Internal Audit Department is approved by the otal num er o corrective actions purposes of the Internal Audit and its functional and Audit Committee of the Board of Directors by hearing 1 Chairman of the Company's Management Board and prescri ed administrative subordination were separated to ensure regular reports from the Company's management on considered by the Audit Committee of the Company's the independence of the Internal Audit. the execution of a corrective action plan to liquidate any Board of Directors on a preliminary basis and is defects revealed by the Company's Audit Commission, the Functionally, the Internal Audit Department approved by the Company's Board of Directors. Company's internal auditor and the external control bodies. reports to the Company's Board of Directors, while For example, in 2016 the Department operated in administratively it reports to the Chairman of the accordance with the work plan for 2016, which was Company's Management Board. approved by the Board of Directors of PJSC FGC UES
1 Minutes No. 291 of 19 November 2015 of the Board of Directors. 4 Approved by the Audit Committee of the Company's Board of Directors (Minutes No. 43 of 02 December 2015). 2 Approved by the Chairman of the Company's Management Board on 24 October 2016. 5 Approved by the Company's Board of Directors (Minutes No. 309 of 29 February 2016). 3 Approved by the Audit Committee of the Company's Board of Directors (Minutes No. 43 of 02 December 2015). 6 Approved by the Audit Committee of the Company's Board of Directors (Minutes No. 40 of 21 September 2015).
118 PJSC FGC UES Annual Report 2016 119 Corporate Governance Report EXTERNAL AUDITOR
Audit Commission External Auditor
The Audit Commission is a permanent body that is — To confirm the reliability of the data in the Company’s
elected annually by the General Meeting of Shareholders Annual Report, accounting balance sheet and profit Strategic Report The Company annually hires an external auditor to Selected Auditor of the Company's Statements and is responsible for exercising control over the and loss statement; perform an independent and unbiased assessment of for 2016 Company’s financial and business operations, governing — To analyse the Company’s financial position, the quality of its RAS and IFRS accounting (financial) Full name: RSM RUS Limited Liability Company bodies and structural units. In its operations, the Audit discover ways for its improvement and develop statements. Commission is governed by the Company's Articles Address: 4 Pudovkina str., Moscow, 119285 recommendations for the governing bodies; of Association and by the Regulations on the Audit External auditors are hired based on tenders providing an INN (Taxpayer No.): 7722020834 OGRN (Principal State Commission approved by the Annual General Meeting of — To organise and perform audits (revisions) of the objective selection. As per the Resolution by the Board Registration Number): 1027700257540
Shareholders on 26 June 2015. Company’s financial and business operations. of Directors of PJSC FGC UES “On determining a tender Corporate Governance Report procedure for the selection of auditing organisations Telephone: (495) 363-2848 The main functions of the Audit Commission are as In the reporting year, the Audit Commission held 4 to perform a statutory audit of PJSC FGC UES for Fax: (495) 981-4121 follows: meetings. 2015-2017,” a centralised procurement of services E-mail: [email protected] on performing a statutory audit of PJSC FGC UES’s 1 statements for 2015–2017 was conducted by PJSC Members of the Audit Commission of PJSC FGC UES Rosseti. Data on membership of the auditor in self-regulatory Year Educa- organisations of auditors: Self-Regulatory Organisation The Annual General Meetings of Shareholders dated 27 of Birth tion Position of Auditors “Association Sodruzhestvo” (address: 21 June 2014, 26 June 2015, and 29 June 2016 approved Michurinsky Avenue, Bldg. 4, Moscow, Russia, 119192) Nikolay Pronin 1952 Higher Head of the Economic Security Division of the Anti-Corruption and LLC RSM RUS as the selected auditor for PJSC FGC UES. In May 2016, the Board’s Audit Committee discussed Economic Security Department of PJSC Rosseti The Annual General Meetings of Shareholders decided on Chairman the assessment of the external auditor’s performance the auditor's remuneration for the audit of the Company's Financial Statements of the Audit with regard to the audit of the Company’s statements. statements for 2016 in the amount of RUB 24,682,983.68, Commission As per the opinion of the Committee, the audit was in including VAT. accordance with the key terms and conditions of the 1976 Higher Principal Adviser, Deputy Head of Division and Head of Division Tatiana Zobkova contract. Based on the opinion of the Audit Committee, for Corporate Governance, Pricing Environment and Auditing in the the external audit procedure was generally performed in Fuel and Energy Industries of the Russian Ministry of Energy accordance with the main requirements. Igor Karpov 1988 Higher Deputy Head of the Department for Property Relations and Privatisation of the Federal Agency of State Property Management
(Rosimuschestvo) Appendix Igor Schmakov 1974 Higher Deputy General Director for the Control of PJSC Kubanenergo Vladimir Khvorov 1947 Higher Leading Expert of the Department of the State Regulation of Tariffs, Infrastructure Reforms and Energy Efficiency of the Ministry of Economic Development and Trade Conflicts of Interest
For their participation in the audit of financial and Remuneration Amount Paid to Audit business operations, each Audit Commission member Commission Members in 20162 Preventing Conflicts of Interest of the Board Members is paid a lump-sum remuneration equal to 20 minimum Remuneration The Board Members shall take reasonable and efficient Company, in its subsidiaries or in controlling companies, monthly wages of a first category worker, with this Members of the Audit Commission (RUB) actions, in particular by taking decisions in consideration of as well as on the sale and/or purchase thereof, in addition minimum monthly wage being set by the sectoral all the information available, in the absence of any conflicts to holding any positions in other companies or accepting tariff agreement of the electric energy complex of Denis Kant Mandal, Chairman of the 3 of interest and by treating the Company’s shareholders invitations to become a candidate for the Board of the Russian Federation for the period of the audit. — Audit Commission equally, assuming standard levels of risk. Directors (a supervisory board) of any other company or The amount of remuneration to the Chairman of the on any change of their permanent (primary) place of work Company's Audit Commission increased by 50%. Nikolay Varlamov 143,880 The Company has a comprehensive system for dealing (service, entrepreneurial activity, etc.) Marina Lelekova 143,880 with any conflicts of interest between the Board Members by providing reasonable assurance that any conflict With the goal of detecting any conflicts of interest early Roman Litviniov 143,880 situation will be settled at an early stage and that the on, the Company has developed a questionnaire for its Marat Izmailov 143,880 Company's interests will not be infringed upon. Board Members that contributes to the requirements of the legislation, both in terms of the completeness As per the Regulations on the Board of Directors, a Board of information disclosure and in relation to changes to Member must inform the Company's Board and the the Federal Law On Joint-Stock Companies. Every three Corporate Secretary on any potential conflicts of interest months, Board Members must complete the questionnaire and their reason for doing so, including their own interest in and provide any required information that may reveal any the Company’s transactions. conflicts of interest. In addition, a Board Member must promptly disclose any information on their holding of any securities in the
1 Formed by the annual General Meeting of Shareholders of PJSC FGC UES on 29 June 2016. Positions of the Audit Commission members 3 The Chairman of the Audit Commission, Denis Kant Mandal, sent a refusal for remuneration for his participation in the work of the are stated at the time of election. None of the Audit Commission members holds any shares in PJSC FGC UES nor do they hold any Company's Audit Commission. positions in its governing bodies. 2 In 2016, remuneration was paid to the members of the Audit Commission, elected by the Annual General Meeting of Shareholders on 26 June 2015, acting for 2015-2016 corporate year.
120 PJSC FGC UES Annual Report 2016 121 ANTI-CORRUPTION POLICY Corporate Governance Report AND ECONOMIC SECURITY
Dealing with Conflicts Of Interest of the Executives — Continuous control over and regular monitoring of — To set requirements and restrictions for interacting the effectiveness of anti-corruption standards and with the state authorities whose competence include The Company strives to prevent and minimise any With the aim of preventing any conflicts of interest, the procedures, as well as control over their observance. combating corruption; consequences of possible conflicts of interest among its Members of the Management Board must refrain from
executives. The Company has a comprehensive system actions that will or may potentially lead to a conflict — To prevent corruption and other offences and to provide Strategic Report of dealing with conflicts of interest among executives between their interests and the Company's interests, as The main tasks of the Company’s Anti-Corruption Policy for the liability of said offences; that is aimed at preventing any potential conflicts of well as refraining from discussing and voting on matters are: — To show the Company's strong intolerance towards interest and minimising their negative consequences to in which they have a conflict of interest. — To determine the key directions to ensure compliance corruption in all its forms and manifestations to its the interests of PJSC FGC UES. In addition, all external appointments of Members to the with the requirements of Article 13.3. of the Anti- shareholders, partners, contractors and members of As per the Regulations on the Management Board of Management Board are subject to the consent of the Corruption Law; executive and control bodies; PJSC FGC UES, Management Board Members must Company’s Board of Directors.
— To establish an effective mechanism for implementing — To minimise the risk of the Company’s involvement in Corporate Governance Report inform the Board of Directors, the Audit Commission, With the goal of detecting any conflicts of interest early measures to prevent and fight corruption (including the corruption. the Auditor and the Secretary of the Management Board on, the Company has developed a questionnaire for Anti-Corruption Policy); about the following: the Members of the Management Board. Every three — His\her affiliation; months, the Members of the Management Board must complete a questionnaire and provide all the required — Potential conflicts of interest, including any interest information that may reveal any conflict of interest, in in the Company’s transactions; particular for the transactions of interested parties. — The holding of any securities in the Company, as well as the sale and/or purchase thereof. Key Results of the Company's Anti-Corruption Activity in 2016:
Direction Key Achievements Financial Statements
Improving the Company’s The following internal regulations were approved: Regulatory Standards — methodology documents on the risk management of corruption; Anti-Corruption Policy — the action plan (“road map”) for implementing the risk management and internal control procedures of preventing and fighting corruption; a new version of the Anti-Corruption Policy of PJSC FGC UES was developed and
and Economic Security Appendix approved (Minutes No. 357 of the meeting of the Board of Directors of PJSC FGC UES dated 13 March 2017); The Anti-Corruption Policy is an element of the 80 by Rosimushchestvo of 2 March 2016). a list and map of the Company's corruption risks were developed and approved (Minutes Company’s Internal Control and Risk Management The implementation of the Company's Anti-Corruption No. 357 of the meeting of the Board of Directors of System and provides a set of measures aimed at Policy is based on the following principles: PJSC FGC UES dated 13 March 2017). preventing corruption, reducing reputation risks and the risks of imposing penalties and sanctions on the — Compliance of the Anti-Corruption Policy with the Company as a consequence of the bribery of officials. applicable laws and generally accepted standards; Identification and Settlement the Company ordered to declare any conflicts of interest. Over 5 thousand declarations In 2012, the Company initiated its Anti-Corruption of Conflicts Of Interest were collected and checked, and the information declared was analysed. The Company's — Observance of the rights and legitimate interests of corresponding subdivisions considered any potential conflict situations; Policy, which describes a set of interrelated the Company’s employees, partners, contractors and procedures and specific measures to prevent and fight other parties, as well as keeping commercial secrets in the declared information was analysed. Commissions on Corporate Ethics and Conflicts corruption within the Company and which is aimed at implementing anti-corruption measures; of Interest at the Company's affiliates examined the potential conflict situations and implementing the recommendations of paragraph 260 submitted them to the Company’s Central Commission on Corporate Ethics and Conflicts of the Corporate Governance Code, in which measures — “Tone at the Top,” set by senior executives to foster of Interest. Decisions were taken based on the examination of the results (Minutes No 6 have been determined to develop the elements intolerance towards corruption and to develop the of the meeting of the Central Commission dated 14 November 2016). of the Company’s corporate culture, as well as its internal system to prevent and fight corruption; organisational structure, rules and procedures, that — Employee involvement: the Company’s employees Anti-Corruption Control in monitoring transactions for any conflicts of interest, the timely receipt of information on ensure the prevention of corruption. shall be informed about the provisions of anti- Relations with Partners and changes to the shareholders of contracting parties, as well as the inclusion of an anti- On 24 August 2012, the Board of Directors approved corruption legislation and shall participate in creating Contracting Parties corruption clause and other mandatory clauses, into contracts; a new version of the Anti-Corruption Policy of PJSC and implementing anti-corruption standards and review of the documents and control of the funds for charitable assistance. FGC UES with the purpose to improve the Company’s procedures; Anti-Corruption System and create a unified document — Proportionality of the anti-corruption procedures to the providing a set of interrelated principles, procedures potential damage and corruption risks; Identification of Potential anti-corruption review of 255 executive documents (about 24 per cent of the total number and specific measures aimed at preventing and fighting Corruption in the Abuse Of of the executive documents issued by the executives for the reporting period); corruption. — Effectiveness of anti-corruption procedures: anti- Power collection and analysis of information on the income, expenses, property and property- In 2017, the Anti-Corruption Policy of PJSC FGC UES corruption measures that are easy to implement and related obligations of employees whose positions are subject to the above procedures. was updated and approved in a new version (Minutes bring significant results; Participation in Working submission of a monthly report containing information on contracts signed, including the No. 357 of the Meeting of the Board of Directors — Liability for corruption and the inevitability of Groups and Collective entire chain of the shareholders of contracting parties, to the Russian Ministry of Energy, of PJSC FGC UES dated 13 March 2017) in order punishment for all employees, irrespective of their Initiatives on Preventing and the Federal Financial Monitoring Service (Rosfinmonitoring) and the Federal Tax Service to exercise a risk-based approach to implementing position, length of service or other conditions, in the Fighting Corruption of Russia. the Anti-Corruption Policy of PJSC FGC UES and in case of corruption while performing their functions; accordance with the guidelines of Rosimushchestvo on Evaluation of the Anti- anonymous questionnaire survey was held among employees. — Transparency in business: informing the Company’s risk management and internal control in preventing and Corruption Policy’s partners, contractors and the public on the anti- fighting corruption in joint-stock companies with the Effectiveness state participation of the Russian Federation (Order No. corruption standards of business that are implemented;
122 PJSC FGC UES Annual Report 2016 123 Corporate Governance Report Strategic Report Corporate Governance Report
2
Financial Statements Appendix Backbone electric grids of the East PHOTOS:
(MES East) 1 ostoc n Cosmodrome 1 Key infrastructure projects 2 ladivosto FGC RA C ure s PP
o mino o s ore oil loading 2003–2012 Control o electric po er capacit s ortages in t e Primors port erritor SER CE AREA Elimination o rolling outages 5 constituent territories of the Russian Creation o conditions or developing economic potential o t e sout ern region Federation in t e Far East Federal district Development of Vladivostok as a centre of international cooperation in the Asia-Pacific with a population over 5 million people. Region
PERSONNEL 2004–2005 Po er suppl o units and o t e ure s PP in UES o East A out 2 t ousand people Reduction o dependence on uel suppl o po er s stems in Far East regions Rene al o PP e uipment resources
АSSETS 1 Creation o conditions or developing t e Far East region HVTL 15.8 thousand km 91 substations, 220-500 kV 2014 Po er suppl o ostoc n Cosmodrome 3 TSS, 6-10 kV Creation o conditions or po er suppl o ostoc n Cosmodrome and t e uture Capacity — about 15.2 thousand MVA science cit t e cit o siol ovs 2009–2015 Electricit suppl to t e in rastructure o t e Eastern Si eria OPERATIONS Pacific Ocean pipeline system Electricit transmission Construction of facilities to supply electricity to the SS of the Eastern Siberia – Pacific e ranc provides electric connection o Ocean pipeline system (up to 50 million tonnes of oil for the Asia–Pacific market); UES o East it t e po er s stem o Si eria Connection o o mino o s ore oil loading port t e end point o t e Eastern Si eria and exports electricit to C ina Pacific Ocean pipeline system.
1 according to annual per ormance reports 124 PJSC FGC UES Annual Report 2016 125 Corporate Governance Report SHARE CAPITAL, SECURITIES TRADING
Monitoring Anti-Corruption Awareness The Company's Securities on the Stock Market In 2016, the Company held an anonymous who are ready to report on corruption as compared For more details on questionnaire survey among its employees to assess to the previous year (a 7 % increase in both figures in protecting against
the effectiveness of its anti-corruption activities. the Executive office). There was a 9% increase in the Capitalisation increase in 2016 Strategic Report terrorism and crime The results showed a 3% increase in the number of awareness of where to report in case an employee 244% on economic and employees who assessed the Anti-Corruption Policy as becomes aware of possible acts of corruption. information security and effective and a 2% increase in the number of employees on managing integrated 2016 security, see the 2016 OBJECTIVE ACHIEVEMENT 2017 OBJECTIVE Appendix 1 hereto Total Shareholder Higher than the change value of the Higher than the change value 2
Return (TSR) MOEX RCI (Regulated Companies 267% of the MOEX RCI (Regulated Corporate Governance Report Index) by a positive value set by the (MOEX RCI Companies Index) by a positive Board of Directors index value: value set by the Board of Directors Share Capital, 44%)
Securities Trading QUESTION & ANSWER Information on the Company’s share capital As of 31 December 2016, the share capital of PJSC to 72,140,500,768 ordinary registered shares with a history can be found on FGC UES stood at RUB 637,332,661,531.50, divided nominal value of RUB 0.50 each and a total nominal our corporate website into 1,274,665,323,063 ordinary registered uncertified value of RUB 36,070,250,384. Authorised ordinary at www.fsk-ees.ru/eng/ shares with a nominal value of RUB 0.50 each. No shares offer the same rights as outstanding ordinary Financial Statements in the Investors / Share preferred shares have been placed as of the date shares. Information / Share above. In 2016, there were no issues of additional shares of Capital History section. In accordance with the Company’s Articles of PJSC FGC UES. Association, the number of authorised shares amounts Share Capital Structure Appendix
The total number of the Company's shareholders is For further details on the over 400 thousand. As of 31 December 2016, the The Company's Share Capital Structure Company’s share issues, Shareholder Register included: as of 31 December 2016 please see Appendix 1 — 406,994 individuals; hereto Maria Tikhonova — 1,434 legal entities (including 43 nominees and 3 1 PJSC Rosseti 80.13 2 Deputy Chairman of the Management Board, trustees). 2 S are olders it 5.34 o ners ip rom 0 Member of the Management Board In 2016, there were no significant changes to the to 2 o t e aut ori ed Company’s share capital structure. capital o t e Compan PJSC Rosseti is the largest shareholder of PJSC FGC S are olders it 14.53 1 o ners ip less t an UES (holding 80.13% of the share capital). The State 0 o t e aut ori ed (the Russian Federation), represented by Federal capital o t e Compan What is the reason of such a rapid increase in the Company's shares value? Property Management Agency (Rosimuschestvo), Until March 2016, the Company's stock quotes were for the return of their fair valuation by the market. holds 0.59% of the Company's share capital. The sideways, awaiting news on further growth or decline. government has no special right to participate in the Other positive signals for growth included the At that stage, many investors removed the Company's Company's management (golden share). Company’s good financial results in 2015 (which shares from their investment portfolio. These factors, attracted investors focused on investing in assets with as well as the purchase of shares by Long-Term good growth prospects), as well as an initiative by the investors who are focused on undervalued assets, led Shareholders' Agreement Russian government to increase the minimal dividends to a powerful move of the quotations in the second half of state companies from 25% to 50% of the net profit In June 2013, PJSC Rosseti and Rosimushchestvo As of 31 December 2016, 1.077% of the Company's of 2016. for 2015. This positive market trend was increased in signed a shareholders’ agreement regarding managing shares were in a cross holding owned by LLC FGC – For more details on the In 2013-2014, the Company's shares and depositary April 2016 by the decree No. 705-r “On the amount of and voting in PJSC FGC UES. The parties have signed Asset Management. Company's minority receipts were very undervalued by the market and were dividends paid by companies with state participation the agreement with respect to all, present and future, shareholders, please see bought by investors who are focused on Value Strategy: in 2015.” voting shares in PJSC FGC UES. the Management Report/ a strategy for buying undervalued assets and waiting Information Disclosure and Communication with Investors and What is the Company's investment attractiveness in the management's opinion? Free-float Shareholders/ Federal Grid Company is a low-risk, government- fulfilment of the public task of the UNEG development Communication As at the end of 2016, the percentage of the free float The Company performs an annual analysis of the regulated business focused on increasing shareholder based on the technical and economic optimisation of 1 with Investors and shares of PJSC FGC UES comprised 18.2% . shareholder register to identify the key groups of the welfare through dividend payments and increasing backbone electrical grids. Shareholders section. holders of ordinary shares and depository receipts. the value of its assets. The Company is focused on
1 Free-float is calculated as the percentage of the Company's shares which are in free circulation as at the end of 2016, excluding shares 2 MOEX RCI is the index of the regulated companies of the Moscow exchange. owned by PJSC Rosseti, the State (Government), municipalities and 'quasi-treasury' shares.
126 PJSC FGC UES Annual Report 2016 127 Corporate Governance Report SHARE CAPITAL, SECURITIES TRADING
Key Parameters of Share and DR Trading TSR of Russian Electric Grid Companies As Per the Results of 2016, 2014 2015 2016
FGC Strategic Report For latest information on The Company's Shares on MOEX RC index the GDR program, please ER RA ost capitali ed see the official London Trading Volume RUB bn 65.3 28.9 90.4 osenergo and li uid s ares Stock Exchange website at Rosseti included in www.londonstockexchange. Low RUB 0.02900 0.0440 0.0539 icexP R Rus dro com under the Company's ticker symbol – FEES.
Unipro High RUB 0.0939 0.0804 0.2097 Corporate Governance Report
0 100 200 00 Year End RUB 0.04569 0.0594 0.2032 Price increase ividends The Company's DR at the London Stock Exchange
As per TSR dynamics in 2016, the Company's shares became the leaders among the Trading Volume USD bn 1.4 0.7 7.0
most liquid share, both in the electric energy sector and in the Russian market in total. Low USD 0.55 0.36 0.30
High USD 1.50 0.80 1.65 Financial Statements Shares of Federal Grid Company are traded on the the Bank of New York Mellon (BNY Mellon). As of 31 For more information on Year End USD 0.79 0.36 1.64 Level 1 quotation list of the MOEX and are included in December 2016, the GDR programme represented the Company’s trading the list of securities traded on the St. Petersburg Stock 0.164% of the Company’s total share capital. shares, please see the Exchange. The Company's shares are included in the index website at www.fsk-ees. In 2016, the performance of the MICEX PWR Sector In the reporting period, the Company’s shares were Outside of Russia, the Company's shares are traded as calculation base of key Russian and foreign indices. ru/eng/ in the Investors / Index was significantly higher than the performance significantly higher than both the MICEX and MICEX global depositary receipts (GDR) on the London Stock Share information / of the MICEX Index. The main factor contributing to PWR indices. Throughout the year, the Company’s share Exchange. The GDR programme’s depository bank is Interactive Stock Chart this stable increase in MICEX PWR after the decrease price increased by 242% (from RUB 0,059 at the end of section. of 2011-2015 was the rise in the financial standing 2015 to RUB 0,203 at the end of 2016) compared to the Appendix of power companies due to the end of the tariff increase of 27% and 110% demonstrated by the MICEX General Information on the Shares of PJSC FGC UES Weight In Indices, %, as of 31 December 2016 restrictions period (for electric grid companies) and a Index and MICEX PWR respectively. At the end of 2016, decrease in investment expenses (for power generation the Company's market capitalisation was RUB 257.6 companies), which contributed to the improved billion. MICEX Index 0.52 Ordinary Registered investment attractiveness of power companies. Category of Shares Uncertified Shares
Nominal value RUB 0.50 For more information on Broad Market Index (MICEX BMI) 0.51 DR trading, please see the Dynamics of the Company's Ordinary Share Value Compared to MICEX Index and PWR Index in 2016 website at www.fsk-ees. MICEX Ticker FEES ru/eng/ in the Investors / FGC 2 2 1 Share information / GDR RTSI 0.52 SPBEX Ticker FEES Program section. 200
LSE Ticker FEES MICEX PWR 14.86 MicexPWR ISIN RU000A0JPNN9 110 1 The RTX Energy (Vienna Stock 100 16.85 Bloomberg Code FEES RX Exchange)
MICEX 26
0 0 12 201 2 02 2016 2 0 2016 0 06 2016 1 0 2016 1 10 2016 0 12 2016
The growth of the Company's share value was due to — Improvement of the attitude of international investors the following factors: towards Russian assets in general, towards their — The Russian government made it obligatory for state strong dividend histories in particular; owned companies to increase its dividends from 2015 — Upturn of the Russian economy, stabilisation of the to 50% of the net profit and considered the possibility ruble, the decline in interest rates by the Central Bank to use such measures for 2017-2019; of Russia and a decline in inflation. — The Company showed good financial results, with effective optimization of the Investment Programme and operating costs;
128 PJSC FGC UES Annual Report 2016 129 Corporate Governance Report SHARE CAPITAL, SECURITIES TRADING
GDR Price and Volume Dynamics on the LSE Trading Volume, the Minimal and Maximal Price of the Company's Shares per Month, and Main Event Drivers of the Growth in Share Value for 2016 Strategic Report e inistr o Finance suggested extending t e practice o t e 0 dividend pcs US 2015 IFRS: profit RUB 44.1 Q1 2016 IFRS: profit RUB 16.4 polic or state o ned companies in n compared to 201 loss n 0 o 201 201 000 000 1 6
RU 0 2
000 000 1 2 Corporate Governance Report
0 1 2 000 000 0
0 1 1 000 000 0 16 10 1 2 6 0 2 2 0 0 0 01 02 0 0 0 06 0 0 0 10 11 12 2016 0 0 0 01 16 0 0 16 0 06 16 01 0 16 0 12 16 Financial Statements e government made it o ligator or H1 2016 IFRS: profit RUB Q3 2016 IFRS: profit RUB state o ned companies to increase t eir n 160 o 2 n 6 o rading olume R price on SE e given R price at t e end o trading dividends rom 201 to 0 o t e net R pcs US on t e osco Stoc Exc ange1 profit.
olume ax price n pcs in price The significant increase in the Company's share value in 2016 was accompanied by the improvement Recommendations of Analysts on the Company's of recommendations by energy market analysts. At Shares, Appendix the end of 2015, none of the energy market analysts recommended buying the Company's shares, whereas 2016 2 2 Dividend Policy in December 2016, 29% of analysts recommended 2016 6 buying the Company’s shares. 2 2016 6 and Profit Distribution 1 2016 6 201 6
When shaping our Dividend Policy, we are guided not only by the strict observance of u old Sell legal requirements, but also by the necessity to provide an optimal balance between the Source t e Compan s o n data shareholders’ interests, the Company’s business needs and the need to enhance the Company’s investment attractiveness and capitalisation. Company's Shares Price and Volume Dynamics on the MOEX
The principles of the Dividend Policy are set in the Regulations on Dividend Policy of PJSC FGC UES as approved by 20 0 the Board of Directors.
1 20 The full text of the In April 2016, the Russian government issued the revaluation of traded shares of its subsidiaries Regulations on Dividend a decree2 according to which the amount of and related income tax) according to accounting 10 Policy is available on dividends shall not be less than the larger of 2 (financial) statements, or 50% of the net profit the corporate website at amounts – either 50% of the net profit of the according to the consolidated financial statements 10 www.fsk-ees.ru/eng/ in company (excluding income and expenses from of the company. the Investors section.
0 0 06 01 1 06 11 1 06 0 1 06 11 1 06 0 16 06 11 16
rading volume n pcs Price o t e s ares op
1 The given DR price is an evaluation of the 1GDR price using the share price at the end of trading on the Moscow Stock Exchange (arbitrage of the receipt price). Calculation as per the formula: Price per 1 share on the MOEX / The CB of Russia’s exchange rate in $ to RUB * 500 (the number of shares in 1 GDR). 2 Decree No. 705-r of the Russian Government dated 18 April 2016.
130 PJSC FGC UES Annual Report 2016 131 Corporate Governance Report DIVIDEND POLICY AND PROFIT DISTRIBUTION Information Disclosure The General Meeting of Shareholders decides on dividend payments based on Despite the challenging market and recommendations made by the Board of and Communication with Investors S
Directors. The recommended dividend amount t economic situation in 2016, the Company r ate g is determined based on the Company’s paid dividends for 2015 in the amount of and Shareholders i c Federal Law No. 208-FZ of December 26, Re po r 1995, "On Joint Stock Companies", and the was a record event in the Company's decree No. 774-r of the Russian Government t dated 29 May 2006, and other legal acts of the dividend history. Information Disclosure System Russian Federation. Co rp o r a
QUESTION & ANSWER te G
Dividend History of PJSC FGC UES o v e r
2012–2014 2014 nanc e 2011 (for 2011– (for the 1st 2015 2016 (for 2010) 2013) Quarter of 2014) (for 2014) (for 2015) Re p Total amount of o r
Dividends Declared, RUB 2,577.7 436.8 847.4 16,976.6 t mln Finan c
Dividend per Share, RUB 0.0020524 0.0003427 0.0006647883 0.0133185 ial S tate m 4.44% 36% 25%2 95% as per RAS)
No dividends ent s were declared Georgy Reshetnikov Date of Declaration 29 June 2011 for 2011, 2012 27.06.2014 26.06.2015 29.06.2016 Interim Head of External
and 2013 App endi x Communications and Government 29 August 25.07.20143 30.07.20153 25.07.20163 RUB 100,037,019.63 Relations Department Date of Actual Payment 2011 20.08.20144 20.08.20154 15.08.20164 was transferred Dividend payment It's important for our stakeholders to have reliable information on the Company's performance. What does the Balance of Unpaid as dividends obligation Company’s do to provide this? Dividends5 (as of 31 cancelled due to the Federal 1.6 3.4 67.4 December 2016), RUB to end of the others. It's important to note that all of these audience mln dividend request Budget. period have. This rule works in most cases and we try to groups receive consistent and uniform information. follow it. Traditionally, Federal Grid Company gives the This is achieved through the implementation of the stakeholders a lot of information about its activities, Company's Information Policy that was developed in 2008 and updated in 2015 in accordance with the recommendations of the Russian Corporate Governance attention is surely paid to our work with the media. FGC Code. In addition, the Regulations on implementing 2012 2013 2014 2015 2016 UES not only processes 100% of incoming information the Information Policy were developed in 2016 and (for 2011) (for 2012) (for 2013) (for 2014 ) (for 2015 ) and dividends paid is presented in requests, but also provides a constant flow of outgoing approved by the Board of Directors in the beginning accordance with the resolutions messages on its performance in order to give journalists of 2017, which allowed to us formalise and arrange Retained pr of the Annual General Meetings an opportunity for direct communication with the coordination with JSC Rosseti and the Company's for the reporting period, - 2,468,359 - 24,501,917 - 25,897,521 4,699,940 17,870,137 of Shareholders (GMS): Company’s executives. During the past three years, the subsidiaries. incl.: Company has been one of the top three industry leaders GMS 2011 (for the year 2010) - Finally, the last block is aimed at identifying any by number of hits in the media. Minutes No. 11 dated 4 July 2011. reputation risks and inaccurate information in the Reserve Fund – – – 256,837 893,507 However, it is impossible to have one disclosure GMS 2012 (for the year 2011) - channel for work across all audience groups. information space is organised and the data thereof is Minutes No. 12 dated 2 July 2012. Development – – – – – Various departments are responsible for providing promptly sent to the Company's management. GMS 2013 (for the year 2012) - information to the consumers, the government, Dividend payment – – – 847,383 16,976,630 Minutes No. 13 dated 2 July 2013. suppliers, contractors, public organisations and GMS 2014 (for the year 2013) - Cover for losses of – – – 3,595,720 – Minutes No. 15 dated 30 June previous periods 2014.
GMS 2015 (for the year 2014) - The Information Policy of Federal Grid Company is and achieving the full realisation of their rights in order Minutes No. 16 dated 30 June aimed at ensuring the Company’s effective interaction to receive the relevant and reliable information required 2015. with shareholders, investors and other stakeholders for investment and management decisions. 2 Including dividends for the 1st quarter of 2014. GMS 2016 (for the year 2015) - 3 To nominees and trustees. Minutes No. 17 dated 4 July 2016. 4 To other persons registered in the Company's Shareholder Register. 5 Dividends are paid in full to all persons registered in the Company's Shareholder Register, except for those who had not promptly informed the register keeper of changes in their data, and whose dividend payment details are incorrect.
132 PJSC FGC UES Annual Report 2016 133 Corporate Governance Report INFORMATION DISCLOSURE AND COMMUNICATION WITH INVESTORS AND SHAREHOLDERS
The Company’s Disclosure Principles Public Relations — Regularity — Availability, Reliability, Federal Grid Company maintains close and constant communication with mass media and stakeholders, For information on the interaction with its stakeholders, including the the organisation of various sector events and projects The full text of the
Completeness and Comparability participation of PJSC government authorities, public organisations and the aimed at promoting the activities of the backbone grid Strategic Report — Consistency Regulations on the FGC UES in congresses mass media. To implement the Company’s policy in complex. The Company's PR projects are organised of Disclosures Information Policy and exhibitions, please this area, a Department of External Communications within the framework of the Unified Information Policy — Timeliness of PJSC FGC UES is see Appendix 1 hereto and Government Relations has been created and of PJSC Rosseti. available at the website operates actively in different spheres, including at www.fsk-ees.ru/ eng/ in the Investors / The Company avoids a formal approach to disclosure policy to ensure the effective disclosure of statutory Corporate governance / and goes beyond strict compliance with the applicable and additional information contributing to the increase Corporate documents Corporate Governance Report legislative requirements. The Company strives to of information openness and transparency of relations section. Interactions with Investors and Shareholders promptly inform its stakeholders on all the significant between the Company and its shareholders, creditors, facts and events related to its activities through various potential investors, professional participants of media outlets and channels, primarily electronic media. securities market, state bodies, the media and other The key objectives of the Company's IR Team are to feedback from this audience in order to understand stakeholders. raise awareness about the Company in the investment how certain decisions may impact the investors’ When providing information, the Company maintains a community and to provide effective interaction assessment of the Company. reasonable balance between its own interests and the The Regulations provide a list of additional information therewith in order to enhance investor confidence and interests of stakeholders, in particular with regard to that the Company undertakes to disclose beyond what The Corporate and Strategic Management Department increase the demand for the Company’s shares. restrictions on the access to insider information and is statutorily required. This includes information on the For details on the is responsible for close interaction with the investment commercial secrets. corporate governance system, the work of the governing Company’s compliance We consider an active dialogue with the investment community. bodies, the Company’s capital structure, financial with the Information community to be an important tool for obtaining The Regulations were developed based on activities and financial position. Policy, please see Financial Statements recommendations of the Russian Corporate Governance paragraphs 6.2 and 6.3 Code. These Regulations determine the information of the Report on the Company’s compliance Information on Minority Shareholders with principles and recommendations of the The Company’s key minority shareholders main comprise The share of foreign institutional investors, Corporate Governance 7 The Chairman of the Company’s Management Board The Corporate and Strategic Management institutional investors, with retail investors accounting including major international funds whose Code in Appendix 3 is responsible for the completeness and accuracy of Department analysed the information disclosed for 3%. assets under management exceed hereto. the information on the Company and its performance. by the Company in 2016 in accordance with USD 1 billion, such as the Kopernik Global Appendix In 2016, the largest foreign shareholders of the 6 He ensures the procedures of preparation, approval, the Regulations on the Company’s Information All-Cap Fund, the Vanguard International Company are the investment funds and mandates under 2 control of content and deadlines for information Policy and prepared the report on the Company’s Equity Index Fund, BlackRock funds and management of Prosperity Capital Management Ltd – disclosure, an appropriate document storage system observance of the Information Policy. the investment funds of some countries, in 5 2.1% collectively. and the functionality and safety of information The report on the Company’s observance of particular that of Norway and the United Arab resources. The Board of Directors is responsible for Information Policy is submitted for review to the Emirates, comprises 67% of the free float. List of Foreign Shareholders Collectively Holding monitoring compliance with the Company’s Information Company's Board of Directors. Policy. about 5% of the Company's Outstanding Shares Type of Disclosure Channels Name Country Investor Funds and Federal Grid Company uses various disclosure In addition to publishing information on its website, Prosperity Capital Cayman Foreign Investor Breakdown by Region channels, primarily electronic, which ensure the free, the Company discloses information on the websites Managing Management islands easy and indiscriminate access of information to all of of the Interfax agency, the Moscow Exchange, the companies 1 USA 36 its stakeholders. London Stock Exchange and in the printed version 10 11 State Street Bank and Banks and 2 C prus 18 of Rossiyskaya Gazeta, in addition to posting price- USA We regularly update our corporate website, Trust Company Trusts Ca man slands 9 sensitive information on the RNS international www.fsk-ees.ru/eng/, whose sections contain both 1 uxem ourg 7 information portal. Funds and 6 mandatory and voluntary disclosures on all areas of Kopernik Global All-Cap Great ritain 6 USA Managing the Company’s business, information for shareholders The Company pays special attention to important tools Fund 6 et erlands 5 companies and investors, customers, suppliers and employees, for communication with its shareholders, investors or a 4 the latest news and press releases, financial and other stakeholders such as the annual and social Funds and reland 4 Polunin Developing ritis irgin 3 statements, annual reports and reports on sustainable reports. We strive to constantly improve the quality of USA Managing Countries Fund slands development. We ensure that the structure of our our corporate reports, combining clear structure and companies 2 10 UAE website and its interactive tools provide quick and easy logic with the brevity and depth of the statements. 3 Sovereign 11 t er 5 access of to all the necessary information. Norges Bank Norway Wealth Funds Funds and Vanguard International USA Managing Equity Index Funds companies
The XIX Annual Report Competition organised by the Moscow Exchange: RECOGNITION — Best Information Disclosure on Corporate Governance in the Annual Report; Expert Community Evaluation of 2015 the — Best Information Disclosure on the Corporate Website. Annual Report of PJSC FGC UES
134 PJSC FGC UES Annual Report 2016 135 Corporate Governance Report INFORMATION DISCLOSURE AND COMMUNICATION WITH INVESTORS AND SHAREHOLDERS
"Meetings in such format have become a tradition that enable Foreign Investor Breakdown by Investment Type The majority of the Company's shares held by foreign the Company’s management to get direct feedback from market investors belongs to US companies – 36%. experts, thus improving the quality and efficiency of management
Over 50% of the Company's shares held by non- Strategic Report residents belong to funds and managing companies. decisions." 1 Andrey Murov, the Chairman of the Company's Management Board 1 an s and trusts 19 2 2 ro ers 8 t er 4 6 Pension and insurance 7 companies Corporate Governance Report Sovereign ealt unds 10 2017 Investor Calendar 6 Funds and anaging 52 companies Date Event/Location
Foreign Investor Breakdown by Investment Style Most investors consider the Company's shares as an undervalued asset (Value) or an asset with good February 28th 2016 Annual Results (RAS) prospects for value growth (Growth); an intermediate The Investor Calendar 6 1 position between these two approaches is a style of is constantly updated investing called GARP (Growth At Reasonable Price). March 23rd FY 2016 Financial Results (IFRS) 2 and available on the The "By Market" group consists of short-term investors Company website at Financial Statements who focus on the current situation of the market – www.fsk-ees.ru/eng/ in On or prior to Annual Financial Results as per requirements of Financial Conduct Authority (United 1 including brokers and hedge funds. The objectives for mar et 11 the Investors / Investor April 28th Kingdom) 2 GARP the Index Investor Group are various index solutions. 8 Calendar section. On or prior to Gro t 30 Q1 2016 Financial Results (RAS) ndex 9 April 28th alue 37 On or prior to 6 t ers 5 Q1 2017 Financial Results (IFRS) May 30th On or prior to Appendix Annual General Meeting of Shareholders IR Events June 30th On or prior to The Company's policy to increase investment H1 2017 Financial Results (RAS) — letters and emails with answers to investors’ and July 28th attractiveness for stock market participants includes shareholders’ questions; a series of events. In 2016, such events included the For details on the On or prior to — regular monitoring of the Company's share capital, H1 2017 Financial Results (IFRS) following: Company's IR events, which allows the organisation of the main groups August 29th — the Company’s IFRS financial results for 2015 were please see the website and types of investors in order to develop an optimal presented by the Head of the Financial Unit via at www.fsk-ees.ru/eng/ mechanism of interaction with them; October VTB Capital Investment Forum RUSSIA CALLING (Moscow) conference call; in the Investors / IR — actions to engage minority shareholders in voting releases section. — the Company's executives held one-on-one meetings On or prior to on items for the preparation for the Annual General with representatives of Russian and foreign Q3 2017 Financial Results (RAS) Meeting of Shareholders; October 30th investment companies in the framework of the VTB On or prior to Capital Investment Forum “RUSSIA CALLING”; — an annual business lunch of the Chairman of the Q3 2017 Financial Results (IFRS) Management Board with the representatives and November 30th — regular communication by the Corporate and analysts of the investment community. Strategic Management Department with the analysts Annual Meeting of the Company's executives with the investment community of investment banks in order to give them information December (Moscow) to update of the Company's investment models; A list of investment analysts monitoring the Company’s performance is available on the website at www.fsk-ees. ru/eng/ in the Investors / IR Team Contacts Analysts Coverage In December, the Chairman of the Company's Management Board, Andrey Murov, and the heads of the section. Telephone: 8 (800) 200-18-81 Fax: +7 (495) 710-96-41 Company’s key units, held a business lunch with the representatives of the investment community and business analysts to discuss the Company’s performance in 2016, as well as its mid-term plans. This was the fourth meeting held in such format. As a result, it was agreed to continue an active dialogue with the purpose of Egor Toropov Alexey Novikov informing investors on the Company's performance and in order to obtain feedback from industry experts. Telephone: 8 (800) 200-1881 extension 22-75 Telephone: 8 (800) 200-18-81 extension 21-43 E-mail: [email protected] E-mail: [email protected]
136 PJSC FGC UES Annual Report 2016 137 BASIC FORMS OF ANNUAL ACCOUNTING STATEMENTS Financial Statements OF FEDERAL GRID COMPANY
RSM RUS LTD We believe that the audit evidence obtained in the course of the audit provides sufficient basis to express our opinion on 4 Pudovkina street. the reliability of the accounting statements. Moscow, 119285, Russia
T: +7 495 363 2848 Strategic Report F: +7 495 9814121 Opinion E: [email protected] In our opinion, the accounting statements fairly present, in all material respects, the financial standing of FGC UES, PJSC www.rsmrus.ru as of December 31, 2016, its financial performance and its cash flows for the year 2016 in accordance with the Russian Accounting Standards. 20.02.2017 № РСМ-1115
Independent Auditor’s Report on the Accounting Corporate Governance Report Chairman of the Management Board Audit Leader Auditor qualification certificate No. 05-000015 issued Auditor qualification certificate No. 05-000030 is issued Statements for 2016 pursuant to resolution No. 24 of the Self-Regulatory pursuant to the resolution (minutes No. 25) of the Self- Organization of Auditors Non-Commercial Partnership Regulatory Organization of Auditors Non-Commercial to the Shareholders of FGC UES, PJSC “Russian Collegium of Auditors” (dated November 15, Partnership “Russian Collegium of Auditors” (dated 2011) for an indefinite period of time. November 30, 2011) for an indefinite period of time. Auditor: PREN in the register of auditors and audit PREN in the register of auditors and audit Audited entity: organizations – 21706004215. organizations – 21706004441. Limited Liability Company RSM RUS. Federal Grid Company of Unified Energy System, PUBLIC JOINT-STOCK COMPANY (short name – Place of business: 4 Pudovkina St., Moscow, Russia, N.A. Dantser N.N. Usanova FGC UES, PJSC). 119285 Financial Statements Place of business: 5a Akademika Chelomeya St., Telephone: (495) 363-28-48; fax: (495) 981-41-21; Moscow, Russia, 117630 Principal State Registration Number – 1027700257540. Principal State Registration Number – 1024701893336.
Limited Liability Company RSM RUS is a member of the Self-Regulatory Organization of Auditors “Association Sodruzhestvo” (membership certificate No. 6938, Principal Number of Registration Entry (PREN) – 11306030308), place of business: 21 Michurinsky Avenue, Bldg. 4, Moscow, Russia, 119192 Appendix
We have conducted an audit of the enclosed accounting statements of FGC UES, PJSC, consisting of the Balance Sheet as of December 31, 2016, the Profit and Loss Statement, the Statement of Changes in Equity, and the Cash Flow Statement for 2016, written appendices to the annual accounting statements. Responsibility of the audited entity for the accounting statements Management of FGC UES, PJSC is responsible for the preparation and fair presentation of these accounting statements in accordance with the Russian Accounting Standards and for designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of accounting statements which are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on the reliability of these accounting statements based on our audit. We conducted the audit in accordance with the federal auditing standards. These standards require that we comply with applicable ethical norms and plan and perform an audit in such a manner as to obtain reasonable assurance whether the accounting statements are free of any material misrepresentation. Our audit involved performance of auditing procedures aimed at obtaining audit evidence about the amounts and disclosures in the accounting statements. The selected auditing procedures are a matter of our judgment, which is founded on the assessment of the risk of material misrepresentation due to malpractice or error. In the course of assessment of this risk, we reviewed the internal control system ensuring the preparation and reliability of the accounting statements in order to select appropriate auditing procedures but not to state our opinion regarding the efficiency of the internal control system. The audit also included evaluation of the appropriateness of the existing accounting policies and the reasonableness of accounting estimates made by the management of the audited entity, as well as evaluation of the overall presentation of the accounting statements.
RSM RUS LLC is a member of the RSM network and operates as RSM. RSM is a trademark used by members of the RSM network. The RSM network consists of independent accounting and consulting companies, performing independent activities. The RSM network itself does not constitute a separate legal entity in any jurisdiction.
138 PJSC FGC UES Annual Report 2016 139 BASIC FORMS OF ANNUAL ACCOUNTING STATEMENTS Financial Statements OF FEDERAL GRID COMPANY
A A CE S EE Annex to rder o t e R ian ini tr o Finance o n ndicator A o ece er A o ece er A o ece er dated J a revi ed rder o t e R ian code a o ece er ini tr o Finance o n dated cto er ote A
C ES III. CAPITAL and RESERVES Strategic Report S are capita contri ted capita a t ori ed nd U For o S o Annexe contri tion o partner rgani ation ublic oint toc ompany ederal rid ompany ate ear ont da S are rep rc a ed of Unified Energy System” a per P Reva ation o non c rrent a et Tax identification code 4716016979 S o Annexe Additiona capita it o t reva ation Activit power transmission a per E Re erve capita For o corporate entit incorporation or o o ner ip public joint-stock a per PF FS Undistributed profit (uncovered loss), Corporate Governance Report company/mixed Russian assets with a federal share inc ding Undistributed profit of past years Unit RUB thousand a per E Undistributed profit of the reporting year Uncovered o o t e reporting ear ocation addre 5A Akademika Chelomeya Street, Moscow, Russia, 117630 Approva date Uncovered o o pa t ear ai ing acceptance date TOTAL for Section III 1300 987,000,569 885,386,179 854,489,570 ndicator A o ece er A o ece er A o ece er IV. LONG-TERM LIABILITIES ote ASSE code S o Annexe orro ing and oan e erred tax ia i itie I. NON-CURRENT ASSETS E ti ated ia i itie
S o ote Financial Statements S o Annexe ntangi e a et t er ia i itie S o ote S o Annexe Re earc and deve op ent re t TOTAL for Section IV 1400 286,824,380 294,158,912 267,435,690 Fixed a et S o ote V. SHORT-TERM LIABILITIES S o Annexe inc ding orro ing and oan and p ot and nat ra re o rce S o ote S o Annexe Acco nt pa a e inc ding i ding ac iner and e ip ent tr ct re pp ier and contractor other fixed assets pa a e to e p o ee nco e earing inve t ent in tangi e a et S o ote pa a e to tate non dgetar nd
S o Annexe Financia inve t ent Appendix taxe and ee pa a e e erred tax a et advance received S o ote t er non c rrent a et inc ding ot er creditor inve t ent into non c rrent a et pa a e to e er o nder S o Annexe ot er non c rrent a et e erred inco e S o ote S o Annexe advance again t non c rrent a et E ti ated ia i itie S o Annexe e ip ent or in ta ation t er ia i itie TOTAL for Section I 1100 1,183,264,138 1,124,338,485 1,117,920,595 S o ote TOTAL for Section V 1500 92,348,848 88,756,355 109,291,706 II. CURRENT ASSETS BALANCE S o ote nventor 1700 1,366,173,797 1,268,301,446 1,231,216,966 S o Annexe inc ding ra ateria ateria and ot er i i ar a et finished goods and goods for sale a e added tax on p rc a ed ote to t e a ance S eet and State ent o Financia Per or ance or a et Annexe to t e ann a Financia State ent S o ote Acco nt receiva e S o Annexe inc ding Acco nt receiva e pa ent are expected over ore t an ont pon t e a ance eet date inc ding c to er and con er C ie Exec tive A E rov C ie Acco ntant A P o ov advance pa ent ade ot er de tor ignat re print na e ignat re print na e Acco nt receiva e pa ent are expected it in ont ro t e a ance eet date inc ding c to er and con er Fe r ar a o nt o ed e er o nder a are capita pa ent F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix advance pa ent ade ot er de tor S o ote Financia inve t ent S o Annexe except ca e iva ent S o Annexe Ca and ca e iva ent S o Annexe t er c rrent a et TOTAL for Section II 1200 182,909,659 143,962,961 113,296,371
BALANCE 1600 1,366,173,797 1,268,301,446 1,231,216,966
F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix
140 PJSC FGC UES Annual Report 2016 141 BASIC FORMS OF ANNUAL ACCOUNTING STATEMENTS Financial Statements OF FEDERAL GRID COMPANY
For p S A E E F F A C A RESU S Annex to rder o t e R ian ini tr o Finance o n dated J a revi ed rder o t e R ian
A o ece er Strategic Report or ini tr o Finance o n dated cto er A o ece er ote ndicator na e
C ES FOR REFERENCE U For o S o Annexe Result of the fixed assets revaluation, not included in the net profit (loss) for the period rgani ation ublic oint toc ompany ederal rid ompany ate ear ont da of Unified Energy System” Gain or o ro ot er operation not inc ded in t e net a per P profit for the period Tax identification code 4716016979 Total financial result for the period Corporate Governance Report Activit power transmission a per E S o Annexe a ic earning o per are For o corporate entit incorporation or o o ner ip public joint-stock a per PF FS i ted earning o per are company/mixed Russian assets with a federal share ote to t e a ance S eet and State ent o Financia Per or ance or Unit RUB thousand a per E Annexe to t e ann a Financia State ent
For t e a e For t e repor Financial Statements ote ndicator ting period period o t e a t C ie Exec tive A E rov C ie Acco ntant A P o ov ear e cription Code ignat re print na e ignat re print na e General income and expenses Reven e ro a e o good prod ct and ervice net o A exci e d tie and ot er Fe r ar i i ar andator pa ent inc ding
F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix Appendix ervice or e ectric po er tran i ion ot er activit S o ote Prod ction co t o good prod ct and ervice o d inc ding ervice or e ectric po er tran i ion ot er activit Gross profit (2110 + 2120) Co ercia expen e S o ote Ad ini trative expen e Profit (loss) from sales (2100 + 2210 + 2220) nco e ro participation in ot er co panie ntere t inco e ntere t expen e S o Annexe t er inco e S o Annexe t er expen e Profit (loss) before tax (2200 +2310 + 2320 + 2300 124,320,047 27,884,261 2330 + 2340 + 2350)
S o Annexe C rrent inco e tax inc ding permanent tax liabilities S o Annexe C ange in de erred tax ia i itie S o Annexe C ange in de erred tax a et t er inc ding Other similar mandatory payments Income tax adjustment for the previous periods Net profit (loss) for the reporting period 2400 106,070,911 17,870,137
F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix
142 PJSC FGC UES Annual Report 2016 143 BASIC FORMS OF ANNUAL ACCOUNTING STATEMENTS Financial Statements OF FEDERAL GRID COMPANY rea r are rep rc a ed Undi tri ted A t ori ed ro Additiona Re erve profits (uncov ndicator na e Code capita are o der capita capita ered o ota
Annex to rder o t e R ian ini tr For 2016 г.3 o Finance o n dated J S A E E F C A GES E U a revi ed rder o t e R ian ini tr ncrea e in capita va e tota o Finance o n dated cto er inc ding
or Strategic Report net profit х х х х C ES propert reva ation х х х х х inco e re ating direct to t e increa e х U For o in capita va e rgani ation ublic oint toc ompany ederal rid ompany ate ear ont da additiona i e o are х х of Unified Energy System” a per P increa e o are х х
Tax identification code 4716016979 deno ination reorgani ation o ega entit Corporate Governance Report Activit power transmission a per E Red ction o capita va e tota For o corporate entit incorporation or o o ner ip public joint-stock a per PF FS inc ding company/mixed Russian assets with a federal share o х х х х х х Unit thousand RUR i ion RUR a per E propert reva ation х expen e re ating direct х х х to t e red ction o capita va e decrea e o are х deno ination red ction o are antit х 1. Changes in equity reorgani ation o ega entit dividend х х х х Financial Statements rea r are ot er rep rc a ed Undi tri ted A t ori ed ro Additiona Re erve profits (uncov C ange in t e additiona capita х х х ndicator na e Code capita are o der capita capita ered o ota C ange in t e re erve capita х х х х Capita va e a o ece er Capita va e a o ece er 2. Corrections due to changes in the accounting policy and errors elimination For p For 2015 г.2 C ange in e it or A o ece er d e to ot er A o ece er due to net profit Appendix ncrea e in capita va e tota ndicator na e Code o actor inc ding net profit х х х х Equity — total propert reva ation х х х e ore correction inco e re ating direct х х х correction d e to to t e increa e c ange in t e acco nting po ic in capita va e error e i ination additiona i e х х a ter correction o are inc ding increa e o are х х deno ination retained earning reorgani ation ncovered o o ega entit e ore correction ot er correction d e to c ange in t e acco nting po ic error e i ination For p a ter correction ot er capita ite rea r are ect to correction rep rc a ed Undi tri ted per ite A t ori ed ro Additiona Re erve profits (uncov ndicator na e Code capita are o der capita capita ered o ota e ore correction correction d e to Red ction o capita va e tota c ange in t e acco nting po ic
inc ding error e i ination х х х o х a ter correction propert reva ation х х х expen e re ating direct х х х 3. Net assets to t e red ction o capita va e A o ece er A o ece er A o ece er ndicator na e Code decrea e o are х deno ination Net assets 987,695,490 red ction o are antit х reorgani ation o ega entit dividend х х х х C ange in t e additiona capita х х х C ange in t e re erve capita х х х х C ie Exec tive A E rov C ie Acco ntant A P o ov Capita va e a o ece er ignat re print na e ignat re print na e Fe r ar
F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix ote e ear preceding t e previo ear i indicated e previo ear i indicated e reporting ear i indicated F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix
144 PJSC FGC UES Annual Report 2016 145 BASIC FORMS OF ANNUAL ACCOUNTING STATEMENTS Financial Statements OF FEDERAL GRID COMPANY
Annex to rder o t e R ian ini tr o Finance o n dated J CAS F S A E E a revi ed rder o t e R ian ini tr o Finance o n dated cto er ndicator na e Code For For
or Strategic Report Cash flows from financial transactions C ES Receipt tota inc ding U For o o taining o credit and oan ate ear ont da rgani ation ublic oint toc ompany ederal rid ompany onetar contri tion o o ner e er of Unified Energy System” a per P ro i e o are participator intere t increa e Tax identification code 4716016979 ro i e o ond pro i or note and ot er de t ec ritie Corporate Governance Report Activit power transmission a per E ot er receipt For o corporate entit incorporation or o o ner ip public joint-stock a per PF FS Pa ent tota inc ding company/mixed Russian assets with a federal share to o ner e er d e to rep rc a e o are participator intere t o t eir organi ation or t eir ce ation o e er ip Unit RUB thousand a per E or pa ent o dividend and ot er di tri tion pa ent profit to owners (members) d e to t e pa ent o pro i or note and ot er de t ec ritie repa ent o credit and oan ot er pa ent Cash flow balance from financial operations Cash flow balance for the reporting period 4400 14,030,529 (17,503,024) Cash and cash equivalents balance as of the beginning 4450 21,977,309 39,480,333 Financial Statements ndicator na e Code For For of the reporting year Cash and cash equivalents balance as of the end 4500 36,007,838 21,977,309 Cash flows from current transactions of the reporting year Receipt tota n ence o oreign c rrenc c ange ver RUR inc ding ro a e o prod ct good or and ervice ea e pa ent icen e ee ro a tie co i ion c arge and ot er i i ar pa ent from resale of financial investments Appendix ot er receipt Pa ent tota inc ding to pp ier contractor or ra ateria ateria or and ervice re neration o a or de ent re intere t C ie Exec tive A E rov C ie Acco ntant A P o ov corporate tax ignat re print na e ignat re print na e ot er pa ent a ance o ca o ro c rrent tran action Cash flows from investment transactions Receipt tota inc ding Fe r ar from sale of fixed assets (except financial investments) F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix ro a e o ot er co panie are participator intere t ro repa ent o granted oan ro a e o de t ec ritie c ai or ca again t t ird partie dividends, interest on debt financial investments and other similar income ro participator intere t in ot er co panie dget id ot er receipt Pa ent tota inc ding pa ent a ociated it t e ac i ition e ta i ent pgrading reconstruction and preparation for the use of fixed assets ro p rc a e o ot er co panie are participator intere t ro p rc a e o de t ec ritie c ai or ca again t t ird partie granting oan to t ird partie de ent re intere t inc ded in t e inve t ent a et va e ro dget id ot er pa ent a ance o ca o ro inve t ent tran action
F ver ion o ann a acco nting tate ent o Federa Grid Co pan or i provided in Appendix
146 PJSC FGC UES Annual Report 2016 147 BASIC FORMS OF CONSOLIDATED FINANCIAL Financial Statements STATEMENTS OF FGC UES GROUP
RSM RUS LTD 4 Pudovkina street. Revaluation and impairment of property, plant and equipment Moscow, 119285, Russia In our opinion, this matter was one of most significance in our audit due to a significant share of property, plant and
T: +7 495 363 2848 equipment in total assets of the Group, high level of subjectivity of assumptions used to determine the fair value as Strategic Report F: +7 495 9814121 well as materiality of judgments and estimates made by the management in determining the replacement cost of E: [email protected] property, plant and equipment. www.rsmrus.ru The majority of the Group’s property, plant and equipment is specialized in nature and is rarely sold on the open mar- 21.03.2017 № РСМ-1810 ket other than as part of a continuing business, making it impossible to use market-based approaches for determin- ing its fair value. Consequently the fair value of such items is primarily determined by the Group using depreciated replacement cost valuation method. Corporate Governance Report Independent Auditor’s Report We have performed procedures of analysis and testing of the model used in making the estimates, assessment of adequacy of assumptions underlying the estimates, including assumptions in respect of projected revenue, tariffs To: the Shareholders of PJSC «FGC UES» decisions, discount rates etc. We have also reviewed the relevant controls in respect of the estimates, consideration by management of estima- tion uncertainty and changes in approaches as compared to the previous period. We have reviewed the actual out- Audited entity: Auditor: comes of the use of the model to obtain sufficient and appropriate audit evidence about whether the management Public Joint-Stock Company “Federal Grid Company RSM RUS Ltd. in making the estimates complied with IFRS requirements, the methods used in estimates of tests are appropriate of Unified Energy System” (abbreviated name (“FGC and are applied consistently and the changes in estimates are reasonable based on information available at the date Location: 4, Pudovkina Str., Moscow, 119285; UES”). of preparation of the accounts. Tel.: (495) 363-28-48; Fax: (495) 981-41-21; Location: 5A Akademika Chelomeya Street, Moscow For testing the model of estimate and underlying assumptions, we have engaged an expert in accordance with the 117630, Russian Federation; Primary state registration number – 1027700257540; procedure established by ISA. Financial Statements Primary state registration number – 1024701893336. We have evaluated the accuracy and sufficiency of information disclosure in the consolidated financial statements o about determination of the fair value of property, plant and equipment, including information about uncertainties taken into consideration when making the estimates. RSM RUS Ltd. is a member of Self-regulatory organization of auditors Association “Sodruzhestvo” (membership certificate # 6938, ORNZ 11306030308), location: 21, Michurinsky Ave., bldg. 4, Moscow, 119192. Information about the manner of determining the fair value of the Group’s property, plant and equipment is provided in Note 6 “Property, plant and equipment” to the consolidated financial statements. Appendix Opinion Impairment of accounts receivable In our opinion, this matter was one of most significance in our audit due to significant balances of accounts receiva- We have audited the consolidated financial statements ofPJSC “FGC UES” and its subsidiaries (the Group), ble as at 31 December 2016. The management estimate of recoverability of accounts receivable is complex, largely which comprise the Consolidated Statement of Financial Position as of 31 December 2016, and the Consolidated subjective and based on the assumptions, in particular, forecasting financial solvency of the Group’s counterparties. Statement of Profit or Loss and Other Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows for the year then ended and notes to the consolidated financial statements, We have performed procedures of evaluation of the adequacy of the Group’s policy on reviewing accounts receiv- including a summary of significant accounting policies. able and determining if allowance for impairment should be accrued, as well as procedures of confirming the rea- sonableness of the estimates made by the management of the Group, including specific characteristics of specific In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the con- clients, their financial solvency, dynamics of collection of accounts receivable, payments and arrangements after the solidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and balance-sheet date, as well as review of expected future cash flows. its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Accrued allowance for impairment of accounts receivable is disclosed by the Group in Notes 6, 10 and 13 to the consolidated financial statements.
Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under Assessment of control and significant influence those standards are further described in the Auditor’s Responsibilities for the Audit of the consolidated Financial in respect of the Group entities Statements section of our report. We are independent of the Group in accordance with the International Ethics In our opinion, this matter was one of most significance in our audit of the consolidated financial statements Standards Board for Accountants` Code of Ethics for Professional Accountants (IESBA Code) together with the because in July, 2016 the Group lost control over the subsidiary OJSC “Nurenergo” following the court ruling. As a ethical requirements that are relevant to our audit of the consolidated financial statements in Russian Federation, result, gain from loss of control in the amount of RUB 11,868 mln. was recognized in the accounts. In January, 2017 and we have fulfilled our other ethical responsibilities in accordance with these requirements and IESBA Code. We following the ruling of the court of appeal, the previous court decision was revoked, as a result, the Group again believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. obtained control over OJSC “Nurenergo”. We have performed procedures of evaluation of completeness and accuracy of recognition of transactions related to loss of control in the consolidated financial statements, as well as subsequent disclosures of post-balance-sheet Key Audit Matters events related to regaining control. Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Information about changes in the Group is provided in Notes 2 and 30 to the consolidated financial statements. consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters
RSM RUS LLC is a member of the RSM network and operates as RSM. RSM is a trademark used by members of the RSM network. The RSM network consists of independent accounting and consulting companies, performing independent activities. The RSM network itself does not constitute a separate legal entity in any jurisdiction.
148 PJSC FGC UES Annual Report 2016 149 BASIC FORMS OF CONSOLIDATED FINANCIAL Financial Statements STATEMENTS OF FGC UES GROUP
Recognition of income from revaluation of available-for-sale — Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business financial investments activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. In our opinion, this matter was one of most significance in our audit of the consolidated financial statements -be cause a significant income from revaluation of available-for-sale financial investments in the amount of RUB 53,040 We communicate with the Audit Committee of the Board of Directors regarding, among other matters, the planned Strategic Report mln. is recognized in the consolidated financial statements. This income was formed as result of significant growth scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control of quotations of the Group’s financial investments in shares of PJSC “Inter RAO”. that we identify during our audit. We have performed procedures of evaluation of completeness and accuracy of recognition of income from revalu- We also provide the Audit Committee of the Board of Directors with a statement that we have complied with relevant ation of financial investments in the consolidated financial statements, analyzed if there were fundamental factors ethical requirements regarding independence, and to communicate with them all relationships and other matters of the growth of the market value of shares of PJSC “Inter RAO” and reviewed the completeness of disclosure in the that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
consolidated financial statements. Corporate Governance Report From the matters communicated with the Audit Committee of the Board of Directors, we determine those matters Information about changes in quotations of shares is provided by the Group in Note 9 to the consolidated financial that were of most significance in the audit of the consolidated financial statements of the current period and are statements. therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to Responsibilities of Management and the Audit Committee of the Board outweigh the public interest benefits of such communication. of Directors for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in ac- cordance with International Financial Reporting Standards, and for such internal control as management determines Management Board Chairperson Manager responsible for the audit is necessary to enable the preparation of consolidated financial statements that are free from material misstate- Audit Certificate No. 05-000015. Issued following Audit Certificate No. 05-000030. Issued following ment, whether due to fraud or error. Resolution of self-regulatory organization Not-for-Profit Resolution of self-regulatory organization Not-for-Profit Financial Statements Partnership “Russian Collegium of Auditors” dated 15 Partnership “Russian Collegium of Auditors” dated 30 In preparing the consolidated financial statement, management is responsible for assessing the Group’s ability to November 2011 No. 24. Permanent award. November 2011 No. 25. Permanent award. continue as a going concern, disclosing, as applicable, matters related to going concern and using the going con- cern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no ORNZ in the Register of auditors and audit ORNZ in the Register of auditors and audit realistic alternative but to do so. organizations – 21706004215 organizations – 21706004441 The Audit Committee of the Board of Directors is responsible for overseeing the Group’s financial reporting process. Appendix Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements N.A. Dantser N.N.Usanova Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepti- cism throughout the audit. We also: — Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. — Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. — Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. — Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. — Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation;
150 PJSC FGC UES Annual Report 2016 151 BASIC FORMS OF CONSOLIDATED FINANCIAL Financial Statements STATEMENTS OF FGC UES GROUP
PJSC “FGC UES” PJSC “FGC UES” Consolidated Statement of Financial Position in millions of Russian Rouble unless otherwise stated) Consolidated Statement of Profit or Loss and Other Co pre en ive nco e Strategic Report in millions of Russian Rouble unless otherwise stated) 31 December 31 December ear ended ear ended Notes 2016 2015 31 December 2015 Notes 31 December 2016 ASSE S on-current assets Revenues 21 255,603 187,041 Property, plant and equipment 6 846,695 821,114 t er operating inco e 21 6,039 4,001 Intangible assets 7 7,320 7,752 Operating expenses 22 (155,508) (130,963) Corporate Governance Report nve t ent in a ociate and oint vent re 1,160 1,691 Gain on derecognition of subsidiary 30 11,868 Available-for-sale investments 76,537 22,271 Impairment and revaluation loss on property, plant and equipment, net 6 (38,155) (2,850) Deferred income tax assets 16 14 260 Operating profit , , Long-term accounts receivable 10 45,145 15,180 Finance inco e 23 6,974 8,701 Other non-current assets 10 1,853 1,799 Finance co t 24 (8,010) (9,635) otal non-current assets , , S are o o o a ociate (327) (8) and oint vent re Current assets Profit before income tax , , Cash and cash equivalents 11 44,404 28,176 Income tax expense 16 (10,102) (12,189) Bank deposits 12 450 30,269 Profit for the period , , Accounts receivable and prepayments 13 58,187 50,043 Other comprehensive income / (loss) Income tax prepayments 305 432 Items that will not be reclassified subsequently Financial Statements nventorie 14 14,900 16,063 to profit or loss t er c rrent a et 140 278 Change in revaluation reserve for property, plant and equipment 6 14,280 117 otal current assets , , Remeasurements of retirement benefit 18 1,500 (3,005) obligations O AL ASSE S , , , Income tax relating to items 16 (2,948) 570 that will not be reclassified E U A L AB L ES Total items that will not be reclassified , (2,318) Equity to profit or loss Share capital: Ordinary shares 15 637,333 637,333
Items that are or may be reclassified subsequently Appendix rea r are 15 (4,719) (4,719) to profit or loss S are pre i 10,501 10,501 Change in fair value of available-for-sale 54,266 7,776 Reserves 15 281,759 229,578 inve t ent Accumulated deficit (198,273) (252,980) Foreign c rrenc tran ation di erence (204) (152) Equity attributable to s are olders of FGC UES , , Income tax relating to items that may (10,853) (1,556) be reclassified 16 Non-controlling interest 1,816 (75) Total items that are or may be reclassified , , otal equity , , to profit or loss Other comprehensive income for the period, , , on-current liabilities net of income tax Deferred income tax liabilities 16 25,433 14,589 Total comprehensive income for the period , , Non-current debt 17 236,954 250,076 Profit / (loss) attributable to: e erred inco e 919 1,105 Shareholders of FGC UES 25 68,159 44,768 Retirement benefit 18 5,959 7,357 Non-controlling interest 223 (670) obligations Total comprehensive income / (loss) attributable to: otal non-current liabilities , , Shareholders of FGC UES 123,705 48,499 718 Current liabilities Non-controlling interest (651) 25 . Accounts payable to shareholders of FGC UES 73 6 Earnings per ordinary share for profit attributable to shareholders . of FGC UES – basic and diluted (in Russian Rouble) Current debt and current portion 17, 19 29,660 31,466 of non-current debt Accounts payable and accrued charges 20 62,059 71,036 e acco pan ing note are an integra part o t e e Con o idated Financia State ent Income tax payable 7,636 55 Full version of consolidated financial statements of FGC UES Group for 2016 is provided in Appendix 14. otal current liabilities , , otal liabilities , , O AL E U A L AB L ES , , ,
Authorised for issue and signed on behalf of the Management Board:
21 March 2017
Chairman of the Management Board A.E. Murov
Head of Accounting and Financial Reporting – Chief Accountant A.P. Noskov
e acco pan ing note are an integra part o t e e Con o idated Financia State ent Full version of consolidated financial statements of FGC UES Group for 2016 is provided in Appendix 14.
152 PJSC FGC UES Annual Report 2016 153 BASIC FORMS OF CONSOLIDATED FINANCIAL Financial Statements STATEMENTS OF FGC UES GROUP
PJSC “FGC UES” PJSC “FGC UES” Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity in millions of Russian Rouble unless otherwise stated) in millions of Russian Rouble unless otherwise stated) Strategic Report
Attributable to s are olders of FGC UES ear ended ear ended Notes 31 December 2016 31 December 2015 Accumu- Non- S are S are rea r ated contro ing ota CASH FLOWS FROM OPERATING , , Notes capita pre i are Reserves deficit ACTIVITIES: ota intere t equity Profit before income tax As at January , , (4,719) , (252,980) , (75) , Adjustments to reconcile profit Total comprehensive income for the period Corporate Governance Report before income tax to net cash provided by operations Profit for the period 68,159 68,159 223 68,382 Depreciation of property, plant and equipment 22 39,397 39,447 Other comprehensive income / (loss), net of related income tax (Gain) / loss on disposal of property, plant and equipment 22 (72) 3,699 erecognition o reva ation (3,365) 3,365 15 Amortisation of intangible assets 22 1,330 1,481 reserve on disposed property, p ant and Impairment and revaluation loss of property, plant and equipment, net 6 38,155 2,850 equipment Gain on derecognition of subsidiary 30 (11,868) Change in revaluation reserve for property, 6, 15 10,929 10,929 495 11,424 S are o re t 327 plant and equipment o a ociate C ange in air va e 9, 15 43,413 43,413 43,413 Accrual of allowance for doubtful debtors 22 2,666 7,063 of available-for-sale inve t ent Accrual of other provision for liabilities and charges 20 2,502 434 Remeasurements 15, 18 1,408 1,408 1,408 Finance inco e 23 (6,974) (8,701) of retirement benefit Financial Statements Finance co t 8,010 9,635 obligations Other non-cash operating income 24 (39) (74) Foreign c rrenc tran ation di erence 8, 15 Operatin cas flo s before orkin capital c an es (204) (204) (204) and income tax paid , , Total other comprehensive income , , , , or in capital chan es Total comprehensive income for the period 52,181 71,524 123,705 718 124,423 Increase in accounts receivable and prepayments (43,273) (12,824) ransactions it s are olders of FGC UES recorded directly in equity Decrease / (increase) in inventories 1,144 (5,607) ividend dec ared (16,817) (16,817) (1) (16,818) (Increase) / decrease in other non-current assets (69) 387 otal transactions (16,817) (16,817) (1) (16,818) it s are olders of FGC UES Increase in accounts payable and accrued charges 5,865 Appendix 7,375 C an es Decrease in retirement benefit (511) (2,833) in o ners ip obligations Derecognition of subsidiary 1,174 1,174 Income tax (paid) / received (5,108) 906 otal c an es 1,174 1,174 et cas enerated , , in o ners ip by operating activities As at 31 December 2016 , , (4,719) , (198,273) , , , CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (78,872) (75,604) e acco pan ing note are an integra part o t e e Con o idated Financia State ent Proceeds from disposal of property, plant and equipment 4,864 1,980 Full version of consolidated financial statements of FGC UES Group for 2016 is provided in Appendix 14. Purchase of intangible assets (898) (948) Redemption of promissory notes 206 667 Investment in bank deposits (5,257) (30,422) Redemption of bank deposits 35,085 337 ividend received 353 21 oan given (18) (1,000) Purchase of subsidiary (4) (293) Sale of subsidiary 14 568 ntere t received 6,569 7,452 Net cash used in investing (37,958) (97,242) activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from non-current borrowings 10,165 40,099 Proceeds from current borrowings 350 Repayment of current and non-current borrowings (23,172) (23,210) Repayment of lease (150) (150) ividend paid (16,751) (840) ntere t paid (27,732) (30,572) Net cash used in financing (57,290) (14,673) activities Net increase / (decrease) , (13,892) in cash and cash equivalents Cash and cash equivalents at the beginning of the period 11 , , Cash and cash equivalents at the end of the period 11 , ,
e acco pan ing note are an integra part o t e e Con o idated Financia State ent Full version of consolidated financial statements of FGC UES Group for 2016 is provided in Appendix 14.
154 PJSC FGC UES Annual Report 2016 155 BASIC FORMS OF CONSOLIDATED FINANCIAL Financial Statements STATEMENTS OF FGC UES GROUP Disclaimer PJSC “FGC UES” Consolidated Statement of Changes in Equity
(in millions of Russian Rouble unless otherwise stated) Str This Annual Report includes, among other things, By their nature, forward-looking statements involve statements regarding the Company’s future operations ate gic Attributable to shareholders of FGC UES based on management’s current forecasts and which may cause the relevant assumptions, forecasts, assessments. There are a number of objective factors projections and other forward-looking statements to not Re po rt Accumu- Non-con- that could cause the actual results to differ from the materialise. In view of the above risks, uncertainties and Share Share Treasury lated trolling Total above forecasts and assessments. assumptions, the Company warns that the actual results Notes capital premium shares Reserves deficit Total interest equity may differ materially from those expressed or implied,
The Annual Report contains certain forward-looking C
As at 1 January 2015 637,333 10,501 (4,719) 226,382 (297,237) 572,260 971 573,231 and such forward-looking statements are true only as of orpo r statements regarding the Company’s business Total comprehensive income for the period the date of the Annual Report’s publication.
Profit for the period — — — — 44,768 44,768 (670) 44,098 as its business plans, projects and expectations. In The Company neither promises nor guarantees that the ate
Other comprehensive income / (loss), net of related income tax addition, this Annual Report may include estimates of above results will be achieved. The Company shall not Gover Change in revaluation reserve for property, price changes, production and consumption volumes, be held liable for any losses incurred by legal entities or plant and equipment 15 — — — 75 — 75 19 94 costs, expenses, development prospects and other individuals who relied on forward-looking statements. nan c Change in fair value of available-for-sale similar factors, as well as forecasts on industry and Such forward-looking statements represent, in each
9, 15 — — — 6,221 — 6,221 — 6,221 e Re po rt investments market development, and start and end dates of certain case, only one of many possible scenarios and should Remeasurements projects of the Company. not be viewed as the most likely scenario. — of retirement benefit 15, 18 — — — (2,413) — (2,413) (2,413) obligations Except as required by the applicable legislation, use of such terminology as “intend,” “strive,” “project,” the Company does not undertake any obligation to Foreign currency translation 8, 15 (152) — (152) — (152) Finan c difference — — — “expect,” “estimate,” “plan,” “anticipate,” “assume,” “may,” publicly release any updates or revisions of such Total other comprehensive income — — — 3,731 — 3,731 19 3,750 “could be,” “will be,” “continue,” or similar words and forward-looking statements, whether as a result of new Total comprehensive income for the period 3,731 44,768 48,499 (651) 47,848 expressions or variations thereof. information or future events. ial S
Transactions with shareholders of FGC UES recorded directly in equity tate m Dividends declared — — — — (832) (832) (1) (833)
Total transactions with shareholders — — — — (832) (832) (1) (833) ent s of FGC UES Changes
in ownership A Glossary pp endi x Acquisition of subsidiary — — — — (214) (214) 58 (156) Disposal of subsidiary — — — (535) 535 — (452) (452) Total changes in ownership — — — (535) 321 (214) (394) (608) As at 31 December 2015 637,333 10,501 (4,719) 229,578 (252,980) 619,713 (75) 619,638 Abbreviations ADCS Automated Dispatch Control System The accompanying notes are an integral part of these Consolidated Financial Statements. Full version of consolidated financial statements of FGC UES Group for 2016 is provided in Appendix 14. APCS Automated Process Control System CBETL Cross-Border Electricity Transmission Line CHP Combined Heat and Power CIMS Corporate Information Management System CIS The Commonwealth of Independent States CIUS UES DECT Digital European Cordless Telecommunications EBITDA Earnings before Interest, Taxation, Depreciation & Amortisation ESUPCN FFMS Federal Financial Market Service FOCL Fiber-Optical Communication Line FTP Federal Targeted Programme FTS of Russia Federal Tariff Service of Russia GDR Global Depository Receipt GDP Gross Domestic Product
156 PJSC FGC UES Annual Report 2016 157 Appendix GLOSSARY
GMS General Meeting of Shareholders Units of measure GRES State District Power Plant bn billion mln million
HPP Hydro Power Plant сub. m cubic metre MVA megavolt-ampere Strategic Report HR Human Resources Gcal gigacalorie MVAr megavolt-ampere reactive HVL High Voltage Line GW gigawatt MW megawatt IFRS International Financial Reporting Standards h hour MWh Megawatt-hour Inter-regional Distribution Grid Company
IDGC Financial Statements Corporate Governance Report km kilometer pcs pieces ICS Internal Control System kV kilovolt p.p. Percentage point IPS Integrated Power System kW kilowatt RUB Russian rouble ISIN International Securities Identification Number kWh Kilowatt-hour sq. m square metre IT Information Technology m metre t ton JSC Joint Stock Company KPI Key Performance Indicator LLC Limited Liability Company Contacts MES Backbone Electric Grid MICEX Moscow Interbank Currency Exchange State Registration: Company Registrar: NPP Nuclear Power Plant Primary State Registration: A Company/An individual that keeps the Shareholders’ Register: OHL Overhead Line State Registration Number: 00/03124 Date of registration: 25 June 2002 Joint-Stock Company Registrar Society STATUS (JSC OHTL Overhead Transmission Line STATUS) Appendix Name of Registering Authority: Leningrad Oblast OSG Outdoor Switchgear Registration Chamber Address: building 1, 32 Novorogozhskaya St., Moscow 109544, Russia Information on Legal Entity Registration: PABX Private Automated Branch Exchange Tel: +7 495 974 8350 Primary State Registration Number of Legal Entity: PJSC FGC UES Public Joint Stock Company Federal Grid Company of Unified Energy System 1024701893336 Fax: +7 495 678 7110 Date of Entry into the Unified State Register of Legal E-mail: [email protected] PMES Backbone Electric Grid Enterprise Entities (Registered Prior to 1 July 2002): 20 August License Number: 10-000-1-00304 PSPP Pumped Storage Power Plant 2002 Issue Date: 12 March 2004 Name of Registering Authority: Inspectorate of the Expiry Date: Non-expiry PTL Power Transmission Line Ministry of Taxes in the Tosnensky district of the Issuing Authority: FFMS of Russia R&D Research and Development Leningrad Oblast Business Address and Correspondence Address: 5A Depository Russian Accounting Standards RAS Academica Chelomeya St., Moscow 117630, Russia Information on the depository where all the securities RAB Regulatory Asset Base Call Centre: 8 800 200 1881 are kept: Foreign Calls: +7 (495) 710 9333 Non-Banking Credit Organisation Closed Joint-Stock Rosstat Federal State Statistics Service Fax: +7 495 710 9655 Company National Settlement Depository (CJSC NSD) SS Substation E-mail: [email protected] Address: building 12, Spartakovskaya St., 105066 Tel: +7 495 234 9960 UES of Russia Unified Energy System of Russia Website: http://fsk-ees.ru/eng/ For Shareholders: 8 800 200 1881 E-mail: [email protected] Unified National (all-Russian) Electric Grid UNEG Fax: +7 (495) 710 9641 License Number: 177-12042-000100 VAT Value Added Tax Issue Date: 19 February 2009 Expiry Date: Non-expiry WECM Wholesale Electricity and Capacity Market Issuing Authority: FFMS of Russia
158 PJSC FGC UES Annual Report 2016 159 Appendix APPENDICES Appendices
The following Appendices are available on the official Company’s website at http://www.fsk-ees.ru/eng/investors/company_reports/ or in the electronic version of the Annual Report of PJSC FGC UES for 2016: Appendix 1. Additional Information on the Sections of the Annual Report Appendix 2. Audit Commission’s Report Appendix 3. Report on Compliance with the Russian Corporate Governance Code and Report on Compliance with Main Principles of the UK Corporate Governance Code Appendix 4. Information on Major Transactions and on Transactions by PJSC FGC UES in 2016, Classified Under the laws of the Russian Federation as Related Party Transactions Subject To Approval by the Company’s Authorised Governing Bodies Appendix 5. Information on Material Transactions made by PJSC FGC UES and Entities Controlled Thereby Appendix 6. Information on the Actual Execution of Instructions of the President and the Government of the Russian Federation Appendix 7. Information on the Participation of PJSC FGC UES in commercial and non-commercial organizations in 2016 Appendix 8. Information on the Debt Recovery Claims in which PJSC FGC UES Participates Appendix 9. Information on Concluded Purchase Agreements of Shares, Stocks, Equity Interest of Business Partnerships and Business Entities, including Information on Parties, Subject, Price, and Other Terms of the Agreements Appendix 10. Information About the Structure of the Property Portfolio of PJSC FGC UES Appendix 11. Information on Land Plots of PJSC FGC UES Appendix 12. Information on the Disposal of Non-Core Assets in 2016 Appendix 13. Annual Financial Statements of PJSC FGC UES for 2016 Under RAS Appendix 14. Consolidated Financial Statements of PJSC FGC UES for 2016 Under IFRS
160 PJSC FGC UES