Federal Grid Company Of Unified Energy
Annual Report 2013

Plain-text annual report

POWER LINE FOR DEVELOPMENT ANNUAL REPORT Federal Grid Company is a unique infrastructure company that provides reliable and uninterrupted electric power transmission through backbone electric grids in the Russian Federation, and a world leader among public electric grid companies in terms of the length of power transmission lines and transformer capacity — 135,000 km and 332,000 MWA respectively. We ensure reliable, uninterrupted and safe supply of electricity to our customers by continuous investments in improving and expanding the electric power infrastructure using advanced innovative technologies. The amount of capital investments deployed in 2013 was RUB174.8 billion. We are a customer-oriented company that provides customers with high-quality services and we strive to constantly enhance the quality of interactions with all our stakeholders in order to maintain sustainability of our long-term development. Federal Grid Company is a public company whose securities are traded on Russian and foreign stock exchanges. As of 2013, the Company’s revenues came to RUB155 billion, market capitalisation amounted to RUB115 billion. Information on Annual Report This Annual Report contains 2013 performance results of Joint Stock Company “Federal Grid Company of Unified Energy System” (‘JSC FGC UES’, ‘Federal Grid Company’, ‘Federal Grid’ or ‘the Company’). The Annual Report was preliminary approved by the Board of Directors of Federal Grid Company, Minutes No. 215 dated 15.05.2014. Chairman of the Management Board A. Murov Chief Accountant A. Noskov Power Line for Development In mathematical economics, a turnpike is the trajectory of economic growth characterised by maximum speed and balance. In other words, a turnpike is the trajectory of ideally balanced growth. In Russian, this term is synonymous with “power line” in that context. A strategic priority for Federal Grid Company is to maintain and develop the Unified National Electric Grid – the electric grid power line infrastructure to support the economic growth in Russia and provide an uninterrupted power supply to the consumers in all regions of the country 2 3 Contents 6 8 10 11 18 20 22 27 29 33 36 37 39 41 46 47 52 57 57 67 74 75 76 87 88 92 95 96 Statement from the Chairman of the Board of Directors Statement from the Chairman of the Management Board Key Performance Indicators Key events in 2013 ST R AT EG I G OV ERV I E W Company profile Business Model Geography Market overview Development strategy Strategy in the context of sustainable development PER FO R M A N C E R ES U LTS Operating performance overview Electricity transmission Technological connection Improving reliability Reducing losses Development of communication networks and IT-systems Procurement Investments and innovative development Investment activities Innovative development programme Management’s Discussion and Analysis Overview Financial performance Cash flow Financial position Tariff regulation Debt portfolio Credit ratings 100 104 115 117 118 120 126 126 128 149 149 151 151 159 160 161 162 164 164 166 170 171 172 174 175 176 S O C I A L R ES P O N S I B I L I T Y A N D S U STA I N A B L E D E V ELO PM EN T Sustainable development policy and social responsibility principles HR Policy Social policy Industrial safety Energy saving and energy efficiency Environment C O R P O R AT E G OV ER N A N C E Governance System Corporate governance principles Governing and control bodies Key performance indicators Remuneration to the governing bodies Control System Internal control and Risk management Audit Commission Auditor Managing subsidiaries and associates Anti-Corruption activities Share capital Share capital structure Stock market Dividend policy Information policy Investor relations A D D I T I O N A L I N FO R M AT I O N Disclaimer Contacts Glossary A PPEN D I C ES on the memory stick attached I N FO R M AT I O N M AT ER I A L S on the memory stick attached 4 5 reliability and efficiency, we intend to improve our financial performance. We will continue to improve our corporate governance framework and develop relations with the Company’s stakeholders. An important incentive for our work in this area will be the adoption of a new Russian Code of Corpo- rate Governance and new listing rules which will soon come into effect. As a large public company, we will have to make our internal documents, rules and procedures consistent with the new governance requirements and recommenda- tions in order to improve the efficiency of the Company’s operations and competitiveness, and strengthen consumer and investor confidence. The implementation of social projects remains one of our priorities. We will continue to improve housing conditions for our employees, provide benefits to young specialists, cooperate with higher-education institutions in Russia and support young researchers and the academic community. A detailed discussion of Federal Grid Company’s achieve- ments in sustainable development is available in the Social Responsibility and Corporate Sustainability Report, which is published annually. In 2014, our tasks include the further development of Fed- eral Grid Company and the implementation of our invest- ment projects. We will have to commission new and re- constructed grid facilities in accordance with agreed-upon schedules, and improve the efficiency of our core business processes. We have all the necessary resources for doing so, as well as the support and confidence of shareholders and the government, a professional team of employees and clear and well-defined strategic goals. I am sure that future decisions of the Board of Directors and initiatives of our management will contribute to the further strengthening of the electricity grid infrastructure and to in- creasing the reliability of our customers’ electricity supply. Oleg Budargin Chairman of the Board of Directors STATEMENT FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS Statement from the Chairman of the Board of Directors Power Line for Developement Dear shareholders! Oleg Budargin Chairman of the Board of Directors The global economic situation in 2013 affected, to some extent, the largest electricity consumers, and many of them had to adjust their production plans downwards. Howev- er, despite all external circumstances, the volume of power transmission services provided by the Company increased by 0.6%, or by more than 2.9 million kWh. In 2013, we continued to improve the reliability of the Unified National Electric Grid’s operations. We managed to reduce the accident rate by 12%, and our actual power losses were below the targets that had been approved by the Russian Ministry of Energy. Federal Grid Company delivered power that was essential for the implementation of major industrial and infrastruc- ture projects in Russia. They included commissioning the energy ring in St Petersburg that ensures energy balance and a reliable electricity supply to the northern capital, the construction and reconstruction of facilities required for the provision of a stable electricity supply to major interna- tional events within Russia, important industrial enterpris- es, community facilities and citizens. We commissioned an upgraded 220 kV Zarechnaya substation in Nizhny Novgo- rod designed to become one of the main power sources for facilities at the 2018 FIFA World Cup; reconstructed the 330 kV Chudovo substation, which is one of the key supply centres for the Novgorod oblast; commissioned, prior to the scheduled date, a 500 kV Pomary–Udmurt- skaya power line that enhanced connection between the Middle Volga and the Ural regions and ensured a reliable electricity supply for the 2013 World Summer Universiade in Kazan. We should also say that Federal Grid Company made a considerable contribution to the development of the ener- gy infrastructure of the city of Sochi. We have successfully completed construction of transmission lines and substa- tions that ensured a reliable electricity supply for the Winter Olympic Games. A systemic change in the way the electric grid complex is managed became a milestone event for Federal Grid Company in 2013. The consolidation of transmission and distribution assets within the Russian Grids group fol- lowed by the implementation of uniform technical stand- ards and the creation of a unified emergency system opened up new opportunities to improve the reliability and efficiency of the electricity supply and the quality of services we provide. In 2013, the Development Strategy for the Russian Electric Grid Complex was approved. This document enables us to make our planning process more exact and transparent and to align our operations with those of the whole energy system of Russia. These and other aspects will be reflected in the Company Development Strategy that we expect to approve in 2014. Our strategic priorities in the short term will remain broad- ly unchanged. While improving the electric grid complex’s 6 7 STATEMENT FROM THE CHAIRMAN OF THE MANAGEMENT BOARD Statement from the Chairman of the Management Board Infractructure for the economy Andrey Murov, Chairman of the Management Board of Federal Grid Company, describes the key 2013 results and the Company’s prospects. Operational and Financial Results Last year, 2013, presented major challenges and tasks for Federal Grid Company. Our main achievements were the implementation of the power supply project for the Sochi Olympic and Paralympic Games, the absence of power fail- ures caused by flooding in the Far East, the construction of facilities for the Kazan Universiade and a number of projects that are less noticeable though equally important for our customers and UNEG’s reliability. Our Company has completed its investment programme. The commissioning value was 120%, or RUB169.4 billion. We commissioned 3,690 km of electricity transmission lines and 10,793 MVA of transformer capacity. In 2013, we connected large industrial facilities, improved the reliability of the electricity supply to metropolises and worked in the most remote areas of the country. The volume of electricity transmission services has in- creased. In 2013, Federal Grid transmitted 520 billion kWh, which is 0.55% more than the previous year. DA for 2013 amounted to RUB96.3 billion, which is 16% above that of the previous year. Our debt burden remains at an acceptable level. In October, the international rating agency Fitch Ratings Ltd assigned Federal Grid Company a Long-term foreign cur- rency Issuer Default Rating of ‘BBB’ (similar to sovereign), which confirmed our security on capital markets. Investments and Development Federal Grid Company will continue to build an infrastructure to support the development of Russia’s economy. We have gained valuable experience that will help us to achieve new ambitious targets. Our investment programme up to 2019 includes the construction of the electric grid infrastructure for Transsib and BAM with an enhanced transfer capacity, power supply of facilities for the East Siberia–Pacific Ocean oil pipeline, the Polyus Gold facilities in the Amur River region and Udokan Mining & Refining Plant facilities in Transbai- kal. New energy infrastructure facilities will be constructed for major international sport events, including the 2018 FIFA World Cup and the 2019 Krasnoyarsk Universiade. It is important that Federal Grid Company demonstrate fi- nancial stability even while dealing with a heavy workload conditions. Our consolidated revenues grew by 12% as compared to the previous reporting period. Adjusted EBIT- As before, our key investment priorities will reflect the de- velopment priorities of the Russian economy and society at large. Traditionally, Federal Grid Company has invested in increasing the reliability and safety of the power supply. Improving customer satisfaction, facilitating technical con- nection and enhancing the accessibility of electric grid fa- cilities are at the forefront of this. In terms of geographical position, particular importance is given to East Siberia and the Russian Far East, which were named among the areas of fastest economic growth. Human capital development and opportunities for young professionals are among our social policy priorities. The Company is committed to open and transparent invest- ment planning and performance analysis. In particular, the draft of Federal Grid Company’s investment programme for 2015–2019 has undergone a public hearing procedure and the document has been made publicly available for the first time on the Russian Ministry of Energy’s website. This is one more way for us to make the Company’s operations more efficient at all stages. Electricity transmission grids make up an underlying system of the economy. Their reliable and uninterrupted operation is fundamental to the country’s energy security. While im- proving efficiency, we need to seek a balance between eco- nomic expediency and security. *** I firmly believe that we will be able to ensure the successful and sustainable long-term development of the Company by adhering to the principles of responsibility, professionalism and mutual trust and by building strong relations within the Company and with its customers, partners, shareholders, prospective investors and other stakeholders. Andrey Murov Chairman of the Management Board I would like to especially focus on innovations and techno- logical development. Our completed projects include doz- ens of new process solutions. One of the 2013 outcomes in this area was a reference architecture template for a smart electric energy system that will be the core element for up- grading electric grids. Federal Grid Company intends to use the most sophisticated, efficient technologies and encour- age and rely on home-grown solutions. The development of equipment manufacturing in Russia is of material significance for us. The share of domestical- ly made equipment procured by Federal Grid Company reached 38% in 2013, and we intend to increase it to at least 50% by the end of 2014. By using this approach, we will contribute to the achievement of strategic goals that are important for Russia, such as lowering dependence on im- ports, reforming the Russian industrial sector, developing the research community and creating new jobs. Efficiency and Rationality The current social and economic situation and the re- striction on tariff growth dictate terms: the Company has planned major efforts to improve its performance. We ex- pect a 25% reduction in operating expenses by 2017 (to the 2012 level) and a 30% reduction in construction costs (i.e. unit capital costs). It will allow us to retain volumes of investment (i.e. com- missioning new capacities by constructing new power lines and substations) and to maintain the Company’s financial stability. In 2014, we expect revenue and the EBITDA mar- gin to be at the level of 2013, provided that the net debt level remains below thresholds set by the Board of Directors. We are looking for new sources of finance. A number of amendments to our regulatory documents have been adopted that will allow us to distribute the cost of construc- tion of major technological connection facilities more fairly. The Company enjoys strong support from the government and is exploring the possibility of government financing for priority investment projects, including the development of the electric grid infrastructure for BAM and Transsib. We also plan to drive major consumer demand, including via a co-financing facility. 8 9 MAIN FIGURES / KEY PERFORMANCE INDICATORS Key Performance Indicators Electricity supply to distribution grid companies, direct customers and independent energy joint stock companies, net mln kWh 452,662 470,648 484,664 498,288 509,737 2.3% units 2009 2010 2011 2012 2013 increase 2013/2012 Electricity supply via UNEG to neighbouring states, net1 mln kWh 13,628 15,716 19,285 15,769 12,974 -17.7% Financial highlights Electricity losses within UNEG mln kWh 22,121 22,526 22,553 21,946 22,262 1.4% Revenues RUB mln 85,078 111,085 138,137 138,836 155,352 11.9% Accident rate2 units 2.78 3.20 2.64 2.29 1.95 -14.9% Cost (excluding management expenses) RUB mln 64,080 75,680 84,174 106,650 120,725 13.2% Adjusted EBITDA RUB mln 40,379 67,405 84,683 82,8091 96,296 16.3% Profit (loss) before tax RUB mln -54,049 67,312 11,444 -14,2701 -17, 672 -23.8% Net profit (loss) RUB mln -59,866 57,082 -2,468 -24,5321 -25,898 -5.6% Number of process disturbances caused by human errors Actual implementation of the investment programme units 82 61 57 39 19 -51.3% RUB bn 106.0 167.0 184.7 179.9 149.7 -16.8% Commissioning of electricity transmission lines thou- sand km 1.4 2.2 3.0 3.6 3.7 1.3% Adjusted net profit (loss) RUB mln 9,427 25,702 33,687 13,3831 16,758 25.2% Commissioning of new capacities MVA 7,946 10,416 18,502 17,827 10,793 -39.5% Adjusted net profit per share RUB 0.0082 0.0208 0.0268 0.0106 0.0132 24.5% Credit portfolio RUB mln 13,000 56,000 130,000 212,500 282, 349 32.8% 1 According to the WECM data 2 Number of accidents per 1,000 units in maintenance. Market capitalisation RUB mln 367,971 452,717 351,138 253,905 114,600 -54.9% Return on equity Return on net assets % % 1.4 2.2 3.3 3.8 4.1 5.4 1.6 1.7 2.0 4.0 0.4 pp 2.3pp Financial leverage 0.12 0.14 0.22 0.32 0.44 37.5% Operating highlights Number of substations2 units 804 805 854 891 919 3.1% Length of electricity transmission lines including leased lines thousand km 121.1 121.7 124.6 131.6 135.1 2.7% Transformer capacity of substations including leased substations MVA 306,422 311,008 322,533 334,7973 332,009 2.4% Declared capacity MW 95,545 91,179 90,937 90,492 91,398 1.0% 1 According to 2013 accounting statements (2012 data was subject to retrospective changes) 2 Including leased facilities and outdoor switchgear and cells on the SS owned by other entities 3 In 2012, transformer capacity of substations was reported with account of the capacity of boosting and regulating trans- formers. If the latter is excluded, the transformer capacity in 2012 was 324,672 МVA Events in 2013 January Innovations Federal Grid Company will build in Skolkovo an intelligent electricity supply network based on Smart- Grid innovative technology. This project will be implement- ed under the Cooperative Agreement that Federal Grid and Skolkovo Foundation signed on 17 January. Promotion of R&D Federal Grid Company and the Coor- dinating Council for Young People’s Affairs in Science and Education at the Presidential Council for Science, Technol- ogies and Education held a nationwide competition, “En- ergy Breakthrough”, of science-intensive and innovating projects. Its objectives were to promote the creative capa- bilities of students majoring in energy, and proactively in- volve them in the Company’s R&D. February March Energy efficiency At the Krasnoyarsk Economic Forum, Federal Grid presented the key ways of improving energy efficiency of the Unified National Electric Grid: it discussed energy-saving technologies that are available to the Rus- sian electric grid network, as well as international practices of reducing power transmission losses and their impact on the final tariff for customers. Seasonal readiness The Company’s repair teams had been brought to a state of increased readiness for a period of spring high-water river floods. These teams have the nec- essary special equipment and means of communication for dealing with any emergency situations at power facilities. On-schedule and off-schedule inspections of substation 10 11 MAIN FIGURES / EVENTS IN 2013 equipment and foundations of buildings and facilities were held in all branches of the Company, and the conditions of emergency reserves were inspected. Smart grids For the first time, Federal Grid Company par- ticipated in the fifth meeting of the Executive Committee of the International Smart Grid Action Network (ISGAN). Our participation in its work is based on the Company’s large- scale efforts to build a smart power grid in Russia. This smart grid should improve the efficiency and competitive- ness of the Russian grid system based on new innovative solutions and technologies. ferred 79.64% of Federal Grid’s shares to JSC Russian Grids, a unified management company which manages the Russian electric grid complex and will from now on supervise all electricity transmission and distribution grids. Building HR Capacity A conference of young researchers, “Energy of the Unified Network”, was held as part of the St. Petersburg Economic Forum. It discussed issues pertain- ing to the development of new electricity transmission tech- nologies and mechanisms for involving young researchers in this process. Risk management Federal Grid hosted a seminar, “Internal Control and Risk Management System as a Tool for Improv- ing Management Efficiency”, for the heads of its structural units and subsidiaries. The main goal of this seminar was to integrate internal control in the daily management process and present the best international practices of risk manage- ment and internal audit Infrastructure bonds The first tranche of Series 23 and Series 28 infrastructure bonds in the total amount of RUB30 billion with a maturity of 35 years, issued by Federal Grid Company, was placed at the Moscow Stock Exchange. The main investor was Vnesheconombank, which acts as a State management company that is a trust manager of pension savings. April July Power system reliability A Russia-wide meeting of electric power companies was held. The meeting acknowledged suc- cessful performance in the autumn and winter period of 2012 and 2013: equipment and grids performed reliably despite harsh weather conditions, the number of accidents at the Com- pany’s facilities dropped by 5.3% as compared to the previous autumn and winter period, the specific accident rate was down by almost 10% and injuries were also reduced. May New technologies For the first time in southern Russia, Federal Grid used an electrical conductor with cast insu- lation at 110 kW at the Stekolnaya substation (Republic of Dagestan). This helps to reduce transmission losses sub- stantially, strengthen the transmission line and increase its service life significantly (to 40 years). Building HR Capacity Federal Grid Company and St. Pe- tersburg State Polytechnic University signed an agreement of cooperation in the area of professional training of mid-level technical specialists. The university-based polytechnic col- lege Radiopolytechnicum will start enrolling students onto the “Electric Power Stations, Networks and Systems” course. June Changes in the ownership structure The Russian Federation, represented by Rosimushchestvo, trans- Energy supply to the Universiade Federal Grid ensured the 27th World Summer Universiade held in Kazan on 6–17 July 2013 had a reliable electric power supply. Before sporting events began, the Company’s specialists con- ducted engineer inspections of power transmission lines and equipment of substations that supply electric power to Kazan. The 500 kV Pomary–Udmurtskaya transmission line was commissioned ahead of schedule. It strength- ened the systemic 500 kV line connecting the Middle Vol- ga and Ural regions. Federal Grid launched pilot projects that are part of the Russia-wide Programme for the Development of Charg- ing Infrastructure for Electric Vehicles in Russia. The pro- gramme includes the building of a commercial network that will have 100 charging stations in Moscow and in the Kaluga oblast. Liquidity of securities As of 1 July 2013, the Bank of New York Mellon replaced Deutsche Bank Trust Company Amer- icas as the depository of the Company’s global depository receipts (GDR) programme. Electricity supply to IC Skolkovo. SS 220/20 20 kV Soyuz and SS 220/20 20 kV Skolkovo were com- missioned to supply electric power to IC Skolkovo. These are the first underground substations in Rus- sia; they have advanced innovative equipment includ- ing high-capacity batteries that accumulate power for substations’ in-house needs, and SF6 gas- insulated transformers. August Infrastructure bonds Federal Grid raised a new tranche of long-term financing for its investment programme via is- suance of Series 26 and 27 infrastructure bonds, to a total amount of RUB26 billion, with a maturity of 35 years. Ensuring reliability The Company’s specialists took part in the remedial work after flooding in the Russian Far East. Its main efforts focused on additional technical maintenance and the repair of power facilities in the flooded area, and on the procurement of equipment, special machinery and materials that were necessary to reduce flood losses. September Liquidity of securities VTB Capital was appointed as Federal Grid Company’s market maker to work at the LSE’s Main Market, with a view to strengthening investor relations and increasing the liquidity of GDRs. Development of the customer-oriented approach Fed- eral Grid established the Customer Council in order to take customers’ opinions into account in its corporate deci- sion-making process on improving accessibility of energy infrastructure, efficiency of operations and investments, customer-oriented approach, and social and information openness. October Consistency with the quality standards The Company’s executive team successfully passed the second audit of environmental management system. The compliance audit was held by Russian Register, a certification organisation. Its findings confirmed the consistency of the Company’s environmental management system with the requirements of international standard ISO 14001:2004. Credit rating International rating agency Fitch Ratings as- signed the Company long-term foreign and local currency Issuer Default Ratings (IDRs) of BBB with a Stable outlook. elected Andrey Murov as Chairman of the Management Board. Before his election, Mr Murov was First Deputy Chairman of the Management Board. On 28 November the Company’s Board of Directors terminated the powers of four Management Board members and appointed new members. Decision about issuance On 12 November, the Board of Directors made a decision to increase the Company’s char- ter capital by placing 9,431,399,773 additional common registered shares with the nominal value of 50 kopecks each, to a total amount in excess of RUB4.7 billion. Innovations Power accumulation systems with high-capac- ity batteries were commissioned for the first time in Russia at SS Psou and SS Volkhov-Severnaya. December Preparedness for the Olympic Games Federal Grid Com- pany fully met its obligations to prepare energy infrastruc- ture facilities in Sochi to the Winter Olympics. The Company completed construction, in a timely way and to a high qual- ity, of systemic power facilities in the region: 36 electric grid facilities including 326.6 km of cable transmission lines and 14 substations with a total capacity of 1,715 MVA. Reliable and uninterrupted operations Federal Grid com- pleted a three-year pilot testing of bunches of multi-cham- ber insulator-arresters that are radically new devices for the protection of power transmission lines during thunder- storms. The outcomes of these tests reaffirmed that these innovative devices will increase lightning-surge protection of the Company’s facilities. Environmental protection Federal Grid Company and the World Wildlife Fund (WWF) signed a cooperative agreement that envisages cooperation in such areas as improvement of efficiency and environmental safety of the Company’s facilities, promotion of renewable sources of energy, protection of biodiversity, support to specially protected natural areas in Russia and sustainable forest management. Infrastructure bonds The Company received the second tranche of long-term funding by issuing Series 29 infra- structure bonds in the total amount of RUB20 billion, with a maturity of 35 years. Technical Policy The Federal Grid’s Board of Directors ap- proved the Regulation of JSC Russian Grids on the Unified Technical Policy in the Electric Grid Complex as the Com- pany’s internal document. November Renewal of the Management Board An extraordinary General Meeting of Shareholders held on 11 November Infrastructure bonds Federal Grid Company received a new tranche of long-term financing for its investment pro- gramme through issuance of Series 30 and 34 infrastruc- ture bonds, to a total amount of RUB24 billion, with a ma- turity of 35 years. 12 13 MAIN FIGURES / EVENTS IN 2013 Events after the Reporting Date Federal Grid Company’s Awards in 2013 January 2014 Investment Programme The Federal Grid’s Management Board approved the draft adjustments to the Investment Programme for 2014 and the Investment Programme for 2015-2019 in the amount of RUB675.9 billion. According to this programme, the Company should put into operation more than 20,000 km of transmission lines and capacity of more than 71,000 MVA. February 2014 Code of Corporate Conduct and a number of best interna- tional practices. March 2014 Consumers Federal Grid’s Consumer Council that has been created according to the RF President’s instruction held its first meeting in Moscow. The Council is designed to take into account the consumer opinions when making decisions that affect the prices of products and services of Federal Grid Company as a natural monopoly. Transparency of investment planning Open hearings of Federal Grid’s Investment programme for 2015–2019 were successfully completed in the Russian Ministry of Energy. Corporate Governance Rating The Russian Institute of Directors (RID) confirmed Federal Grind’s National Corpo- rate Governance Rating at 7+. This rating proves that the Company complies with the Russian corporate legislation, follows the majority of recommendations of the Russian Environment Federal Grid took part in a worldwide event Earth Hour organised by the World Wide Fund for Nature (WWF). The Company turned off power for one hour at more than 200 facilities. Building HR Capacity A new Personnel Training Centre was opened in St. Petersburg at the 220 kW Volkhov-Sev- ernaya substation. This Centre is one-of-a-kind in the region with a potential to train more than 1,500 people annually. • Winner of the RUIE’s annual national competition “The Best Russian Companies: Dynamics, Efficiency and Responsibility – 2012” in the category “Building HR Capacity” • Winner of the “Environment and Environmental Man- agement” nomination in the competition among 100 best Russian organisations during the Seventh Annu- al National Conference “Environment and Production: Prospects for Development of Economic Tools for En- vironmental Protection” • Winner of the National Annual Prize “IT LEADER –2013” among nominees in “Energy Companies”. The prize was awarded for innovative operations, high achievements in IT, substantial contribution to the de- velopment of the national energy sector and its inte- gration in the global community • Winner of the prize “Leader of Competitive Procure- ment – 2013” organised by B2B Centre, an interna- tional centre of electronic trade, in the category “For Contribution to the Advancement and Promotion of Competitive Procurement” • Federal Grid Company is one of three leaders among State-owned companies in terms of compliance with the federal rules of procurement and consistency with the best business practices in this area (findings of a survey conducted by Expert RA rating agency at the request of the National Association of Procurement Institutions) • A long-term programme of corporate assistance for the improvement of Company employees’ housing condi- tions and an innovative education project “Leaders of Change” (training employees for strategic succession pool) were acknowledged by the Russian Ministry of Energy at the Fourth Russian Personnel Conference “Human Capital in the Fuel and Energy Sector: A Strat- egy of Changes” • • The Company’s 2012 Annual Report won the “The Best Annual Report (Non-financial Sector)” category at the 15th competition of annual reports held by Ex- pert RA rating agency The interactive version of the Company’s annual report won the third prize at the 16th annual federal competi- tion of annual reports and websites, held by the Secu- rities Market magazine and social network INVESTOR. RU in partnership with the CBR’s Financial Markets Service • Winner at the “CNews Forum 2013: Information Tech- nologies Tomorrow” in the category “Cybersecurity in the Energy Sector” for building a company-wide cyber- security system • The Company’s IR practice was acknowledged to be among the three best practices of mid-capitalisation companies in the categories “Best Investor Relations by a CEO” and “Best Investor Relations by a CFO” of IR magazine (Russia & CIS) NATIONAL CORPORATE GOV- ERNANCE RATING OF FEDERAL GRID COMPANY WAS CON- FIRMED AT 7+LEVEL 14 15 16 STRATEGIC OVERIEW / COMPANY PROFILE Company Profile Federal Grid Company has a unique infrastructure that ensures a reliable and uninterrupted electric power trans- mission via backbone electric grids throughout the Russian Federation. • Federal Grid was established in 2002, in accordance with Russia’s electric power industry reform , as the management organisation of the Unified National (All-Russia) Electric Grid (“UNEG”) for the purpose of its maintenance and development. • UNEG includes a network of transmission lines that cover most of Russia. • • • • The Company’s electric grid facilities (transmission lines and substations) are located in 75 Russian re- gions covering a total area of more than 14.8 million square kilometres. Federal Grid Company is the largest publicly traded grid company in the world in terms of the length of its transmission lines (135.1 kilometres) and transformer capacity (332.01 MVA). The Company’s key activity is the electricity transmis- sion via transmission grids. Over a half of all power consumption in Russia is of electric power transmitted via the Company’s grids Federal Grid Company is a natural monopoly in the area of electricity transmission. It is included in a list of systemically important organisations of strategic im- portance to Russia. • • • • The largest share of the Company’s revenue is generat- ed from RAB-based tariffs for electricity transmission, as approved by the Federal Tariff Service (the ‘FTS’). In terms of organisational structure, Federal Grid Com- pany consists of an Executive Office and 51 branches with more than 23,000 employees in total. Federal Grid is a public company; its securities are traded on Russian and foreign stock markets, includ- ing the Moscow Stock Exchange and the London Stock Exchange. The Company’s major shareholder that owns 80.6% of its common stock is the state-owned company Rus- sian Grids (Rosseti). The Company’s Key Activities 2005 What is UNEG? What is WECM? UNEG, or the Unified National (all-Russian) Elec- tric Grid, is a network of electric power grids and other electric grid facilities that provides a sus- tainable supply of electric power to customers and ensures the proper functioning of the whole- sale market and the parallel operation of power systems in Russia and other countries. WECM, or the Wholesale Electricity and Capac- ity Market, is a market for trading very specific goods, i.e. electric power and capacity, within the Unified Energy System and on the economic territory of the Russian Federation, with the par- ticipation of large producers and buyers of elec- tricity and capacity, as well as other entities that have the status of a wholesale market member. Key Milestones in the Company’s History 2002 2009 • State registration of Federal Grid Company took place. The Company began providing electricity transmission and technological connection services to customers • • The Federal Tariff Service approved the parameters of the Company’s transition to RAB-regulation for 2010– 2012 The Company’s shares were included in the MSCI Russia and MSCI Emerging Markets stock indices 2003 • The Company was included in the register of natural monopolies and a list of commercial organisations that are the WECM members 2004 • Inter-regional backbone electric grid companies (MMSKs) were established • Forty-four backbone electric grid companies (MSKs) were established on the basis of JSC-Energo and for- ty-six regional grid companies. • A decision was made to place inter-regional distribu- tion grid companies’ shares in trust of Federal Grid Company 2006 • The UNEG consolidation process was completed and Regulation on the Technical Policy of Federal Grid Company was approved for the first time 2007 • A decision was made to re-organize the Company by taking over JSC RAO UES of Russia, JSC State Hold- ing, JSC Minority Holding FGC UES, 56 MSKs and 7 MMSKs 2010 • • The Company received the Energy Company of the Year award for rapidly introducing a successful, inno- vations-based modernisation of the national electric grid complex. The FTS approved RAB-based tariffs for Federal Grid Company for 2011-2014 2011 • • The Company adopted a new Technical Policy and an Innovative Development Programme that outlined the fundamental areas of WECM development in the long term. The Company’s GDRs were listed and their trading started on the London Stock Exchange’s main market. 2012 • • • • Federal Grid Company was appointed as a sole exec- utive body of JSC IDGC Holding. The Russian Ministry of Energy approved the Com- pany’s investment programme for 2013–2017 for RUB775.5 billion. Joint-stock company Russian Grids (Rosseti) was es- tablished by the decree of the President of the Russian Federation. The State’s share in Federal Grid Compa- ny (79.55%) was vested in the share capital of Russian Grids. The Company placed its debut issue of Eurobonds. 2008 2013 • • The Company was listed on the RTS and MICEX Stock Exchanges, and trading started. A global depositary depository receipts (GDR) programme for the Compa- ny was launched The final stage of consolidation: shares of taken-over MSKs, JSC RAO UES of Russia, JSC State Holding and JSC Minority Holding FGC UES were converted into shares of Federal Grid Company • The Russian Government approved the Development Strate- gy of the Russian Electric Grid Complex until 2030 • Regulation on the Unified Technical Policy in the Electric Grid Complex of the Russian Federation was approved as the Company’s internal document • State-owned company Russian Grids became Federal Grid Company’s majority shareholder, owning 80.6% of its com- mon stock 18 19 STRATEGIC OVERIEW / BUSINESS MODEL Business Model STRATEGIC OVERIEW / GEOGRAPHY Geography The Company operates in 75 Russian regions covering an area of more than 14.8 million square kilometres. The territory in which the Company’s facilities are located is divided into zones of responsibility for corporate branches, known as backbone grid com- panies, and their local enterprises (or MES and PMES). Underpopulated territories with no large customers – such as Chukotka, Kamchatka, Magadan oblast and Sakhalin – are not integrated into UNEG because they do not have economic conditions nec- essary for laying electricity transmission lines and establishing large substations. STRATEGIC OVERIEW / GEOGRAPHY Subsidiaries and Associates As of 31 December 2013, Federal Grid Company had 21 subsidiaries and associates that operate in different in- dustries, including those that support electric grid facili- ties (core subsidiaries and associates). Two subsidiaries and associates (JSC Tomsk Trunk Grids and JSC Kuban Trunk Grids) are backbone grid companies. Core companies in which Federal Grid Company has equity shares JSC Mobile Gas-Turbin Power Plant 100% JSC ESSK EES 100% JSC Tomsk Trunk Grids 52.025% JSC MUS Energetiki 100% JSC Elektrosetservis UNEG 100% AO OES GruzRosenergo 50% JSC R&D Centre of FGC UES 100% Index Energetiki – FGC UES LLC 100% JSC Kuban Trunk Grids 48.999% JSC CIUS EES 100% JSC DESP 1 share* JSC Inter RAO 14.0749% * the remaining shares are owned by JSC R&D Centre of FGC UES For further details on the management of subsidiaries and associates see section Corporate Governance / Control System / Managing subsidiaries and associates of the Report (p. 161) Detailed information about Federal Grid Com- pany’s holdings in subsidiaries, associates and other organisations can be found in Appendix to the Annual Report on the memory stick attached International Operations Federal Grid Company facilitates the transit of electric pow- er over Russia’s customs border and operates as a techni- cal contactor under commercial contracts of importers and exporters on the WECM. Pursuant to contracts with JSC Inter-RAO UES and JSC TGC-1, our Company provides services on electricity trans- mission throughout Russia and right up to its borders via electric grid facilities that are integrated into UNEG and le- gally owned by the Company. 140 CROSS-BORDER ELECTRICITY TRANSMISSION LINES AS PART OF UNEG Cross-border Electricity Transmis- sion Lines mon Economic Space is a supra-national regional econom- ic community of the three Customs Union states - Belarus, Kazakhstan and Russia. Electricity transmission lines that cross the state border of the Russian Federation meet the criteria of treating electric grid facilities as UNEG facilities as per Resolution No. 41 of the Government of the Russian Federation dated 26 Janu- ary 2006. Work of Russia’s Unified Energy System in parallel with electric power systems of the other countries Federal Grid Company collects and processes information about electricity transmission along 140 cross-border elec- tricity transmission lines based on data supplied by com- mercial metering devices. To supply electricity to Russian customers in Bryansk, Pskov and Kaliningrad oblasts, the Company entered into contracts with the relevant organisations of Latvia, Lithua- nia, Estonia and the Republic of Belarus to paid electricity transit services through the electric grids of these countries. Pursuant to an agreement dated 20 November 2009 and signed by the governments of the Russian Federation and the Republic of Kazakhstan about measures to ensure the parallel operation of the unified energy systems of Kazakh- stan and Russia, the Company entered into a contract for the transit of electricity. As of May 2010, under this contract, Federal Grid has paid for the transit of electricity through the territory of Kazakhstan to supply electricity to its Rus- sian customers. According to an agreement by and between the govern- ments of the Russian Federation, the Republic of Kazakh- stan and the Republic of Belarus about access to the services of natural monopolies in the electricity industry, including basic principles of pricing and tariff policy, it has become possible since 2012 to transmit electricity across the member states of the Common Economic Space , in- cluding transmission via the Russian UES grids. The Com- There are currently several agreements in force, stipulating parallel operation of the Russian UES with the electric power systems of foreign states. The parties to these agreements are Federal Grid Company and economic entities of Geor- gia, Kazakhstan, the Baltic countries and the Republic of Belarus. The Company also signed an Inter-system Agree- ment with Finland. It also signed agreements on technical support of parallel operations with Ukraine, the Republic of Belarus, Azerbaijan and Mongolia. Being a management organisation of UNEG and cross-bor- der electricity transmission lines of all voltage classes, Fed- eral Grid Company: • • coordinates commercial contracts for the import/ex- port of electricity and provides their engineering sup- port arranges and implements commercial metering of electricity transmitted along cross-border electricity transmission lines • measures actual volumes of electricity that has been transmitted across the State border, and arranges for their customs clearance (declaration). In order to measure the volume of electricity transmitted trough each cross-border transmission line, Federal Grid Company and foreign counterparts signed agreements 24 25 STRATEGIC OVERIEW / GEOGRAPHY 400 kV Vyborgskaya SS Thanks to the equipping of the 400 kV Vyborgskaya SS in Leningrad Oblast with the DC link, a technical capability has been gained in 2013 to import electricity from Finland to Russia. concerning the metering of cross flows via a particular cross-border transmission line. Under these agreements, the Company and electric power systems of 11 countries exchange commercial metering data. • CIS Electric Power Council (CIS EPC) and its commis- sions, including the Commission for Operating and En- gineering Coordination of Collective Operation of CIS and Baltics Energy Systems (COTC) The agreement between the Russian Federation and the Republic of Kazakhstan regarding the parallel operations of Russian and Kazakhstan UES includes an understanding between Federal Grid Company and JSC KEGOC concern- ing commercial contracts for the settlement of deviations from the agreed schedule of flow balances based on hourly data provided by commercial metering. Similar agreements with Ukraine and Belarus were drafted and approved in 2013. • task forces including Fingrid (Finland), KEGOC (Kazakh- stan) and Belenergo (Belarus) • BRELL Power Systems Committee (its members are Belarus, Russia, Estonia, Latvia and Lithuania) • Integration Committee of Eurasian Economic Commu- nity (EurAsEC) • Russia-EU Energy Dialogue International Cooperation Federal Grid Company continually modifies and improves its systems in relation to those of foreign power systems on is- sues pertaining to the harmonisation of legislation / regulations within the global electricity industry, as well as to form and syn- chronise the electricity and capacity markets in accordance with intergovernmental initiatives. This work is done with: 26 Market Overview Federal Grid Company is the infrastructural lynchpin of the Russian electricity market. In terms of industry classifica- tion, managing the electric grid complex is a separate elec- tricity industry segment in which the Company has a mo- nopoly. As a natural monopoly, the Company is subject to government regulation. This is why it is Federal Grid Com- pany and its performance that drive the development of the Russian electric grid complex. Today, a moderate increase (up to 2% per year) of electric- ity demand is what drives the development of the power industry in Russia and determines the further development of electric grid complex. The Russian Ministry of Energy estimates that the total de- mand for electricity across the Russian UES will reach about 1,153.6 billion KWh by the end of 2019, which is 137.1 billion kWh above the 2012 level. It is estimated that consumption in 2019 will exceed 2012 levels by 13.5%, with an average annual growth of 1.82%. The planned expansion and reno- vation of operating facilities and the expected commissioning of new facilities at large manufacturing plants are expected to increase power consumption across the Russian UES in 2014–2017. However, it is expected that this demand will decrease after 2017 following the anticipated technological modernisation of industrial facilities, particularly energy-in- tensive metallurgical facilities, and the increased develop- ment and use of energy-saving technologies. These growth rates are explained by the gradual improve- ment of energy efficiency. In the coming 10–15 years, Rus- sia will implement technologies that are being used in the electric grids of the developed countries. In particular, Rus- sia will install smart grid technologies that will help to in- crease the transfer capacity and stability of power supply, and reduce losses and costs associated with the technical and commercial metering of customer facilities. The continued development of the national energy sector is based on the scenario of innovation-based economic de- velopment. According to the Energy Strategy of Russia until 2030, as approved by the Russian Government, the nation- al economy’s dependence on the energy sector is expected to weaken following priority being given to the development of innovative energy-saving sectors and the implementation of energy-saving technologies. As a result, the fuel and en- ergy complex’s share of gross domestic product will almost halve by 2030 (compared with 2005). At the same time, the energy sector will maintain its key role in making fundamental strategic decisions pertaining to national development. This is particularly true of the con- struction of a new power infrastructure that will accelerate the social and economic development of Eastern Siberia and the Russian Far East, help to overcome infrastructural imbalances between regions and form new territorial and production clusters based on energy-generating and -pro- cessing facilities. The lessening dependence of the economy on the energy sector will be accompanied by qualitative changes in the role of the fuel and energy complex in the national econo- my. The Russian energy sector will maintain its influence on the social situation in the country because the level of en- ergy comfort and the availability of energy resources define Russian citizens’ living standards in many respects. INCREASE IN ELECTRICITY DEMAND IN RUSSIA UP TO 2 % PER YEAR The medium-term development of the Russian electric en- ergy sector will be driven by: the electricity industry’s pricing pressure on the nation- al economy being transformed into intensified compe- tition for tariff revenues among all participants in the process of electricity production, distribution and sale; unequal electricity consumption across Russia be- cause of the major differences between various re- gions in terms of capacity and current development of industrial and economic growth; customers pressing for more reliable and better-quality energy supply on the back of rising prices for electricity in general; • • • 27 STRATEGIC OVERIEW / MARKET OVERVIEW improvement of competition on the wholesale electric- ity market as a result of commissioning new sophisti- cated generating capacities under regulated contracts for capacity supply; • Contract for Connection to the Wholesale Market Trad- ing System and Wholesale Market Procedures (these are appendices to the Contract for Connection to the Wholesale Market Trading System). Development Strategy 3,690 kM COMMISSIONING OF ELECTRICITY TRANS- MISSION LINES • • increase in demand for technological connection as procedures for it are simplified and its costs lowered under the Government’s Technological Connection Road Map. Government Regulation in the Electric Power Industry The Russian Government implements its mandate in gov- ernment regulation and control of the electric power in- dustry in compliance with Federal Law “On Electric Power Industry” No. 35-FZ dated 26 March 2003. The following federal executive authorities have mandates for government regulation of the electric power industry: • The Russian Ministry of Energy, which formulates government policy and regulates the national fuel and energy system, including the electric power industry. The Federal Service for Environmental, Technological and Nuclear Supervision (Rostekhnadzor), which exercises control and oversight in the electric power industry, issues licences for certain activities and inspects compliance with the Russian laws on electricity. Federal Grid Company at WECM Since 1 January 2006, Federal Grid Company, on its own, has been purchasing electricity on the WECM to compen- sate for actual UNEG losses net of losses that have been measured and paid for in equilibrium prices by the WECM participants. In these operations Federal Grid is guided by the following laws and regulations: • Federal Law “On Electric Power Industry” No. 35-FZ dated 26 March 2003 • Rules on Non-Discriminatory Access to Electricity Transmission Services and Delivery of These Services approved by Resolution of the Russian Government No. 861 dated 27 December 2004 • Rules on the Wholesale Electricity and Capacity Mar- ket approved by Resolution of the Russian Govern- ment No. 1172 dated 27 December 2010 Federal Grid purchases electricity and capacity on the wholesale market in member regions of the Russian Federation that are pooled into pricing and non-pricing zones. These purchases are made to compensate for UNEG losses. Since 1 January 2011, Federal Grid has been purchasing electricity and capacity at free (non-regulated) prices in accordance with the wholesale market’s rules. Purchas- es of electricity and capacity on the wholesale market for compensation of losses in the non-pricing zones are made under quadripartite contracts by and between JSC FGC UES, JSC ATS, JSC CFR and the seller of electricity and capacity. The price of electricity and capacity that Federal Grid pur- chased to compensate for the 2013 losses amounted to RUB12.29 billion net of VAT, including RUB5.30 billion (net of VAT) for electricity and RUB6.99 billion (net of VAT) for capacity. Development of grid infrastructure 2013 TARGET 2013 ACTUAL 2014 TARGET Commissioning of electricity transmission lines, km Commissioning of new capacities, MVA* 3,235 14,586 3,690 10,793 4,291 9,985 Areas and benchmarks of the Company’s strategic devel- opment are based on Russia’s Electric Grid Complex Strat- egy until 2030 which was approved by the Russian Govern- ment in 2013. The main goal of Russia’s electric grid complex is to of- fer a reliable, high-quality and accessible energy supply for customers in the Russian Federation in the long term by establishing the most efficient grid infrastructure possible that conforms to global standards. This supply should also offer affordable electricity prices to consumers, based on sensible power transmission tariffs, and be an attractive in- vestment opportunity (by offering an adequate rate of return on capital) in the industry. The Company’s Mission Reliable operation and development of the Unified National Electric Grid with a view to supporting economic growth in Russia and providing an uninterrupted electricity supply to customers in all regions of the Russian Federation. Federal Grid’s strategic priorities as a transmission grid company are to support and develop an electric grid in- frastructure that would ensure the delivery of capacity to stations and electricity transmission to the distribution grids, and to ensure the country’s energy integrity and security. The Company’s Strategic Objectives • • • • • • To ensure a reliable power supply to customers. To ensure a quality service for customers. To develop infrastructure to support economic growth in Russia. To maintain a competitive level of electricity tariffs for the development of the industrial sector. To develop capacity for research and innovations. To ensure a rate of return on invested capital that is attractive to investors. Drafting and subsequently implementing appropriate functional policies and development programmes are crucial corporate elements for achieving strategic objec- tives. * The analysis of actual commissioning figures should take Commissioning plan – 2013 14,586 MVA into account the capacity that has been commissioned ahead of schedule (before 2013) at the facilities included in the 2013 plan, and the capacity that was postponed for commissioning because of circumstances beyond the Company’s control. Therefore, while calculating the completion rate, figures in- cluded in the 2013 plan should be adjusted by the volume of capacity that had been commissioned earlier and postponed. Commissioned before 01.01.2013 2,627 MVA Postponed for 2014 365 MVA Adjusted plan for 2013 11,594 MVA Actual 2013 data 10,793 МVА % of completion, including pre-schedule and postponed commissions 93% 28 29 STRATEGIC OVERIEW / DEVELOPMENT STRATEGY Strategic Priorities – 2017 Targets 1. To reduce inflation-adjusted operating costs per unit of maintained electric grid equipment by 15% against the 2012 level adjusted for inflation. 2. To improve investment efficiency on average by 30% against the 2012 level per one physical unit (kilometre and/or MVA). 3. To achieve a sustainable growth of market share in the segment of electricity transmission services in the “commingled” revenues received from the regional electricity consumers. 4. To achieve capitalisation growth over five years after the implementation of measures to stabilise the regulation regime at the level of at least 60–80% of invested capital. 5. To achieve a sustainable improvement of reliability and quality of services to an economically sound level. Development Prospects The Company’s development prospects are set in the Scheme and Russian UES Development Programme for the next seven years, a projection that is revised annually by the Federal Grid Company and UES System Operator, JSC SO UES, and approved by the Russian Government. The main goal of this document is to promote the develop- ment of grid infrastructure and generating capacities and to meet medium- and long-term demand for electricity IN 2013-2019, IT IS PLANNED TO COMMIS- SION MORE THAN 40,000 KM OF TRANSMISSION LINES AND MORE THAN 137,000 MVA OF CAPAC- ITY and capacity. The Scheme and UES Development Pro- gramme is used as the basis for the Company’s invest- ment programme. The Scheme and UES Development Programme for 2013– 2019 was drafted in 2013. Under this programme, the Com- pany is to commission 40,607 kilometres of transmission lines (voltage class 220 kV and above) and substations with a total capacity of 137,736 MVA. 2013–2019 Plan of Commissioning Transmission Lines and 220 kV and Higher Capacities (Net of figures of the automatic transformers replacement programme) 2013-2019 2013 MES North-West MES Centre MES South MES Volga MES Ural MES Siberia MES Western Siberia MES East Km 3,103 2,294 2,213 1,429 1,766 5,976 2,128 3,768 MVA 7,686 22,502 7,593 6,979 6,011 13,292 6,538 3,704 Km 98 136 501 296 339 555 543 768 MVA 896 4,694 2,197 1,751 450 2,416 1,502 480 30 31 STRATEGIC OVERIEW / DEVELOPMENT STRATEGY Long-Term Infrastructure Projects Project Objectives Financing Development of backbone electric grids Strengthen inter-system transits in order to increase reliability of electricity supply to customers 190 investment projects Total cost: RUB660.361 billion Development of OSC RZD’s Eastern tracks, i.e. BAM and Transsib Funding in 2014: RUB38.033 billion 25 investment projects Total cost: RUB179.361 billion Funding in 2014: RUB1.216 billion Provide additional capacity for technological connection of new customers Create the capacity for optimal load of heat plants and hydro stations in order to reduce the cost of electricity for end customers Ensure technological connection of an additional load from JSC RZD on the Eastern railway tracks Improve reliability of electricity supply to existing customers Ensure on-schedule or emergency repairs without limits on load Normalise voltage levels Compensatory actions Ensure reliable operations of UES North-West in cases where parallel operations of UES of Russian and the Baltics UES grid systems are interrupted 11 investment projects Total cost: RUB42.714 billion Funding in 2014: RUB1.115 billion Electricity supply to new power facilities in the Taman Peninsula Provide electricity supply to the existing and projected seaport facilities in the Taman Peninsula 4 investment projects Total cost: RUB9.003 billion Infrastructure for the 2018 FIFA World Cup in Russia Funding in 2014: RUB0.231 billion 16 investment projects Total cost: RUB35.017 billion Funding in 2014: RUB3.944 billion Provide reliable electricity supply to the sports facilities of the 2018 FIFA World Cup and supporting infrastructure facilities Commission 5,165 MVA of transformer capacity and 129.8 km of transmission lines Strategy in the Context of Sustainable Development Traditionally, sustainable development is based on the ambition to meet the needs of the existing generation without threatening the needs of future generations. This can only be done if all stakeholders’ positions are taken into account, with continuous communication with these stakeholders and integration of these practices in all of the Company’s business processes. structive cooperation between the Company and a broad range of stakeholders. These include suppliers, contrac- tors, project and R&D think tanks, distribution electric grid companies, IDGCs, customers, generators, infrastructure regulators, labour unions, government authorities, public and environmental organisations and the expert commu- nity. Owing to its specific role in the energy sector, economy and social development, Federal Grid expands and com- plements the traditional concept of sustainability in its op- erations. As a monopoly operator of UNEG, we transmit electricity via backbone electric grids and are responsible for pro- viding a reliable power supply for consumers across the Russian Federation. Our Company is mandated to develop the electric grid infrastructure in Russia and outstripping growth rates in order to meet the increasing demand of the public and national economy in the future. This is our strategic goal, i.e. to set out on the turnpike (power line) for develop- ment. The Company’s responsibility for the efficient adminis- tration and development of UNEG is not only to ensure a safe, reliable and uninterrupted electricity supply but also to provide non-discriminatory access to its grid ser- vices that should be provided in a transparent, honest (corruption-free) and innovations-based manner. This is why one of the Company’s most important tasks in terms of philosophy and values of corporate social re- sponsibility and sustainable development is to contin- uously seek the balance between public and economic interests in our work. Federal Grid Company, as one of the largest electric pow- er companies in Russia, is responsible for the condition of UNEG, the lynchpin of the national grid system and a vital public infrastructure. Having assessed existing problems and prospective threats, the Company developed and be- gan implementing a package of programmes and policies aimed at the renovation, modernisation and innovative development of UNEG. These are long-term programmes and policies, and their success largely depends on con- Strategic Priorities of Federal Grid’s Sustainable Development • • • To build mechanisms and practices for the synchroni- sation of stakeholder plans that envisage the develop- ment and expansion of UNEG. To achieve import substitution for the purposes of the innovative development of the national energy sector. To form a pool of human resources (HR) for the smart energy sector. • To develop responsible HR management practices. • To improve labour protection and industrial safety. • • • To strengthen environmental protection and improve the energy efficiency of grid operations. To ensure a fair distribution of economic value and as- sess the economic expediency of implementing inno- vations and new technologies. To integrate Corporate Social Responsibility (CSR) strategy in internal business processes. 32 33 34 35 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Operating performance overview Electricity transmission 2013 TARGET 2013 ACTUAL 2014 TARGET Consumers of electricity transmission services 283 292 470 Electricity losses in UNEG, % Major accidents 4.48* 4.28 4.47* 0 0 0 Relative restrictions on the electricity transmission service, %w 0.0028 0.0006 0.0027 Reduction of procurement costs per unit of goods (works, servic- es) by at least 10% a year over three years, in real terms 10 10.25 10 * regulatory standard of process losses + 2,852 mln kWh + RUB16,1 bn INCREASE IN THE VOLUME OF ELECTRICITY TRANSMISSION SERVICES IN 2013 36 The core activity and main revenue source for Federal Grid Company is the electricity transmission through the Unified National Electric Grid (‘UNEG’). In accordance with Russian laws, Federal Grid’s services of electricity transmission via UNEG are monopoly operations regulated by the State. • • the cost of electricity transmission for the maintenance of UNEG grid facilities that are part of UNEG; the cost of regulatory process losses of electricity in UNEG in the Russian regions. The cost of electricity transmission services is based on tariffs that are set by the Russian Federal Tariff Service (the ‘FTS’) and includes: In 2013, the volume of electricity transmission services by Federal Grid Company amounted to 519,983 million kWh, up by 0.55% from 2012. Federal Grid’s Key Operating Results in 2013 Federal Grid’s branches Sales from the grid network to customers and related territorial network organisations within balance sheet and operational attribution, mln kWh Losses mln kWh % MES Centre MES North-West MES Volga MES South MES Ural MES Western Siberia MES Siberia MES East Total 123,366 60,764 42,278 44,765 76,027 66,110 88,329 18,344 519,983 5,054 4.10% 3,119 5.13% 2,118 5.01% 1,740 3.89% 2,825 3.72% 3,082 4.66% 3,075 3.48% 1,248 6.80% 22,262 4.28% Changes in the Volume of Electricity Transmission Services provided by Federal Grid, 2012-–2013 mln kWh RUB mln 2012 517,131 136,581 Change 2013/2012 + 2,852 + 16,128 0.55% 11.8% 2013 519,983 152,709 37 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW The Company enters into direct contracts with customers in all Russian regions where it has grid facilities. The number of counterparties has been increasing steadily as a result of new technological connections to UNEG and phased discontinua- tion of the “last mile” principle.* Technological Connection Share of Federal Grid’s Largest Customers in Terms of Revenues from Electricity Transmission Services, 2013 Technological Connections, by Customers Technological connection is a service package which our Company offers to connect electricity consumers’ power re- ceivers, electricity producing facilities and grid facilities to Fed- eral Grid’s electric grids. We provide technological connection services to new and existing customers if the latter need to change the operating parameters of their power facilities. In 2013, Federal Grid entered into 652* contracts for tech- nological connection, up by 63% from 2012. The total maximum capacity was 2.3 GW for technological con- nection of consumers and distribution grid companies in the reporting year, and 1.4 GW for electricity production facilities. Federal Grid’s Major Technological Connection Projects in 2013 and Capacity Consumption, MW Abinsk Electromechanical Plant, Krasnodar Territory 200 Gazprom Neft Omsk Oil Processing Plant, Omsk oblast Plant of Ural Mining and Metallurgical Company, Tyumen oblast 120 Oil pumping stations, Krasnodar Territory Taganrog Metallurgical Works, Rostov oblast 107 Angara rocket base, Arkhangelsk oblast Mikheevsky Mining & Processing Plant, Chelyabinsk oblast Eurocement Group plant, Voronezh oblast 40 37 Chemical weapons destruction facility, Udmurt Republic 32 28 14 6 * The “last mile” principle is a form of cross-subsidization where large industrial customers that are connected directly to Federal Grid Company’s transmission grids cover an additional tariff for distribution grids of IDGCs to which some of the Company’s capacity (the “last mile”) are let * The number of contracts with direct consumers, regional grid companies and electricity production facilities. 38 39 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Our customer-oriented approach is aimed at improving the transparency and accessibility of technological connection to the Federal Grid’s electric grids. We implement the action plan “Better Accessibility of Power Infrastructure” that was ap- proved by the Russian Government and requires shorter peri- ods and stages of technological connection. Our objective is to synchronise the development of industry across the country with the potential of the backbone electric grid complex. Our customers have interactive access to the Technological Connection Portal at www. fsk-ees.ru, which provides full and up-to-date information about technological connection to customers. The launching of this portal was a step towards better communication with the regional authorities on issues pertaining to the increase of grid capacity and the avoidance of risks related to excessive investments. Improving Reliability The Methodological Guidelines on the Estimation of Relia- bility and Quality of Supplied Goods and Services for the Organisation that Manages the Unified National (all-Russia) Electric Grid and Territorial Grid Organisations were ap- proved by the Order of the Russian Ministry of Energy No. 296 dated 29 June 2010. The list of indicators includes those that measure the re- liability of electricity transmission and characterise the emergence of process violations and their implications for customers; and those that measure the quality of customer service and characterise, in the first place, the capacity for technological connection. Federal Grid Company’s enhanced level of responsibility in providing reliable and stable electricity supply in Russia is related to specific features and the diversity of climates across the country. We are fully aware of the great respon- sibility that is imposed on us, and will do our best to deliver electricity to our customers in a stable and uninterrupted manner and in compliance with all technical specifications. In 2013, we continued to take regular efforts to reduce the accident rate and have achieved visible results in this area. Service Reliability and Quality Indicators Set by FTS Plan for 2011–2014 Number of Accidents at Federal Grid’s Facilities in 2009–2013 and Achieved by Federal Grid in 2013 2011 2012 2013 Federal Grid 2013 2014 Service reliability level 0.0490 0.0483 0.0475 0.0199 * 0.0468 Service quality level 1.2599 1.2410 1.2224 1.1088 1.2040 * Performance over and above the target is downside deviation of the actual length of electricity outages from the planned value (in 2013) owing to the efficient operation of UNEG and the reduced time for dealing with process disturbances. Federal Grid Company met the FTS’s service reliability and quality targets in 2013. The FTS will set service quality targets for technological connection for the next period of regulation (2015–2019) when making decisions about tariffs for that period. 15% ANNUAL REDUCTION IN SPECIFIC ACCIDENT RATE OVER THE PAST THREE YEARS The accident rate at Federal Grid’s facilities went down by 11.7% in 2013, although the maintenance workload (num- ber of electric facilities) has been increasing. Actions taken by the Company have resulted in reduc- ing per-unit accident rates (number of accidents to the maintenance workload ratio) over the past three years, on average, by 15% a year. Accident rate has been reduced because of the following actions: • Implementation of maintenance and repair plans and target programmes. • Implementation of equipment renovation programmes. • Implementation of a package of measures to ensure the top-level preparedness for emergency situations. • Personnel professional development. 40 41 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Accident Rate at Federal Grid’s Facilities in 2009–2013 ( number of accidents per 1,000 units in maintenance) Technical Policy Fixed Assets Renovation Programme In 2013, the Federal Grid’s Board of Directors implement- ed the Regulations on the Unified Technical Policy in the Power Grid Complex (that had been earlier approved by the Board of Directors of JSC Russian Grids) as an internal document. The Unified Technical Policy is the key instrument for op- timising and reducing the full costs of ownership of the electric grid complex facilities with a sound level of UNEG’s reliability. Its aim is to identify the key technical areas that enhance the electric grid complex’s reliability and efficiency in the short and medium terms with an appropriate industri- al and environmental safety based on innovative principles that provide non-discriminatory access to electric grids for all market participants. Implementation of the Unified Technical Policy will help us to improve the electric grid complex’s efficiency, re- duce its operational costs, strengthen the system-wide reliability of UNEG and meet the increasing demand for electricity. The Fixed Assets Renovation Programme is aimed at ensuring the reliable and efficient functioning of the electric grid com- plex. It was included in the Company’s Investment Programme for 2015–2019 as an investment programme for 2014. The draft Renovation Programme stipulates the commis- sioning of facilities with a total capacity of 22,739 MVA and reconstruction of 2,739 km of transmission lines. The total funding for the Programme in 2014–2019 will amount to RUB185.9 billion. RUB27.4 billion will be spent on renovation in 2014. The total capacity to be commissioned at the fully renovated facilities will amount to 1,841 MVA and 136.8 km. In 2013, the total commissioned capacity was 564 MVA at the fully renovated facilities and 362 MVA at reactive power facilities. In order to improve UNEG’s reliability, the Company ener- gised 70 key partially reconstructed facilities in the reporting year, which is 3.5 times above the 2012 level. versiade in Kazan, test competitions in Sochi, and other major events. Based on its experience of operation in special periods, in 2013 the Company approved mandatory measures related to preparation for, and operation in special periods for all MES and PMES, as well as additional measures to ensure the reliable operation of electric grid facilities. Forty-nine duty stations work on a permanent basis in Federal Grid’s branches in order to maintain the reliable operation of the electric grid complex during disruptions of electricity supply to customers and in other contingen- cy situations. Branch representatives take part in the work of duty stations that maintain electricity supply safety in the federal subjects of the Russian Federation. Federal Grid Company entered into 136 cooperative agreements with contractors that are involved, whenever necessary, in emergency and recovery efforts at the grid facilities. It also entered into 62 agreements with the local offices of RosHydroMet and 86 agreements with the local offices of the Russian Ministry of Emergency Situations. The Company has a sufficient emergency reserve includ- ing a pool of major units. We take the following efforts in order to provide for better management of the electric grid facilities: • • • The Company and subsidiaries of JSC Russian Grids arranged regular sharing of information about the ex- isting emergency reserve and its locations. The status of transmission lines is video-archived dur- ing their inspections, walk-arounds and fly-arounds. The Company has 251 diesel-driven generators with total capacity of 60.8 MW to cover its own electricity needs at substations and in administrative buildings. Repairs The main goal of Federal Grid’s repair programme is to en- sure the reliability of UNEG operations. The 2013 maintenance and repair plan was fully implement- ed. The Company completed the following work at its grid facilities: • We cleared 50,254 hectares of high-voltage electricity transmission line paths. • We cut down 76,111 trees that threatened to fall on overhead lines. • We replaced 104,889 insulators, 1,674 km of ground wires, 5,264 distance pieces, 293 inputs, 989 support bar insulators, replaced and strengthened 2,144 bus supports. • We replaced, repaired and strengthened 11,017 foot- ings, repaired 320 phases of autotransformers / trans- formers, 39 phases of shunt reactors, 2,157 on-/off switches, 12,279 phases of disconnecters and 152 compressors. Moreover, in the reporting year the Company implemented the following targeted repair programmes that helped to re- duce the number of accidents caused by damaged inputs and mast and rod insulation: • Replacement of 409 high voltage inputs with T-750 oil at substations. • Improvement of reliability of 27,853 mast and rod insu- lators at substations. • Replacement of 175,746 overaged porcelain insulators on overhead transmission lines. Operations in Special Periods Weather and climatic conditions make a strong impact on the Company’s operations, so we prepare electric grid equipment and facilities in advance for operation un- der low temperatures and peak loads during the autumn/ winter period, and in case of natural anomalies during periods of river floods, fires and thunderstorms. These are called “special periods” in our operations. In 2013, Federal Grid Company ensured reliable work of the electric grid facilities during the St. Petersburg Inter- national Economic Forum, the 27th World Summer Uni- 42 43 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Operational Process Control Operational process control in the Company is designed to ensure the reliable operation of the UNEG facilities and adher- ing to the operating modes that are set by the System Oper- ator’s control centres. Our task is to comply with the quality and safety requirements when we operate the UNEG facilities. We have been taking proactive measures to reduce the number of process disturbances that are due to operating employee errors, and we are developing and implement- ing UNEG development programmes in cooperation with the System Operator’s control centres. The function of Situation Management was delegated to the Operational Process Control Department in 2013 in order to prevent and deal with contingency and emer- gency situations at the Company’s facilities. The task of Situation Management is to monitor the operational envi- ronment and provide information and analytical support to the Company’s executives when they are making de- cisions to prevent or deal with incidents and emergency situations. In the reporting year, the Company successfully met its key performance indicators, such as the rates of process dis- turbances (RPDs) caused by operating employee errors and outage schedule implementation rate (OSIR). Target and Actual Values of Process Disturbances Caused by Operating Employee Errors in 2009–2013 Targets and Actual Values of Outage Schedule Implementation Rate in 2011–2013 Number of Process Disturbances Caused by Employee Errors in 2009-2013 82 80 60 40 20 0 44 45 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Reducing Losses Actual electricity losses in the Company’s grids amount- ed to 22,261.5 million kWh in 2013, or 4.28% of electricity supplied from the grids. • construction, reconstruction and development of electric grids, and commissioning of energy-saving equipment. Measures to reduce electricity losses for the reporting pe- riod were approved as part of the Programme for Energy Saving and Improving Energy Efficiency of Federal Grid Company. They were implemented in three key areas: • • optimisation of scheme and mode parameters in the process of the running and operational management of electric grids; cutting of electricity consumption for substation needs; As a result of the above actions electricity losses were reduced by 98.7 million kWh in 2013. An increase in relative value of the process electricity consumption was due to the change in electric modes of UNEG operations resulted in the increase in load losses, as well as to commissioning of new electric grid equip- ment that led to an increase in conventional constant electricity losses. The amount of actual electricity losses did not exceed the regulatory standard set by the Rus- sian Ministry of Energy in 2013. Development of Communication Networks and IT Systems The development of UNEG, building a smart grid and managing of the Company’s business efficiently are based on advanced and modern information and communica- tions technology. Our Company has been building the En- ergy System’s Unified Process Communications Network (ESUPCN), which is designed to manage the technological processes involved in the production, transmission and distribution of electricity, and for dispatch management and support of operations in the electricity industry. The ESUPCN focuses on the digitalisation of the network and on making it smart. This is achieved through the in- stallation of widespread and sophisticated multiservice communications networks at the grid facilities, the con- struction of a fibre-optic communications network (FOCN), and the deployment of satellite communications systems, mobile digital radio communication systems and other for- ward-looking technologies. In order to improve the observability of the grid network and operational dispatch and process management, the Company identified the digitalisation of its communica- tions channels at the level “Object – Dispatch Centre / Networks Management Centre” as its strategic priority. Actual Electricity Losses in 2012–2013 Digitalisation of the Federal Grid’s Electric Grid Facilities in 2011-2013 2012 2013 Change Federal Grid’s branches mln kWh % mln kWh % mln kWh p.p MES Centre 5,217.6 4.28% 5,054.0 4.10% –163.5 –0.18 MES North-West 3,158.9 5.11% 3,119.2 5.13% –39.7 –0.02 MES Volga 2,007.4 4.70% 2,118.0 5.01% 110.6 0.31 MES South 1,810.5 4.02% 1,740.9 3.89% –69.6 –0.13 MES Ural 2,668.9 3.43% 2,824.8 3.72% 155.9 0.28 MES Western Siberia 3,102.8 4.74% 3,081.7 4.66% –21.2 –0.08 MES Siberia 2,857.6 3.35% 3,075.0 3.48% 217.4 0.13 MES East 1,122.1 6.53% 1,247.8 6.80% 125.8 0.28 Total 21, 945.8 4.24% 22,261.5 4.28% 315.7 0.04 46 47 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Fibre-optic communications network The fibre-optic communications network (FOCN) is the ba- sic communications network for the energy system. It is based on the use of a fibre-optic cable which is suspend- ed on overhead electricity transmission lines. In addition to building new FOCNs, we are working on the large-scale implementation of resources that are provided by major tel- ecommunications operators based on long-term, ongoing lease agreements. Prospective Scheme for the Company’s FOCN until 2020 Federal Grid’s FOSN length increase in 2011–2013, km Satellite Communications Network In order to improve reliability and observability of the electric grid facilities, we installed VSAT-based satellite communica- tions equipment at the Company’s substations in 2013. As the FOCN-based communications network is built, the satellite communications network will serve as the backup network. This will substantially reduce the communications costs. High-Frequency (HF) Communications via Electricity Transmission Lines An HF network is the electricity system’s technological com- munications network that transmits information required for the management of technological processes in the both normal and emergency modes. It is a specific type of wire channels which uses phase wires and cables of overhead transmission lines to carry signals. In 2013, as part of new construction and renovation of the electric grid facilities, Federal Grid upgraded some HF com- munications system facilities and decommissioned some other equipment because when FOCNs were operational- ised. In 2013, Federal Grid Company completed construction of FOCNs on transmission lines at the following facilities: • Samara – Orenburg – Orsk in the responsibility areas of MES Volga and MES Ural branches (520 km) • • 220 KV Razdolinskaya – Nazarovskaya Hydropower Plant substation in the responsibility area of MES Sibe- ria branch (555 km) • Vologda – Arkhangelsk, in the responsibility area of MES Centre and MES North-West branches (1,050 km) Tyumen – Surgut – Nizhnevartovsk – Noyabrsk – Khan- ty-Mansiiysk, in the responsibility area of MES Western Siberia branch (2,200 km) (start-up facilities 1, 3, 4, 5) • St. Petersburg – Petrozavodsk – Murmansk, in the responsibility area of MES North-West branch (1,200 km). 48 49 INCREASE IN FED- ERAL GRID’S FOSN LENGTH IN 2013 +8,570 km Mobile Radio Network Line personnel of overhead line services in PMES branches have cellular, satellite and USB radio equipment in order to maintain a reliable communications network. In 2013, during preparations for the Sochi 2014 Winter Olym- pic and Paralympic Games, the number of line teams in So- chi PMES was increased to 101 and included additional staff members relocated from the Company’s other branches. The larger line teams of Sochi PMES were fully equipped with all necessary mobile communications devices. In order to im- prove the reliability of USB communications, the teams re- ceived 88 additional DMR radio stations connected to JSC Kubanenergo’s radio communications network, and 50 TET- RA radio stations connected to the Federal Communications Agency’s radio network.. Commissioning of HF Communications Systems at UNEG Electric Grid Facilities in 2011–2013 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Telephone Communications Network Based on the radial and hub network principle, the power industry’s telephone communications network provides for interaction with the process network of the System Opera- tor and other electricity market participants. The telephone communications development strategy includes the digi- talisation of the network and the implementation of VoIP technology alongside traditional services. In 2013, Federal Grid installed more than 80 PABXs at its elec- tric grid facilities, as well as systems for recording operational personnel communication, DECT wireless communications systems and loudspeaker and radio searching communica- tions systems. GLONASS-Based Systems Automated Process Control System GLONASS-based systems that are installed in the Compa- ny’s branches to monitor automotive and special vehicles and pedestrian personnel are designed to obtain real-time information about the location of the monitored vehicles / people, controlling the fulfilment of assignments, and for monitoring mileage and fuel consumption. These systems are integrated with a geographic information system and an automated system that monitors vehicle operations. In 2013, GLONASS-based monitoring devices were installed on 563 automotive and special vehicles. The Company in- tends to equip more than 2,000 automotive and special vehi- cles with these devices in 2014-–2015. The automated process control system (APCS) is a Compa- ny-wide distributed hierarchical system that allows both op- erational and non-operational functions to be performed by Electric Grid Control Centres, improves the efficiency of UNEG mode control by allowing a high level of observability, prevents outages and reduces the time for decision-making and the likelihood of errors by operational employees in emergency situations. APCS is a system for the management of UNEG operations and development, so it integrates the devices and systems for the automated dispatch, processing and operational activities of the Company’s administration and MES / PMES services. In 2013 , the Company implemented measures to increase the observability of the UNEG facilities at 71 substations. Installation of Digital Equipment of Telephone Communications Systems at UNEG Substations Federal Grid’s Automotive and Special Vehicles Equipped with GLONASS-Based System Installation of Data Input and Sharing Systems at UNEG Substations in 2011—2013 Development of Corporate Informa- tion-Based Management System Business applications in APCS are a set of IT systems that are integrated in terms of methodology and equipment by spe- cial-purpose software integration technologies aimed to im- prove the Company’s efficiency. Federal Grid Company has a Consolidated Plan of IT Strategy Implementation. In the short term, to achieve its objectives the Company will: • • draft and implement an action plan to mitigate risks related to its IT strategy; adjust a portfolio of IT projects in accordance with Fed- eral Grid’s updated corporate objectives. In 2013, the Company automated business processes re- lated to investment activities, UNEG asset management, financial and economic operations, general corporate ser- vices and customer relations. In accordance with its corporate IT strategy, in 2014 the Company will implement multiple projects of automated management of its industrial assets, IT integration and IT infrastructure, automation of general corporate services, financial and economic operations, management of in- vestment activities and capital construction, automation of customer relations, situation management, management of business processes and HR. 50 51 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Procurement The Company makes purchases proactively in all regions where it operates. Its procurement activities are targeted at purchasing the necessary equipment and services on the competitive market within its corporate investment pro- gramme, and at fulfilling its annual repairs and target pro- grammes. The main document which regulates corporate procure- ment by Federal Grid is Regulations on the Procedure for Regulated Procurement of Goods, Works and Services. This is a fundamental document for the organisation of reg- ulated procurement on methodological basis, with up-to- date, competition-based forms of purchases that are most- ly made through tenders. Principles of Procurement Openness Competitiveness The rules that regulate the organisation of procurement are publicly available at www.fsk-ees.ru. Information about violations of these rules can be sent to Federal Grid’s Central Tender Commission. Most purchases are made through open tenders. Information about tenders is published on the corporate website and in the printed media. Procurement is regulated in such a way that priority is given to open tenders that provide the highest possible level of competition. Any limitation on competition, particularly sole source purchases , must be fully justified and agreed to collectively. In certain cases such decisions are made by the Central Tender Commission (CTC) only, subject to follow-up approval by the Company’s Management Board. Justification The procurement rules require every decision to be justified and documented in order to increase the efficiency of purchases and to prevent corruption. Federal Grid’s Key Objectives in Procurement RUB 140.4 bn VOLUME OF PURCHASES MADE THROUGH COMPETITIVE TENDERING IN 2013 • Reduce the Company’s costs by saving funds during the procurement of goods, works and services • Supply quality goods, works and services to the Company at minimal costs and strictly on time • Optimise the procurement management system by pursuing best practices in this field 91.8% OF THE TOTAL VOLUME OF PURCHASES OF FEDERAL GRID COMPA- NY 2013 Regulated Procurements by Type Value of purchases made under procurement proce- dures, RUB billion Number of procedures Share in the total value of pur- chases made under procure- ment procedures, % Open tender Open request for quote Open request for proposals Open competition-based bargaining Open auction Minor purchase Ordinary purchase Sole source Total 109.2 0.3 28.5 0.9 1.0 0.9 0.5 12.5 152.9 1,069 243 2,389 8 1 3,253 509 802 8,274 71.5% 0.2% 18.6% 0.6% 0.001% 0.6% 0.3% 8.2% 100% Federal Grid has experience in building a procurement system; this is why, in 2013, it was invited by the Gov- ernment and by non-government organisations to con- tribute to the drafting and refining of legislative acts on procurement. In the reporting year, it also continued to develop its internal procurement system. In 2013, Fed- eral Grid began drafting the documents that improve access to its corporate procurement system for small and medium-size businesses. This work was done in accordance with the Roadmap for Support of Small and Medium-Size Business approved by the Russian Gov- ernment. 52 53 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Procurement 54 55 PERFORMANCE RESULTS / OPERATING PERFORMANCE OVERVIEW Import Substitution Policy The Company is taking actions to support and develop do- mestic manufacture of electrical equipment and increase the share of Russian-made equipment in supplies under its corporate investment programme. The Company entered into 97 cooperative agreements with electric engineering companies, including 79 agreements with the manufacturers of electrical equipment; 74 of them are Russian companies Principles of Import Substitution Policy in Federal Grid Company • Reduction of reliance on imports • Implementation of innovative energy-efficient technol- ogies • Development and upgrade of Russian industrial pro- duction • Development production and research capacity • Maintaining the country’s energy security and indus- trial integrity • Raising the process level of production • Creating new jobs. Long-Term Supply Contracts between Federal Grid and Electric Manufacturers JSC Power Machines Hyundai Electrosystems LLC High-Voltage Transformers Plant, a transformer producer of Power Machines Toshiba LLC, began operations on 15 November 2013. Supply of transformers for nominal voltage of 110-750 to Federal Grid’s facilities are scheduled to begin in 2014. According to the approved schedule, the localisation level should be 35% in 2014 and 55% by the end of 2018. A plant in Artem opened on 25 January 2013. It will produce 110-–500 kW gas insulated switchgear cubicles. This equipment is undergoing certification in ac- cordance with Federal Grid requirements, so that it could be used at the Compa- ny’s facilities. According to the approved schedule, the localisation level should be 13.5% in 2014 and 56.7% by the end of 2017. JSC Holding Company Electric Plant The plant has been supplying transformers for nominal voltage of 110-750 kW to Federal Grid’s facilities since 2012. Siemens Transformers LLC Under a long-term supply contract, the plant supplies transformers for nominal voltage under 220 kW. This equipment is made in Voronezh and has successfully passed certification for consistency with Federal Grid‘s technical requirements. According to the approved schedule, the localisation level should be 77.5% in 2014–2017 In the near future we intend to draft a Comprehensive Programme for Substitution of Imported Equipment, Materials and Technologies for 2015–2020. 56 Investments and Innovative Development Investment programme financing, RUB bn Commissioning, RUB bn Meeting the investment financing plan targets, % Meeting the capital investments deployment plan targets, % Meeting the industrial capacity commissioning plan targets, % Meeting plan targets for the commissioning of power lines, % 2013 TARGET 2013 ACTUAL 2014 TARGET 156.6 149.7 113.0 140.6 169.4 118.5 100 100 100 100 96 118 93 114 100 100 100 100 R&D investment, RUB mln 1,685.4 1,654.1 704.0 Investment Activities The main objectives of Federal Grid Company’s investments are modernisation and improving reliability of the unified en- ergy system operations, required to provide uninterrupted power supply to the consumers. As part of its investment activities, the Company implements projects on the con- struction of new electrical grid infrastructure facilities and reconstruction of existing ones. As of 2013, the volume of capital investment remains high- er than the financing. Additionally, exceeding the facilities commissioning plan targets by 21% resulted in a lower, relative to the previous year, volume of construction in pro- gress and confirmed the effectiveness of regulation based on long-term parameters. TOTAL VOLUME OF INVESTMENT PLANNED FOR 2014–2018 RUB 577.8bn 57 PERFORMANCE RESULTS / INVESTMENTS AND INNOVATIVE DEVELOPMENT Basic parameters of the Federal Grid’s investment programme for 2013 Federal Grid capacity commissioning trend for 2009 –2013 Financing, RUB billion (including VAT) Deployment of capital investments, RUB bn (including VAT) Conversion of construction in progress into fixed assets, RUB bn Deployment of industrial capacities target 156.6 148.5 140.6 actual 149.7 174.8 169.4 MVA km MVA * km 14,586 (com- missioning of power facilities) 3,235 10,793 3,690 * The analysis of actual commissioning figures should take Commissioning plan – 2013 14,586 MVA into account the capacity that has been commissioned ahead of schedule (before 2013) at the facilities included in the 2013 plan, and the capacity that was postponed for commissioning because of circumstances beyond the Company’s control. Therefore, while calculating the completion rate, figures in- cluded in the 2013 plan should be adjusted by the volume of capacity that had been commissioned earlier and postponed. Commissioned before 01.01.2013 2,627 MVA Postponed for 2014 365 MVA Adjusted plan for 2013 11,594 MVA Actual 2013 data 10,793 МVА % of completion, including pre-schedule and postponed commissions 93% Overall, Federal Grid has met the 2013 investment pro- gramme plan targets. In particular, its performance was 96% for financing, 118% for development, 121% for con- version of construction in progress into fixed assets, 93% for commissioning transformer capacities (as adjusted), and 114% for commissioning of transmission lines. Investment financing trend for 2009–2013, RUB bn The main reasons for deviations from the targets in 2013 were frugal consumption following facility commissioning, applicant’s refusal to be connected to the grid, the need to adjust the design documentation, as well as, in some cas- es, the absence of an executed agreement to perform the necessary work at the facility. 220 kV Shagol – Novometallurgicheskaya HVL to the newly constructed 220 kV DS of the Chelyabinskaya GRES (State District Power Plant): failure to complete was caused by the need to postpone the commission- ing based on consultation with the administration of the generating facility – the Chelyabinskaya GRES. Below are the projects where the greatest deviations occurred in terms of commissioning new capacities and financing: • • 220 kV approach lines to the Vladimirskaya-2 CHP (Combined Heat and Power) plant and electrical grid connection of JSC “TGC-6”: the lag in financing and development was caused by the need to change the technical aspects of the project implementation due to the passage through a protected natural area, as well as the need to seek approval for the passage of the line from the local administration. • Construction of a daisy chain approach line on the 220 kV DS (Distribution Substation) of the Novokuznet- skaya STTPP (Steam Turbine Thermal Power Plant) as part of the reconstruction of the 220 kV Elanskaya – Ferrosplavnaya HVL and the 220 kV Ferrosplavnaya – NAP (Novokuznetsk Aluminum Plant) HVL: failure to complete was caused by the unavailability of the infra- structure of the generating facility – the Kuznetskaya CHPP, modules No. 14 and 15. • Construction of the approach lines for the 220 kV Tsinkovaya – Novometallurgicheskaya HVL and the 220 kV Rostovskaya NPP – Volgodonsk DS HVL with 220 kV Volgodonsk DS and 220 kV HV approach lines of Volgodonskaya-2 CHPP – Zimovniki: failure was caused by the need to postpone the commissioning based on consultation with the administration of the generating facility – Rostovskaya NPP Furthermore, the overall performance in terms of capacity commissioning in 2013 was affected by the postponement until 2014 of the following power facilities that had been scheduled for commissioning: • New construction of the 220 kV Stupino SS with ap- proach lines to 220 kV Kashira – Pakhra HVL: in con- sultation with the applicant for the grid connection, the commissioning was postponed until 2014. • Two 220 kV Prizeyskaya – Elgaugol HVL with 220 kV El- gaugol SS, the 220 kV “A” and “B” SS’s, and an extension of the 220 kV Prizeyskaya SS 220 kV open switchgear: the commissioning was postponed until 2014 due to the need to adjust the project because of the changes in the technical parameters and solutions in the infrastructure of the applicant. 58 59 PERFORMANCE RESULTS / INVESTMENTS AND INNOVATIVE DEVELOPMENT Federal Grid capital investments by project for 2014 – 2018, RUB bn the expansion of the capacity of BAM and the Trans-Si- berian Railway; as well as other projects) • Removing grid restrictions, ensuring the quality and accessibility of services for electricity transmission and technological connection for the consumers • Synchronisation of the development programmes with the generating facilities and distribution grids • • Improving the efficiency of the backbone electric grids by reducing the costs and implementing energy effi- ciency programmes Establishing an effective system for the management of UNEG operations to improve the observability of the electric grid facilities In this five-year period under consideration, the total amount of investment planned for 2014 – 2018 is RUB577.8 billion, which will be used to introduce 64,300 MVA of capacity and 17,600 km of transmission lines into the fixed assets of Federal Grid. Financing of the investment programmes will be carried out using Federal Grid’s own funds, loans and lines of credit, as well as other sources. The programmes provide for a uniform distribution of the investment costs over the 5-year period, which will enable the Company to maintain a bal- anced structure of its financing sources. Long-term Investment Programme The investment plan for the next five years is presented by the draft adjustments to the investment programme of Fed- eral Grid Company for 2014 and the investment programme for the period of 2015 – 2019. The draft investment pro- grammes have been submitted to the Ministry of Energy of the Russian Federation in accordance with the “Rules for approval of investment programmes for electric power companies that include the State as a participant in their authorised share capital and grid companies”, adopted by the Resolution of the Russian Government No. 977 dated 1 December 2009. During the work on the draft investment programmes, pro- ject cost indicators were also further adjusted based on the results of expert evaluation of the projects, and the financ- ing for the projects was adjusted accordingly. The investment programmes were drafted taking into account the assignment of the Chairman of the Govern- ment of the Russian Federation No. DM-P13-6323 dated 4 September 2013, on the preparation of investment pro- grammes of natural monopolies based on a forecast of prices for services of natural monopolies remaining level in 2014 relative to 2013, and the assignment of paragraph 2 of the protocol of the meeting hosted by the office of the Deputy Minister of Energy V. M. Kravchenko No. VK-428pr dated October 15, 2013, for the scenario of tariff and credit constraints. The main goals of the long-term Federal Grid’s investment programme are: • Modernisation and reliability improvement of the uni- fied energy system to ensure uninterrupted electricity supply to the consumers • Ensuring electricity supply to the facilities of national significance (to ensure reliable operation of UES Rus- sia working separately from the energy systems of the Baltic States, in order to compensate the effects of reduced capacity of the electrical connections of IPS (Integrated Power System) Centre and IPS North-West and change the operating modes of the BRELL ener- gy ring; the Eastern Siberia – Pacific Ocean pipeline, the Skolkovo innovation centre, as well as the devel- opment of the electrical grid infrastructure in Eastern Siberia and the Far East, including that associated with RUB bn Structure of Federal Grid’s capital investments for 2013 – 2018, RUB bn 60 61 PERFORMANCE RESULTS / INVESTMENTS AND INNOVATIVE DEVELOPMENT Key Investment Projects Federal Grid Company is most actively involved in the con- struction and reconstruction of the largest Russian energy infrastructure projects, such as international forums and major sporting events, oil transportation projects, and de- velopment programmes for Russian regions. We under- stand the importance of these projects and do everything possible to build or reconstruct the grid facilities on time and to the highest standards. Successful completion of the trans- mission grid development projects for electricity supply to the facilities of the 2014 Winter Olympics As part of the Programme for the Development of Electric Grids in the Sochi Region for 2008 – 2014, aimed to ensure the functionality of the Olympic sports facilities, Federal Grid built and reconstructed a total of 36 electric grid facil- ities, including 14 substations with a total capacity of 1,715 MVA and 326.6 km of transmission lines. Over the fiscal year, as part of the Sochi project, a 110 kV Sportivnaya substation was built with a capacity of 80 MVA to provide backup power to the Olympic facilities of the Rosa Khutor Alpine Resort and the Olympic mountain village infrastructure. Additionally, in 2013, a 220 kV Cher- nomorskaya distribution substation was built. In accordance with the Russian Government Resolution “On introducing amendments to the construction programme of the Olympic venues and development of the city of Sochi as a mountain resort”, the scope of Federal Grid responsibility was expanded to include 3 new power facilities supplying electricity to the Gornaya Karusel sports and tourism com- plex and the K-125/K-95 ski jumping complex. To ensure a reliable electricity supply for the 2014 Olympics, the plan included the construction of 4 additional facilities not in- cluded in the Olympic programme. In particular, Federal Grid Company completed the reconstruction of the 220 kV Dagomys substation, increasing its capacity by 70% to 472 MVA. Also underway is the reconstruction of the 220 kV Shepsi substation and the 220 kV Shepsi – Dagomys electricity transmission lines. By the start of 2014, Federal Grid’s obligations to prepare the energy infrastructure of Sochi for the Winter Olympics had been 100% fulfilled. To ensure the uninterrupted operation of the Sochi power system during Olympic Games we engaged about 2,000 employees and more than 250 units of equipment of Preparation of the power infrastructure of the city of Sochi for the 2014 Winter Olympics Number of projects under the investment programme Designed capacity 27 1,715 МVА 326.6 km Implementation timeframe 2008–2014 Number of electric grid facilities 36 Cost of the projects completed 33.4 RUB bn Readiness of the facilities 100% Federal Grid Company, its subsidiaries and associates. The “Olympic” team of Federal Grid included about 1,300 people trained in what to do in various emergency situations. In the event of an emergency where the maximum con- sumption exceeds the total available capacity of the power sources of the Sochi district, the excess demand was de- signed to be met by the mobile gas turbine power plants with a capacity of 202.5 MW and by additional power out- put from the TPP of the Tuapse oil refinery of up to 100 MW. BY THE START OF 2014, FEDERAL GRID’S OBLIGATIONS TO PREPARE THE ENERGY INFRASTRUCTURE OF SOCHI FOR THE WINTER OLYMPICS HAD BEEN 100% FULFILED Poselkovaya substation in the mountain area of Krasnaya Polyana 220 kV Poselkovaya SS was constructed in a mountainous area with the use of advanced technologies. It provided electricity supply to all sporting venues of the mountain cluster of 2014 Olympics, including bobsleigh track, ski and biathlon centres, ski jumps and Mountain Olympic Village. Besides, commissioning of Poselkovaya substation en- abled the connection of about 100 new facilities to the electric grid, including such unique ones as Kavkaz biosphere reserve, native plant nursery, and ornithological reserve. New technologies at the Olympic facilities In the course of the work on the Olympics re- lated electric power facilities, new technical solutions are being actively deployed: • Overhead cable lines with XLPE insula- tion connecting the 110 kV substations under construction, are more environ- mentally friendly, safe, and reliable in op- eration compared to the traditional over- head lines. • • The use of gas-insulated switchgear (GIS) sets will significantly reduce the area of the substations, render their op- eration silent, minimise the impact on the environment, and protect the equipment from external forces. To combat icing, the electricity transmis- sion lines are equipped with a unique ice load control system, which creates the conditions for stable operation in the nor- mal mode and a reliable energy supply to the consumers. 62 63 Development of the electric grids of the Far East and Transbaikal Amur Oblast As part of the Federal Target Programme “Economic and social development of the Far East and Transbaikal for the period through 2013”, one of the major projects of the Federal Grid investment programme was completed in the fiscal year – the construction of the 500 kV Zeyskaya HPP – Amurskaya – National Border HVL (2nd stage of the 500 kV Zeyskaya HPP – Amurskaya No. 2 HVL). The facility is being commissioned in the Amur Oblast and is designed to increase the grid capacity in an easterly direction and arrange for export of electricity from the IPS East electric grid to the People’s Republic of China. By the time the project was completed, more than 363 km of high-voltage transmission lines had been commissioned. Republic of Buryatia Another project is being implement- ed in the Pribaykalsky District of the Republic of Buryat- ia: the design and construction of the dual-circuit 220 kV Tataurovo – Goryachinsk – Barguzin HVL with the 220 kV Goryachinsk SS and 220 kV Barguzin SS, as well as the reconstruction of the 220 kV open switchgear at the 220 kV Tataurovo SS. The project is scheduled to be implemented over the 2010 – 2019 period, and the total cost of the con- struction will be RUB7.6 billion. The construction is being financed with Federal Grid’s own investment funds as well as those from the Federal Budget. The new energy facilities will supply electricity to the fa- cilities under construction in the Baikal Harbor special economic zone, such as the Centre for Eastern Medicine, port, as well as sports and recreation and hotel complex- es. Additionally, there will be a significant increase in the reliability of the electricity supply to the Barguzinsky, Kurumkansky, and Pribaykalsky Districts of the Repub- lic with a population of 72 thousand people, as well as the East-Siberian Railway and the Pribaykalsky National Park. Yakutia As part of the effort to improve the reliabili- ty of electricity supply to the districts of South Yaku- tia, our company is building a 220 kV Neryungrinskaya GRES – Nizhny Kuranakh – Tommot-Maya HVL with 220 kV Tommot SS and 220 kV Maya SS. Implemen- tation of the project is scheduled for 2009 – 2016, and the total cost of the construction will be RUB19.3 billion, to be financed, among other sources, from the Federal Budget. Facilities of the first (275 km) and the second stage (480 km, 440 MVA, and 200 Mvar, 275 km) were commissioned in 2011; commissioning of the 434.6 km was carried out in 2013; introduction of 440 MVA and 45.5 km is planned for 2016. Implementation of this project will enable to connect the isolated central power district of Yakutia to the IPS East electric grid and to abandon the costly independent pow- er supply sources. In addition, conditions will be created for connecting new consumers and economic develop- ment of South Yakutia. Programme to contain the fallout from the accident at the Saya- no-Shushenskaya HPP Additionally, we have completed the third stage of the de- ployment of transformer capacity under the project “Re- construction of the GPP-220/110/10 kV substation”. Enabling power delivery from the Kalininskaya NPP Federal Grid continues to implement projects enabling elec- tricity transmission from power unit No. 4 with a capacity of 1,000 MW of the Kalininskaya NPP. In 2013, the project “500 kV Gribovo – Dorokhovo HVL with a 500 kV Dorokho- vo SS and 220 kV HV approach lines” was completed. The Gribovo – Dorokhovo line is the first segment of the second energy ring around Moscow. Over the fiscal year, 1,502 MVA of transformer capacity and 81 km of transmission lines were commissioned. As part of the programme to contain the fallout from the acci- dent at the Sayano-Shushenskaya HPP, in 2013 Federal Grid Company deployed 501 MVA of transformer capacity under the project “Expansion of the 500 kV Ishim (Zarya) SS”. The upgraded substation serves to improve the reliability of electricity supply to the consumers of the Omsk power sys- tem and the southern Tyumen Oblast, and also connects the systems via the 500 kV Kurgan – Vityaz and Vityaz – Voskhod overhead lines, necessary to increase the maximum flow of the IPS Siberia – IPS Ural unified power system. Development of the electric grids in the Krasnoyarsk Krai To deliver power from the Boguchanskaya HPP and ease the energy shortage in the Boguchansky and Motyginski Districts of the Krasnoyarsk Krai, as well as to enable in- tegrated development of the Lower Priangarye area, our Company has completed the construction of the 500 kV Boguchanskaya HPP – Ozernaya HVL 330 km in length. 64 65 PERFORMANCE RESULTS / INVESTMENTS AND INNOVATIVE DEVELOPMENT Basic parameters of the key investment projects Innovative Development Programme Project implementation timeframe start completion Commissioned in 2013 Design capacity Total cost of the construc- tion, RUB bn The goal of the Federal Grid innovative development is to im- prove reliability, quality, and cost efficiency of the energy sup- plied to the consumers through modernisation of electric grids of the Unified Energy System of Russia based on innovative technologies that are then transformed into the intellectual core of the technological infrastructure of the electricity industry. Project Construction of the 500 kV Zeyskaya HPP – Amurskaya – National Border HVL power bridge Design and construction of the dual-circuit 220 kV Tataurovo – Goryachinsk – Barguzin HVL, 220 kV Goryachinsk SS, and 220 kV Barguzin SS Reconstruction of the 220 kV open switchgear at the 220 kV Tataurovo SS Construction of the 220 kV Neryungrinskaya – Nizhny Kuranakh – Tommot-Maya HVL, 220 kV Tommot SS, and 220 kV Maya SS Expansion of the 500 kV Ishim (Zarya) SS, to be subsequently renamed Vityaz SS (construc- tion of a 500 kV wing) Construction of the 500 kV Boguchanskaya HPP – Ozer- naya HVL Reconstruction of the GPP- 220/110/10 kV substation Construction of the 500 kV Gribovo –Dorokhovo HVL and 500 kV Dorokhovo SS with 220 kV HV approach lines 2010 2013 363 km (2nd stage of the 500 kV Zeyskaya HPP – Amurskaya No. 2 HVL) 1st stage – 152.76 km, 180 Mvar 2nd stage – 362,4 km, 6х60 Mvar, 1х60 Mvar 2010 2018 — 2009 2015 435 km 1st stage – 2х125 MVA, 132.3 km 2nd stage – 2х25 MVA, 119.9 km 1st stage – 275 km, 2nd stage – 45.5 km, 434.6 km. 2х63 MVA, 2х125 MVA, 2х16 MVA, 2х16 MVA, 2х100 Mvar 14.9 11.1* 19.3* 2010 2014 501 MVA 501 MVA 4.5 2010 2014 330 km 329.9 km, 180 Mvar 10.0 2010 2014 1,502 MVA 81 km 500 kV HVL 85 km, 2х501 MVA, ap- proach lines 2х12 km, 2х250 MVA 9.8 * the construction will be financed, among other sources, from the federal budget. Federal Grid innovative development initiatives The Management Board and the Strategy Committee un- der the Board of Directors of Federal Grid Company have approved the main provisions of the Federal Grid Innovative Development and Modernisation Policy, implementation of which will result in the creation of a smart grid based on innovative solutions. Our innovation policy is comprehensive in nature and in- cludes the following areas: setting innovative development goals and objectives; developing effective methods and means to achieve these goals; selection and organisation of personnel able to undertake the innovation tasks. Programme for 2013–2017 was developed, with an outlook through 2020, covering the following main areas: With regard to the development of new technologies and launching innovative products: • Development of the concept of a smart power system based on an active-adaptive grid • Development and testing of new technologies of Fed- eral Grid Company • Commercialisation of new technologies • Development of new Federal Grid services for the en- To achieve the goals and objectives of the innovation poli- cy, a comprehensive Federal Grid Innovative Development ergy markets Energy efficiency improvement programme • 66 67 PERFORMANCE RESULTS / INVESTMENTS AND INNOVATIVE DEVELOPMENT • Programme to improve the environmental impact of Federal Grid Company • Collaboration with institutions of higher education and scientific organisations • Programmes to develop partnerships with innovative • • small and medium enterprises Interaction with venture capital firms Interaction with the Skolkovo Institute of Science and Technology With regard to the deployment of new technologies: • Integrated pilot projects to create an active-adaptive grid • Development, modernisation, and improvement of en- ergy efficiency of UNEG • Building a production base for modernisation of UNEG With regard to innovative business processes: • Improving business processes and introducing new management methods • Development of a system of innovation activity at Fed- eral Grid Company The key outcome for the system of implementation of the Programme in 2013 was the continued emphasis on inno- vation activity of Federal Grid Company in implementing in- novations and related activities. This was possible due to the fact that during 2010 – 2012, as part of the R&D pro- jects and programmes, significant results were achieved that met the requirements of innovativeness (including in terms of implementation of the smart grid Concept), as well as in connection with the objective necessity for practical testing and deployment of innovative solutions at the UNEG facilities. Maintaining a focus on innovative development in the elec- tric grid complex and choosing to focus on deployment ac- tivities enabled an increase in spending on the Innovative Development Programme for the year despite the cutbacks in the investment programme. Instead of the planned RUB 9,907.9 billion, RUB 12,165.8 billion was allocated to the implementation of the Programme. Adequate resource al- location in conjunction with the improved efficiency of the innovation activity enabled Federal Grid Company to meet all the performance targets of the Innovative Development Programme for the fiscal year. Meeting key performance targets of Federal Grid’s Innovative Development Programme through 2017 with an outlook through 2020, in 2013 Actual value as of the end of the year preceding the fiscal year Target value set in the Innova- tive Development Programme for the fiscal year Actual value as of the end of the fiscal year Indicator 2012 actual 2013 target 2013 actual Assessment of whether or not the target indicator has been met Trend of reducing the cost of repair of a unit of grid equipment relative to the cost level of 2010, % Share of the spending on equipment pur- chased from domestic manufacturers in the total spending on equipment purchasing, % Share of electricity lost in the total volume of electricity transmitted through the grid, % 1.2 39 1 34 1 Met 38 Met 4.24 4.48 4.28 Met Number of company staff per 100 km of power transmission lines (number of people) Area of land in metropolitan areas freed from the grid infrastructure, ha 16.4 105 16 200 14.76 200 Met Met Share of undersupply of electricity to consumers in the total volume of electricity transmitted through UNEG, % Number of exclusive rights documents (pat- ents and registration certificates) obtained through the R&D work for the year Number of technologies and products devel- oped and introduced into production through the R&D work, pcs. The share of R&D expenditure at the own expense of JSC “FGC UES” relative to the revenue , % Share of funds secured from external sourc- es in the total financing, % Share of expenditures on R&D performed by universities relative to the total R&D expend- iture, % 0.0006 0.0028 0.0006 Met 64 5 2.1 11 1.5 35 2 1.1 2.0 1.0 55 4 1.1* 3 2.4 Met Met Met Met Met * revenue from electricity transmission through UNEG Detailed information on the projects implemented in 2013 under the Federal Grid innovative development initia- tive is set out in Appendix to the Annual report on the memory stick attached. INVESTMENT IN R&D IN 2013 RUB 1,654 mln 68 69 PERFORMANCE RESULTS / INVESTMENTS AND INNOVATIVE DEVELOPMENT Smart (Active-adaptive) Grid In the long term, the result of the implementation of the Innovative Development Programme should be the cre- ation of an electric power system with a smart grid that differs from the existing grid because of its innovative features: automated energy consumption management systems, active grid elements with variable parameters, a current grid status assessment system, and automat- ed real-time systems that support operation of the pow- er system within the prescribed limits as part of a uni- fied analysis and decision making system. The basis for the smart grid structure and the power system man- agement principles is prioritisation of the system factors and conditions – reliability and efficiency of the system as a whole. Smart grid schema FOSN LINES WIND TURBINE S Energy usage data mnitoring Electronic switch INDUSTRIAL BUILDINGS GRID GRID CONTROL CONTROL CENTER OFFICE BUILDINGS SUBSTATION ACTIVE ELEMENTS HOME NETWORK New principles and technologies underlying the construction of the smart grid • The grid is saturated with active elements that allow changing the topological parameters of the grid • Sufficient number of sensors measuring the current oper- ating parameters to assess the status of the grid in differ- ent modes of operation of the power system • A system for collection and processing of data and con- trols for the active elements of the grid and electric instal- lations of the consumers • Presence of the necessary control devices and mech- anisms that enable real-time changes to the topological parameters of the grid and interaction with the connected energy facilities • Mechanisms for automatic assessment of the current sit- uation and forecasting of the grid operation • High performance control system and high-speed infor- tive-adaptive Grid (approved by Resolution of the joint Sci- entific and Technical Council of Federal Grid Company and the Russian Academy of Sciences in 2011). Research and Development, Industrial and Experimental, and Technological Activities (“R&D Activities”) The Innovative Development Programme includes R&D ac- tivities that involve designing and testing of “breakthrough” and “improvement” innovative technologies. Breakthrough technologies include the digital substation technologies, technologies for building electric equipment based on high-temperature superconductivity (of cables, fault current limiters, etc.), multi-agent control systems, and electricity storage technologies. The target of the R&D Programme is creating a technologi- cal basis for a smart energy system with an active-adaptive grid (smart grid). The main areas of the R&D activities of the Company for the period covered by the Programme are: mation exchange • Development of the concept of a smart energy system Detailed information about the projects implemented in 2013 related to the Federal Grid innovation development is presented in the “Basic provisions of the Concept of the Smart Electric Power System of Russia with an Ac- based on an active-adaptive grid • New types of electric power equipment for substations and electricity transmission lines for the smart grid R&D funding trend for 2009-2013, RUB bn ÒSMARTÓ COUNTER POWER GENERATORS INFORMATIONAL STREAMS DISTRIBUTIO N GRID GRID ELECTRIC CA R 70 71 PERFORMANCE RESULTS / INVESTMENTS AND INNOVATIVE DEVELOPMENT Innovation activity cost structure for 2013 by section of the Federal Grid’s investment programme for 2010–2014 including those developed by universities, research and design organisations, and innovative small and medium enterprises; • development and promotion of public documents and Internet resources on the subject of innovation devel- opment of the Company, targeting its partners and contractors, reflecting the goals, objectives, key re- quirements and technologies, and other important in- formation regarding modernisation of UNEG, creation of smart grids, and other areas of the Company’s innova- tion development; • • • ensuring further development of the tools of innova- tive competency centres created with the participation or support of the Company at university laboratories, departments, and faculties, small innovative subsidiary enterprises of universities, and innovation competitions; developing the mechanisms for cooperation between the public and private sectors; development of tools to manage the knowledge, competen- cies, and the Company’s production base, in order to max- imise the use of internal innovative development resources. • New types of control, automation, protection, and measurement system mechanisms for the smart grid • Smart grid control systems • Systems for monitoring and protection of electric grids from external forces • Development, modernisation, and improved energy efficiency In accordance with the investment programme, in 2013 our Company allocated RUB1.7 billion to the R&D Programme, which is 1.1% of the Federal Grid revenue. The decrease in funding for R&D relative to the previous year is due to the adjustment of the investment programme in connection to the changes in tariff increase scenario for electricity trans- mission services as well as the aforementioned focus on testing and implementation of innovative solutions. Under the R&D Programme, in 2013 we obtained 32 utility model patents (including 3 international patents) and 8 in- vention patents. Detailed information on the R&D projects com- pleted in 2013 is provided in Appendix to the annual report on the memory stick attached. To overcome the limitations of funding in future years, we plan to address the following: 1. Growing the quality and efficiency of the planning and implementation of the R&D Programme in order to offset the decline in the resources allocated by the Company’s Investment Programme and to focus on the most ad- vanced and the most critical areas of innovation activity. 2. Mainstreaming “open innovation” tools to work with our partners on the Federal Grid innovation develop- ment, including: • growing the quality and efficiency of managing the re- quirements for the creation and production of the nec- essary innovative technologies and solutions by the Company’s partners (with the subsequent purchase and use of those solutions); • exploring the options to create a corporate R&D Fund to support promising developments and technologies, An element of the bunch of multi-chamber insulator-arresters In 2013, Federal Grid completed a three-year pilot testing of bunches of multi-chamber insulator-arresters that are rad- ically new devices for the protection of power transmission lines during thunderstorms. Application of this novel device will minimise power outages caused by thunderstorms, eliminating the need for a grounding wire and thus reducing the Company’s operating costs. 72 73 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis 1. Overview Adjusted EBITDA, RUB mln Financial leverage Efficiency of Cost Management Programme, % 2013 TARGET 2013 ACTUAL 2014 TARGET 91,037 96,296 91,543 0.38 10.0 0.44 13.8 0.41 15.0 The following review of the financial position and results of operations of Federal Grid Company as of 31 December 2013 should be considered in conjunction with our RAS financial statements for the year 2013 and the notes thereto. Forward-looking statements This report contains forward-looking statements regarding the financial position and results of operations of Federal Grid Company and its consolidated entities. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are statements of future expectations based on the management’s current views and assump- tions that are subject to risks and uncertainties that could cause actual results and events to differ materially from those ex- pressed in or implied by these forward-looking statements. Forward-looking statements include, among other things, statements of possible market risks that may affect our business and statements of the management’s expectations, predictions, estimates, forecasts, plans and assumptions. Such for- ward-looking statements can be identified by the use of conditional or forward-looking terminology such as “imply”, “an- ticipate”, “assume”, “may”, “estimate”, “expects”, “intend”, “could be”, “plan”, “goals”, “view”, “likely”, “project”, “will”, “strive”, “achieve”, “risks”, “tasks”, “should” or similar words and expressions. There are a number of factors that could affect our future activities and cause actual results to differ materially from those contained in the forward-looking statements, including but not limited to: (а) environmental and financial risks; (b) change in demand for the Company’s products; (c) change in currency exchange rates; (d) risks associated with failure to find appropri- ate property and assets for acquisition and to succeed in negotiations and complete such transactions; (e) reserve evaluation; (f) loss of market share and industry competition; (g) economical and financial market conditions in various countries and regions; (h) political risks, delay or acceleration of project implementation, cost estimation; and (i) change in trade conditions. 0.44 As of 31 December 2013, Federal Grid Company has re- gional branches, including: eight backbone electric grids (MES); 41 backbone electric grid enterprises (PMES); one branch – Special-purpose Production Centre Bely Rast; one branch –Technical Supervision Centre. Federal Grid’s financial management system is based on budgetary management that has been built in accordance with the hierarchical budget system rule. The Company’s financial management is accomplished through financial plans differentiated by planning hori- zons: • A long-term programme of activities is developed for a long-term period; long-term planning involves iden- tifying focus areas for implementation of the Govern- ment’s policy with respect to managing UNEG and elaboration of Federal Grid’s strategic plans given the acceptable level of financial risks and maintaining the Company’s financial stability. • Federal Grid’s mid-term business plan is developed with a five-year planning horizon and a one-year plan- ning interval. • Short-term planning implies annual budgeting of Fed- eral Grid Company. Our financial performance in 2013 reflects both internal and external factors affecting our operational results, in- cluding: 1. Implementation of a сost management programme that ensures reduction of the Company’s operating expenses. 2. A write-off of negative differences from the mark-to- market revaluation of quoted securities (mainly shares of JSC Inter RAO UES). 3. Accrual of provisions for the impairment of financial investments not subject to mark-to-market revaluation (promissory notes issued by Energo-Finance LLC). 4. A negative balance of accrual/reversal of provision for doubtful debts (mainly owing to the mark-to-market re- valuation of shares on the books of Energy–FGC LLC and interests accrued on the promissory notes of En- ergo-Finance LLC). 5. Reporting the results of property, plant and equipment revaluation. The increase in revenues by RUB16,515 million was primarily due to transmission tariff growth and the in- crease in rates for electricity loss compensation. Fur- thermore, there was an increase in revenues from grid repair and maintenance services, technical supervision services and property lease. However, the revenues from technological connection to UNEG decreased by RUB91 million. As of the end of the reporting year, Federal Grid Company incurred a loss of RUB25,898 million following the revalua- tion of financial assets and the provisions for doubtful debts and impairment of financial investments. Adjusted net profit (excluding non-cash expenses related to provisions for doubtful debts and revaluation of fixed assets) in 2013 was RUB16,758 million, which exceeded the amount of the previous year by RUB3,375 million. The increase was mainly due to higher operating earn- ings resulting from the Company’s cost-saving initiatives. Federal Grid makes considerable investments in fixed as- sets to provide for the development and reliable operation of UNEG. In 2013, expenditures on construction, re-con- struction and renovation of the Company’s property, plant and equipment amounted to RUB149,696 million, includ- ing VAT. In 2013, the Company financed its investments from the following sources: • Electricity transmission tariffs – 45.8% • Borrowings, including federal budget funds and funds raised through infrastructure bond placement – 42.0% • VAT refund – 4.8% • Other sources (including payment for technological connections) – 7.4%. Federal Grid Company is characterised as a financially sound company with a high level of liquidity and solvency and a low level of financial dependence. 74 75 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS 2. Financial Performance Corporate key financial performance indicators in 2009–2013, RUB million Income and expenses relating to ordinary oper- ations 2009 2010 2011 2012 2013 Change in 2013 Change in 2013, % 2014 forecast Revenues, including: 85,078 111,085 138,137 138,836 155,352 16,515 11.9% 161,714 Electric power trans- mission services 80,173 109,510 134,875 136,581 152,710 16,128 11.8% 157,212 Other operations 4,904 1,574 3,261 2,255 2,642 387 17.2% 4,502 Production cost, including: –64,080 –75,680 –84,174 –106,650 –120,725 –14,075 –13.2% –135,660 Electric power trans- mission services –62,732 –74,856 –83,201 –105,639 –119,468 –13,829 –13.1% – 134,785 Other operations –1,348 –824 –973 –1,011 –1,257 –246 –24.3% – 875 Management expenses –5,128 –6,821 –8,726 –9,860 –12,223 –2,363 –24.0% – 14,571 Sales profit 15,870 28,584 45,236 22,326 22,404 77 0.4% 11,484 Other income* 113,770 150,765 175,670 113,556 61,125 –52,431 –46.2% 8,916 Other expenses** –183,689 –112,037 –209,463 –150,152 –101, 201 48,952 32.6% –5,430 Profit (loss) before tax –54,049 67,312 11,444 –14,270 –17,672 –3,402 –23.8% 14,970 Deferred tax assets –180 –33 46 –55 1,776 1,831 — Deferred tax liabilities –722 –1,181 –5,545 –8,736 –9,977 –1,241 –14.2% – 11,216 Revenues, expenses and net profit in 2009–2013, RUB million 11.9% REVENUE GROWTH IN 2013 2.1. Revenues During 2009–2013, Federal Grid Company demonstrated a sustainable growth in revenues. In 2013, the rate of rev- enue growth increased considerably compared to 2012 – from 0.5 to 11.9%. This growth was primarily due to the increase in revenue from electricity transmission services. Current profit tax –4,876 –9,264 –8,390 –1,471 –5 43 –3 –0.3 — –5 –1,471 –5 — — — – 77 — — –34 206 –21 — –20 –20 –59,866 57,082 –2,468 –24,532 –25,898 –1,365 –5.57% 3,677 Other similar mandatory payments Profit tax adjustment for the previous periods Net profit (loss) for the period Adjusted net profit 9,427 25,702 33,687 13,383 16,758 3,375 25.22% * Other income includes income from participation in other organisations and interests receivable ** Other expenses include interests payable 76 77 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS Revenue structure in 2009–2013, RUB million 2009 2010 2011 2012 2013 Change in 2013 Change in 2013, % Revenues 85,078 111,085 138,137 138,836 155,352 16,515 11.9% 80,173 109,510 134,875 136,581 152,710 16,128 11.8% 66,681 94,950 120,994 125,672 139,075 13,403 10.7% Revenues from electricity transmission services, including: Payments for the maintenance of UNEG grid facilities Payments for normative electricity losses Revenues from technological connection services Revenues from other operations In 2013, revenues generated by the Company’s core regulat- ed operations (excluding revenues from technological con- nections) made up 98.3% of the Company’s total revenues. Compared to 2012, revenues generated by electricity trans- mission services in 2013 grew by RUB16,129 million, including: • a RUB13,403 million increase in revenues related to grid maintenance, mainly owing to a 9.4% growth in tariffs for electricity transmission through UNEG since 01.07.2012, as well as the increase in the volume of services provided; • • • a RUB2,725 million increase in revenues for com- pensation of normative losses, owing to an increase in transmission volumes and tariff indexation since 1 January 2013; revenues from connection services decreased owing to a reduction in the scope and cost of work under contracts in 2013 as compared to 2012; a RUB478 million increase in revenues from other oper- ations was due to an increase in demand for grid repair and maintenance services, technical supervision ser- vices and property leasing. 13,492 14,561 13,882 10,910 13,634 2,725 25.0% 2.2. Cost 3,053 609 2,127 1,077 986 –91 –8.5% 1,852 965 1,135 1,178 1,656 478 40.6% Revenues in 2009–2013, RUB million Cost of services rendered by Federal Grid Company in 2013 (excluding management expenses) increased by RUB14,075 million compared to the previous year. The in- crease was primarily due to increases in depreciation and amortisation charges, wages, salaries and social security contributions. Cost of services in 2009–2013, RUB million Cost elements 2009 2010 2011 2012 2013 Change in 2013 Change in 2013, % Depreciation of property, plant and equipment Purchase of electricity and capacity Labour costs and social security contributions Repair and maintenance services Expenses on raw and other materials 22,562 31,727 39,784 58,993 69,669 10,676 18.1% 13,433 14,183 12,183 11,662 12,285 622 5.3% 7,028 13,926 15,836 18,103 20,244 2,141 11.8% 14,127 5,984 5,291 5,446 5,464 18 0.3% 410 2,246 2,424 2,702 3,147 445 16.4% Property insurance costs 1,094 Lease costs Security costs 772 766 849 926 848 894 975 1,092 1,190 1,223 1,105 1,527 1,693 1,862 Electricity transmission services 422 784 1329 1,741 1,728 Other expenses 3,466 3,950 3,859 4,226 4,128 81 33 169 –13 –98 9.1% 2.8% 10.0% –0.7% –2.3% Total cost 64,080 75,680 84,174 106,650 120,725 14,075 13.2% 78 79 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS 2.2.1. Depreciation of property, plant and equipment 2.2.7. Lease Expenses 2.3. Cost optimisation An increase of 18% in depreciation expenses for 2013 com- pared with 2012 was due to an accrued depreciation for facilities commissioned within the Company’s investment programme and the revaluation of fixed assets. 2.2.2. Purchase of electricity and capacity In 2013, costs for purchasing electricity and capacity in- creased by 5% compared to the previous year, owing to an increase in the volume of electricity purchased on WECM to compensate for transmission losses. 2.2.3. Labour costs and social security contributions An increase of 12% in labour costs and social security con- tributions was due to the following reasons: • • an increase in the number of employees engaged to ensure the operation of the commissioned electric grid facilities; a quarterly indexation of wages for operational per- sonnel in accordance with the actual consumer price growth based on the Tariff Agreement and the policy of maintaining employee income levels; In 2013, lease expenses increased by 3% compared to 2012. The increase was primarily due to lease payment growth under the contracts for utilising electric grid facili- ties, an increase in lease expenses for commissioned wire- less communication networks property and land lease pay- ment growth related to tariff indexation by local authorities. 2.2.8. Security Costs An increase of 10% in security costs in 2013 compared to 2012 was due to an increase in the number of protected fa- cilities, stepping up physical security measures, implemen- tation of the Integrated Automated Security Management System (IASMS) at the Company’s power facilities and the Unified Security Control Centre and to the implementation of the programme aimed at protecting the UNEG facilities against terrorism. 2.2.9. Electricity Transmission Costs In 2013, electricity transmission costs remained at the 2012 level – the deviation was a mere 0.7%. It was due to a de- crease in electric energy cross-flow through the electric grids of Kazakhstan. • an increase in insurance premiums. 2.2.10. Other expenses A decrease of 2.3% in other expenses in 2013 was due to the implementation of the Company’s cost-saving pro- gramme. 2.2.4. Repair and Maintenance Despite an increase in facility maintenance, the related costs in 2013 remained at the 2012 level because of the Company’s cost-saving programme. 2.2.5. Expenses of Raw and other Materials In 2013, an increase in the expenses of raw and other materials was 16.4% compared to 2012, owing to price increases for raw and other materials, transport fuel (be- cause of inflation) and increase in expenses for working clothes because of an increase in the size of the work- force. 2.2.6. Property Insurance Costs In 2013, property insurance costs increased by 9%, ow- ing to an expansion of the list of insured production fa- cilities. The Cost Management Programme has been running in our Company since 2010. It is aimed at reducing Federal Grid’s expenses through reducing prices for contractors’ works and implementing competitive procurement procedures, while maintaining actual work volumes. The total saving of the Cost Management Programme for 2013 was RUB 4,540 million. (excluding the energy-saving programme). Federal Grid’s Energy Saving and Energy Efficiency Pro- gramme involves measures aimed at reducing energy loss- es. In 2013, the Company fully implemented measures to reduce losses within UNEG grids. The total economic effect of measures implemented within the Energy Saving and En- ergy Efficiency Programme in 2013 was RUB 108.85 million (excluding VAT). In 2014, Federal Grid Company will continue to reduce op- erating and investment expenses. In conditions of limited opportunities to improve Company performance, owing to external factors of pricing, a key challenge is to increase internal efficiency and ensure profitability at the required level by optimising internal business processes. This task was emphasised in the Strategy of the Electric Grid Com- plex Development of the Russian Federation and the Plan of Measures to Limit the Final Cost of Goods and Services of Infrastructure Companies. Reduction in operating expenses, % Item 2010 2011 2012 2013 Reduction in expenses resulting from the Cost Management Programme/calculation basis (total operating expenses for 2010) 6.1% 6.4% 6.6% 13.8% THE TOTAL EFFECT OF COST SAVING IN 2013 RUB 4,540 mln 80 81 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS 2.4. Management Expenses In 2013, management expenses increased by 24%, which was primarily due to a RUB2,349 million increase in property tax payments. Management Expenses in 2012–2013, RUB million Cost elements 2012 % of total 2013 % of total Change, % Labour costs and social security con- tributions 2,246 22.8% 2,328 19.0% 3.7% Insurance premiums 309 3.1% 357 2.9% 15.5% Information services and software costs Depreciation of property, plant and equipment and amortisation of intangible assets 1,250 12.7% 1,480 12.1% 18.4% 1,248 12.7% 1,175 9.6% –5.8% Property tax 1,287 13.1% 3,636 29.7% 182.5% General production services Material expenses Lease costs Insurance costs Security costs Communication services Consulting services R&D costs 765 392 668 7 52 367 116 143 7.8% 4.0% 6.8% 0.1% 0.5% 3.7% 1.2% 1.4% Other management expenses 1,011 10.2% 686 459 723 8 56 373 124 61 757 5.6% 3.8% 5.9% 0.1% 0.5% 3.1% 1.0% 0.5% 6.2% –10.3% 17.2% 8.2% 13.8% 7.6% 1.5% 7.2% –57.2% –25.1% In 2013, the increase of management expenses (exclud- ing property tax growth resulting from the phased can- cellation from 01.01.2013 of tax benefits for owning power transmission line property in accordance with the Federal Law “On Introducing Amendments to the Second Part of the Tax Code of the Russian Federation” No. 202-FZ dat- ed 29.11.2012) was a mere 0.17%. The level of 2012 was retained due to the Company’s measures on reducing ad- ministrative and management expenses. 2.4.1. Labour costs and Social Security Contributions In 2013, our labour costs increased by 3.7% compared to 2012. This was mainly due to changing the organisational structure of the Company’s Executive Office. 2.4.2. . Insurance Premiums Insurance premiums increased by 15.5% in 2013, owing to changes in the legislation related to an increase in the normative base for insurance premiums taxable at the rate of 30% from RUB512 thousand to RUB568 thousand. 2.4.3. Information Services and Software Costs Costs for information services increased by 18.4% in 2013, owing to the implementation of new and the up- grading of existing software systems. 2.4.4. Depreciation of Fixed Assets and Amortisation of Intangible Assets In 2013, depreciation/amortisation expenses decreased by 5.8% compared with 2012. 2.4.5. Property Tax increased almost threefold compared Property tax from the phased cancellation, to 2012, owing 01.01.2013, of tax benefits for power transmission lines property. In accordance with Federal Grid Company’s accounting policy, property tax expenses for the whole Company are recorded in management expenses. to 2.4.6. General Production Services Costs for general production services decreased by 10.3% as a result of cost optimisation for legal servic- es, transportation and advertising. 2.4.7. Material Expenses A growth of 17.2% in material expenses compared to 2012 was prompted by an increase in maintenance costs for the backup data processing centre, intercom teleph- ony and video-conferencing. 2.4.8. Lease Costs In 2013, lease costs increased by 8.2% compared to 2012, owing to changes of lease contract conditions and indexation of land lease rates. 2.4.9. Insurance Costs A growth of 13.8% in insurance costs compared to 2012 was due to an increase in costs for civil liability insurance. 2.4.10. Communication Services In 2013, costs for communication services increased by 1.5%, owing to tariff indexation by communications ser- vice providers and the Company’s commissioning new satellite communication systems. 2.4.11. Consulting Services Costs for consulting services increased by 7.2% because of the entry into a contract for rendering services on im- plementing control regulations over transfer pricing in the Federal Grid Company’s Group. 2.4.12. R&D Costs R&D costs decreased by 57.2% compared to 2012, ow- ing to a one-time write-off of R&D with a positive result, on which patents were not issued. 2.4.13. Other management expenses For 2013, other management expenses decreased by 25.1% compared to 2012. This decrease mainly arose from the cost optimisation driven by the im- plementation of the Company’s Cost Management Programme. 2.5. Profit on Sales Total 9,860 100% 12,223 100% 24.0% In 2013, profit on sales from core operations increased slightly – by 0.4%. 82 83 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS 2.6. Interest receivable and interest payable “Interest receivable” refers to income from investment, in- cluding income from the placement of available funds in bank and deposit accounts. In 2013, interest income in- creased by 19% compared to 2012, owing to measures aimed at improving the Company’s current assets man- agement efficiency, which generated additional revenues of RUB801 million. In the income statement for 2013, we reported interest pay- able of RUB1,448 million, which was not recorded in 2012. Part of the funds received from the infrastructure bond placement in 2013 is earmarked to finance the Company’s investment programme in subsequent periods. In accord- ance with the Company’s accounting policy, interests on borrowings are capitalised as part of the cost of fixed assets in case they are allocated to finance the Company’s invest- ment programme. Composition of Other Expenses, RUB million Description 2012 2013 Change in 2013 Change in 2013, % Payment of promissory notes 96,735 49,317 –47 418 –49,0% Provision for doubtful debts 19,355 21,714 2,359 12.2% Provision for impairment of financial investments 9,564 659 –8,905 –93.1% Net book value of written-off fixed assets and construction in progress, and the cost of writing-off 1,735 1,401 –334 –19.3% 2.7. Other income 2.8. Other Expenses Provision for impairment of inventories 209 216 7 3.5% The Company’s other income decreased by RUB53,169 million, owing to payment of promissory notes and reducing the amounts of reversed provisions for doubtful debts. The Company’s other expenses decreased by RUB 50,400 million, owing to a reduction in costs for payment of prom- issory notes and provision for impairment of financial invest- ments. Costs of revaluation of fixed assets 1,795 1,416 –378 –21.1% Negative difference from the mark-to-market revaluation of shares 17,031 22,079 5,049 29.6% Others Total 3,728 2,949 –780 –20.9% 150,152 99,752 –50,400 –33.6% Composition of Other Income in 2012–2013, RUB million Description 2012 2013 Change in 2013 Change in 2013, % Payment of promissory notes 96,735 49,317 –47,418 –49.0% Income from reversal of provision for doubtful debts 9,378 2,269 –7,109 –75.8% Income from reversal of provision for financial investments Extraordinary income from insured events Income from revaluation of fixed assets Other income Total 38 97 414 2,515 29 437 915 3,041 –9 340 501 526 –24.2% 352.7% 120.8% 20.9% 109,176 56,007 –53,169 –48.7% 2.9. Gain/Loss from disposal of investments In 2013, the Company entered into promissory note pur- chase and sale transactions in the amount of RUB49,317 million, which is RUB47,418 million less than the amount of similar transactions in 2012. 2.10. Revaluation of financial investments In 2013, a negative difference from the mark-to-market re- valuation of shares (mainly shares of JSC Inter RAO UES) in the amount of RUB22,079 million was reported in other expenses. In addition, in 2013, we reported a negative balance of ac- crual/reversal of provisions for impairment of financial invest- ments not subject to mark-to-market revaluation in the amount of RUB630 million, including: RUB72 million for Energo-Fi- nance LLC promissory notes; RUB296.5 million for JSC IDGC of Northern Caucasus promissory notes; and RUB290.4 mil- lion for equity investments in shares of subsidiaries and asso- ciates (JSC Nurenergo, JSC Mobile Gas Turbine Power Plant, JSC Tomsk Trunk Grids and JSC Kuban Trunk Grids). 84 85 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS 2.11. Provision for doubtful debts (for impairment of receivables and advances paid) Upon the analysis of receivables by age group and prob- ability of collection, an accrual/reversal of provisions for doubtful debts was made in 2013. A negative balance from the above operations is RUB19,445 million, includ- ing RUB9,983 million for Index Energetiki – FGC UES LLC promissory notes (through a mark-to-market valuation of shares which are on the Company’s balance), RUB1,617 million – provision for accrued interests on Energo-Finance promissory notes and service contracts for electricity trans- mission through UNEG (JSC Lenenergo, JSC Yantarener- go, JSC Kubanenergo, JSC Far Eastern Distribution Grid Company, JSC IDGR South and JSC Dagenergoset. 2.12. Current income tax Net Profit Distribution in 2009–2013, RUB million Item 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013 Retained earnings (loss) in the reported period: –59,866 58,088 –2,468 –24,532 –25,898 Allocate to: Reserve Fund Development Cover of losses of previous years, remuneration to the Board of Directors — — — — 2,904 18,578 34,028 2,578 — — — — — — — — — — — — The Company has no income tax liability for 2013; in 2012, the total amount of income tax was RUB1,471 million. The change was mainly due to an increase in depreciation/am- ortisation charges, which are deductible in tax accounting. Dividends 2.13. Net profit (loss) in the reporting period For 2013, Federal Grid Company recorded a loss in the amount of RUB25,898 million (in 2012 the amount of loss was RUB24,532 million). The loss occurred because of the following factors: • • recognition of a loss on mark-to-market revaluation of shares (mainly JSC Inter RAO shares) in the amount of RUB22,079 million; a negative balance of accrual/reversal of provision for doubtful debts in the amount of RUB19,445 million, owing to the mark-to-market revaluation of shares on the books of Index of Energy–FGC LLC, interests ac- crued on the promissory notes of Energo-Finance LLC and on service contracts for electricity transmission through UNEG; • a negative balance of accrual/reversal of provision for impairment of financial investments not subject to mark-to-market revaluation in the amount of RUB630 million, including Energo-Finance LLC promissory notes, JSC IDGR Northern Caucasus and equity in- vestments in subsidiaries and associates; • recognition of a loss on revaluation of property, plant and equipment in the amount of RUB501 million. 3. Cash Flow 3.1. General information on the Company’s cash flow from core, investment and financial operations As at 31 December 2013, the Company’s cash balance was RUB14,332 million, which is RUB3,196 million less than on 31 December 2012. The following analysis of receipts and payments was made based on the Company’s cash flow statements with due account being taken of mutually exclusive turnovers on de- posits and terminated contracts for providing electricity transmission services. Cash flows in 2012–2013, RUB million Total By type of activities 2012 2013 Operating Investment Financial 2012 2013 2012 2013 2012 2013 313,794 325,765 167,696 182,830 61,475 22,594 84,623 120,341 313,513 328,961 67,220 74,449 234,639 189,795 11,654 64,717 281 –3,196 100,476 108,381 –173,164 –167,201 72,969 55,624 Receipts Payments Balance An actual volume of receipts in 2013 was RUB325,765 mil- lion, which exceeds the receipt value of 2012 by RUB11,971 million. Actual payments in 2013 increased by RUB15,448 million to RUB328,961 million compared to 2012. 86 87 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS 3.2. Net cash from operating activities Cash receipts from operating activities in 2013 increased by RUB15,134 million compared to 2012. The increase was primarily due to revenue from rendering the electricity transmission services. In 2013, payments within operating activities exceeded payments in 2012 by RUB7,229 million, including an in- crease in VAT payment by RUB2,284 million, property tax payment by RUB1,865 million, payments to cover electricity transmission losses by RUB794 million and payments for operating expenses by RUB2,286 million. 3.3. Net cash used in investment activities Key indicators of property, equity and liabilities for 2009–2013, RUB million 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013 Total assets 746,667 902,110 1,037,493 1,122,995 1,214,291 Non-current assets value 588,425 767,152 919,501 1,011,667 1,092,629 Current assets value 158,242 134,958 117,992 111,329 121,662 Total liabilities 746,667 902,110 1,037,493 1,122,995 1,214,291 Shareholders’ equity 665,436 794,192 853,079 849,125 842,975 In 2013, cash receipts from investment activities decreased by RUB38,881 million compared to 2012. The high value in 2012 was due to receipts from the disposal of short-term fi- nancial investments (promissory notes). Payments from investment activities in 2013 decreased by RUB44,844 million compared to payments in 2012, which was mainly due to a reduction in the amount of financing from the Company’s investment programme. Long-term liabilities 7,440 52,668 138,054 209,361 282,429 Short-term liabilities 73,791 55,250 46,360 64,509 88,887 4. Financial Position 4.1. Assets and liabilities The balance sheet ratios suggest that the tendency of asset growth is preserved. For the year ended 31 De- cember 2013, the Company’s total assets exceeded the relevant amount in 2012 by 8%, because of the following: the same time, in 2013, the Company’s authorised capital was increased by RUB3,247 million by registration of an additional share issue of 2012, and the fixed assets value increased by RUB15,398 million upon annual revaluation. • • an increase of 8% in the value of non-current assets, owing to large-scale investments in the construction of fixed assets commissioned in 2013 as part of the Company’s investment programme, and a decrease in investments resulting from the mark-to-market re- valuation; an increase of 9.3% in current assets, owing to an increase in stocks of raw and other materials, and an increase in short-term financial investments upon allocating a cash balance not used in 2013 and re- ceived from an infrastructure bond placement. As at 31 December 2013, the asset structure has not changed compared to 31 December 2012: the shares of non-current and current assets were 90% and 10%, respectively. As at 31 December 2013, the Company’s equity de- creased by 0.7%, owing to the recognition of a loss at the end of 2013 in the amount of RUB25,898 million. At As at 31 December 2013, the following changes occurred in the aggregate liabilities structure compared to the struc- ture as at 31 December 2012: the share of equity capital decreased from 76 to 70% and the share of aggregate liabilities increased from 24 to 30%. The total value of long-term liabilities increased by RUB73,068 million as at 31 December 2013 compared to that value as at 31 December 2012. The increase was due to the following: • an increase of RUB64,850 million in long-term cred- its and loans resulting from attracting the amount of RUB110,000 million through corporate bond place- ment, including infrastructure bonds for RUB100,000 million; JSC Gazprombank credit repayment in the amount of RUB35,000 million; and transforming the short-term liabilities into long-term ones; • an increase in deferred tax liabilities of RUB8,201 million. An increase of RUB24,653 million in short-term liabilities mainly reflected an increase of RUB18,034 million in ac- counts payable to suppliers and contractors and an in- crease of RUB6,398 million in short-term credits and loans. Asset structure in 2009–2013, RUB million According to the accounting statements for 2013, the Compa- ny’s net asset value decreased by RUB6,425 million, and by RUB5,916 million according to the evaluation with account to contributions to the authorised capital. 88 89 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS Net asset value in 2009–2013, RUB million 4.2. Financial indicators in 2009-2013 2009 2010 2011 2012 2013 Nominal* Indicator With account to contri- butions to the au- thorised capital ** Nominal* With account to contri- butions to the au- thorised capital ** Nominal* With account to contri- butions to the au- thorised capital ** Nominal* With account to contri- butions to the au- thorised capital ** Nominal* With account to contri- butions to the au- thorised capital ** Net asset value 665,714 705,892 794,470 805,617 853,354 855,573 849,400 852,647 842,975 846,731 *Evaluation on the basis of annual accounts with retrospective adjustment. ** In 2009 and 2013, the authorised capital of Federal Grid Company was increased through an additional share issue. It led to the reporting of accounts payable to the shareholders on their contributions to the authorised capital in the Company’s accounting statements. Upon registration of the placement report with the Russian FFMS, these accounts will be included in the Federal Grid Company’s authorised capital. An evaluation of net asset value was made with regard to this inclusion: in the amount of RUB 40,177.9 million for 2009, RUB 11,194 million for 2010, RUB 2,219 million for 2011, RUB 3,247 million for 2012 and RUB 3,762 million for 2013. Indicator Liquidity indicators Absolute liquidity ratio Quick asset ratio Current liquidity ratio Financial soundness indicators Equity to total assets ratio Total debt/EBITDA* Current assets coverage ratio Profitability indicators 2009 2010 2011 2012 2013 2014 forecast 2.43 4.02 4.15 0.83 0.04 0.66 1.32 2.74 2.90 0.88 0.7 0.61 1.02 2.27 2.56 0.82 1.3 0.57 0.69 1.60 1.76 0.76 2.4 0.41 0.68 1.30 1.43 0.70 2.8 0.30 0.12 0.73 0.86 0.71 2.7 0.26 Return on equity (ROE)* 1.4% 3.3% 4.1% 1.6% 2.0% 0.001% Return on total assets (ROTA)*, on income before tax 2.0% 3.4% 4.4% 1.3% 2.8% 0.93% EBITDA margin* 47.5% 60.7% 61.3% 59.7% 62.0% 56.6% Business activity indicators Receivables/payables growth ratio Total receivables/payables ratio Most liquid receivables/payables ratio 2.17 1.11 0.83 1.27 1.48 0.62 1.45 1.42 0.51 1.47 1.52 1.12 1.16 0.92 0.53 1.27 1.85 2.31 * To calculate this indicator EBITDA (net profit, income before tax) includes no external factors that affect the Company’s man- agement competency. Actual liquidity ratios as at 31 December 2013 are within standard values. It proves the Company’s ability to dis- charge its short-term liabilities by using its current assets. An increase in profitability ratios is due to an increase in the Company’s adjusted net profit as of the end of 2013 compared to 2012. Equity to total assets ratio proves that the Company’s de- pendence on external loans is within a normal range, the risk of insolvency is low, and there is no cash deficiency risk. Federal Grid Company is characterised as a financially sound company with a high level of liquidity and solvency and low level of financial dependence. 90 91 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS 5. Tariff regulation 5.1. Federal Grid Company’s Tariff Policy 5.2. Tariffs for electricity transmission services Tariffs for electricity transmission services are subject to state regulation and are approved by the Federal Tariff Service (FTS). regulation) was introduced to set electricity transmis- sion tariffs. Tariff rates for electricity transmission services to maintain electric grid facilities, RUB/MW/month and their previous period growth The list of basic legislative acts regulating the tariff setting for electricity transmission over UNEG is given in Appendix to the Annual Re- port on the memory stick attached. In 2010, measures were taken to improve the invest- ment attractiveness of the electric power industry, and a new method for a return on invested capital (RAB To calculate tariffs for each year of the regulatory period, the required gross revenue is determined by summing a return value, return on invested capital and expenses required to provide services on electricity transmission through UNEG. In order to avoid a sharp increase in tariff rates the RAB- based method provides a smooth-running mechanism, which involves redistributing the required gross revenue during the long-term regulatory period. The gross revenue required for electricity transmission services in 2009–2013 The required gross revenue of Federal Grid Company approved by the FTS, RUB mln 66,047 93,781 118,509 125,770 141,908 Increase, % — 142.0 126.4 106.1 112.8 2009 2010 2011 2012 2013 Key long-term parameters for Federal Grid’s RAB regulation approved by the FTS for 2010–2014 regulatory periods Indicator 2010 2011 2012 2013 2014 Rate of return for capital invested before 01.01.2010, %* Rate of return for capital invested after 01.01.2010, % 39 5.2 6.5 7.8 10 11.0 11.0 11.0 10.0 10.0 Invested capital payback period, years 35 Amount of Federal Grid’s invested capital, RUB bn ** 647.6 35 — 35 — 35 — 35 644.7 In accordance with Government Resolution No. 1045 dated 12 December 2009, differential tariff rates are set for electricity transmission services to maintain electric grid facilities within UNEG for the North Caucasus Republics and Stavropol Territory. The table below includes tariffs and their growth rates: * In accordance with the basic principles of pricing in the area of regulated prices (tariffs) in the electric power industry, ap- proved by Government Resolution “On pricing in regulated areas (tariffs) in the electric power industry” No. 1178 dated 29 December 2011, the rate of return during the first long-term regulatory period, excluding the last year, may be set on a case- by-case basis with regard to capital invested before the switch to RAB regulation and to capital created after the switch to RAB regulation. ** Upon the adoption of Government Resolution “On pricing in regulated areas (tariffs) in the electric power industry” No. 1178 dated 29 December 2011, and the switch since 2012 to the recording of facilities on the basis of invested capital as they are commissioned, to calculate the required gross revenue for each year of the long-term regulatory period, the actual cost of facilities commissioned in 2011, and the cost of facilities planned to be commissioned in 2012–2013, is reduced by the value of assets under construction, recorded in the cost of invested capital when Federal Grid Company switched to RAB-regulation in the amount of RUB205.6 billion, which is distributed for three years.. 92 93 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS Period 2010 01.01.2011–31.03.2011 01.04.2011–30.06.2012 01.07.2012–30.06.2013 01.07.2013–30.06.2014 01.07.2014 * RUB/MW*month Growth rate 37,845.23 46,029.88 43,783.55 48,540.01 53,119.60 52,923.13 — 21.6% –4.9% 10.9% 9.4% –0.37% RAB regulation involves the Company’s obligation to comply with the reliability and service quality parameters set by the FTS. The FTS’s decision to establish 2011–2014 tariffs includes targets for reliability and service qual- ity indicators for the UNEG-operating organisation for the 2011–2014 period (see section Operational Perfor- mance / Technological connection on our website) 5.3. Tariffs for technological connection According to the guidelines for calculating fees for techno- logical connection to the UNEG facilities, the FTS set a pro- cedure for applying two calculation methods: approval of an individual fee for an applicant and formula calculation using a standard tariff rate R1 (excluding investment costs). According to the FTS, Decree No. 914-e dated 25 Decem- ber 2012, a technological connection fee for Federal Grid Company was approved as a formula using a standard tariff rate R1 in the amount of 27.56 RUB/kW, excluding VAT. The Guidelines for Federal Grid Company do not provide for the differentiation of a standard rate S1 for 1 kW of connecting power by voltage level, power range, catego- ry of electric power supply of applicants, by territories of citizens of the Russian Federation. Standard tariff rate R1 is uniform throughout the Russian Federation. You can find information on the standard tariff rate approved by FTS Decree No. 914-e dated 25 December 2012, in Appendix to the Annual Report on the memory stick attached. In 2013, an individual technological connection fee was set for two customers in the amount of RUB1,426 million, ex- cluding VAT. * In accordance with Government Resolution No. 1307 dated 30 December 2013, the revision was made of the amount of invested capital of Federal Grid Company upon exclusion of the value of facilities located in the territory of Kaliningrad oblast, which do not meet the criteria for inclusion in UNEG, and of tariffs for electricity transmission services rendered by Federal Grid Company since 1 July 2014 on the assumption that they do not exceed the tariffs as at 30 June 2014. 94 6. Debt Portfolio By the end of 2013, Federal Grid’s debt portfolio grew to RUB282.35 billion, primarily owing to placing infrastructure bond issue in the amount of RUB100 billion and placing bonds of Series 24 in the amount of RUB10 billion, which were used to refund credit of JSC Gazprombank. In ad- dition, the Company repaid bank credits in the amount of RUB25 billion in order to optimise its debt portfolio. Upon bond offerings (Series 06 and 08) in 2014 bonds in the total amount of RUB14.85 billion (the initial amount was RUB20 billion) remained outstanding (repayment in 2020). In case of financing requirements and positive market trends, the Company can place a repurchased portion of the bond is- sues through secondary bond placement. The Company meets its obligations on servicing its debt portfolio and debt repayment in full and on time. the 2015–2019 investment programme and to refinance the current debt. Furthermore, our Company plans to primarily use market-based instruments that provide lesser funding costs with longer borrowing terms. The use of specific in- struments will depend on market conditions. Bond issues in 2013 In 2013, within the adopted programme, the Company placed bonds of Series 23, 26, 27, 28, 29, 30 and 34 with a total value of RUB100 billion (infrastructure bonds). As part of the previously approved 2012 programme, bonds of Se- ries 24 were placed in the amount of RUB10 billion. In addition, the Company has revolving and non-revolving credit facilities opened with major Russian banks (Sberbank of Russia, Gazprombank, Alfa-Bank, NOMOS-Bank, Raif- feisenbank, Promsvyazbank, AB Russia and Bank Saint Petersburg) with a maturity of 5–15 years. As of 31 Decem- ber 2013, the total free limit of the credit facilities amounted to RUB157.5 billion. In 2013, the total amount of funds raised from the bond placement was RUB110 billion. The bonds were placed by public subscription on the MICEX Stock Exchange among a wide range of investors. The funds raised were allocated to finance the Company’s investment programme. The Company does not plan to increase its debt load in 2014. We will continue to use all available tools to attract financing (bonds, Eurobonds and bank loans) to finance The Company’s bonds fully comply with Bank of Russia’s requirements for inclusion to Bank of Russia’s Lombard list and the list of securities acceptable as repo collateral. Federal Grid’s Debt Portfolio as at 31 December 2013 Type of debt Bond issue Infrastructure bonds Eurobonds Total Amount, RUB bn Repayment period 2.5–9 yeas 33–35 years 6.25 years — 164.85 100 17.5 282.35 95 PERFORMANCE RESULTS / MANAGEMENT’S DISCUSSION AND ANALYSIS Dynamics of debt portfolio Credit ratings as at 31 December 2013 Rating Agency International Scale National Scale Latest Rating Date Standard & Poor’s Moody’s Fitch Ratings ВВВ/Stable Ваа3/Stable ВВВ/Stable ruAAA Aaa.ru AAA(rus) 17.10.2013 23.11.2012 25.10.2013 7. Credit Ratings The high level of the Company’s creditworthiness and its fi- nancial sustainability are confirmed by ratings assigned by top international ratings agencies. The current credit ratings are in the investment category and show that the Company’s key performance indicators (KPIs) comply with the level required for the full and timely performance of financial obligations. Information on 2010–2013 credit ratings 25 October 2013 – Fitch Ratings assigned a Long-term foreign currency Issuer Default Ratings of “BBB”. The Out- look is Stable. Long-term National Rating was assigned an “AAA(rus)” with Stable Outlook. 17 October 2013 – Standard & Poor’s confirmed Federal Grid Company’s credit ratings: long-term international scale credit rating at BBB, with a stable outlook and a national scale rating of ruAAA. When assigning ratings, both agencies rely on similar factors. The Long-term foreign currency IDRs include a two-notch uplift to reflect moderately strong links with its majority indirect shareholder, Russian Federation (BBB/Stable) through JSC Russian Grids. Federal Grid Company’s standalone rating (BB+) takes into account the Company’s monopoly position as the owner and op- erator of the country’s national electricity transmission grid, as well as its high level of profitability and liquidity. At the same time, the rating agencies note factors that could have a negative impact on the rating, including uncertainty and low predictability inherent in the Russian regulatory framework, as well as financial risks relating to the implementation of an extensive investment pro- gramme. 23 November 2012 – Moody’s assigned Federal Grid Com- pany an international scale credit rating at Baa3, with a sta- ble outlook. The national scale rating was confirmed at the same level – Aaa.ru. A downgrade in Moody’s rating from Baa2 to Baa3 was caused by changes in the ownership structure of the Company, in accordance with the Russian President’s Decree “On Joint Stock Company Russian Grids” No 1567 dated 22 November 2012. The Company’s financial rating has remained unchanged. 96 97 Federal Grid Company’s Social Respon- sibility and Sustainability Reports are available in the Investors/Annual Reports section of our website www.fsk-ees.ru SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / SUSTAINABLE DEVELOPMENT POLICY 2013 TARGET 2013 ACTUAL 2014 TARGET Average level of customer satisfaction with technological connection services, grade 10 9.3 10 Charitable assistance (to individuals and organisations), RUB mln 200 104 150 Frequency rate of fatal and non-fatal workplace injuries or group accidents because of poor performance/non-performance of job duties, per 1,000 people 0.49 0.32 0.40 Environmental costs, RUB mln 82.5 80.5 88.6 Economic effect of measures within the Energy Saving and Energy Efficiency Programme, RUB mln, net of VAT 101.3 114.5 111.0 Sustainable Development Policy and Social Responsibility Principles Our commitment to social responsibility and sustainable development principles is based on the Company’s mis- sion and strategy. Business priorities set out in our strategy reflect our vision of the further sustainable development of the energy industry in the future. The main principle of Federal Grid Company’s policy in the area of sustainable development is that in our activities we are constantly seeking a balance between social and eco- nomic interests. Federal Grid Company understands corporate social re- sponsibility to mean doing business responsibly and re- sponding to the sustainable development agenda, which is set and updated following regular communication with stakeholders. Since 2008, Federal Grid has published annual reports on social responsibility and corporate sustainability (Social Re- port) that inform stakeholders of the efficiency of the Com- pany’s socially important projects and their influence on the social and economic situation in the regions in which the Company operates. The Company’s social responsibility reports are prepared in accordance with international standards for non-finan- cial statement disclosure: GRI (G3) Guidelines, the GRI energy protocol, AA 1000 SES standard. As part of pre- paring the Social Report, the Company discusses its key topic with stakeholders and collects disclosure requests. Prior to publication, the text of the Report is discussed publicly in the form of hearings held either in absentia or in person. Our Social Reports are registered with the National Reg- istry of Corporate Non-Financial Reports, which is main- tained by the Russian Union of Industrialists and Entre- preneurs. The Company’s 2012 Social Responsibility and Sustainability Report became a platinum winner in the “Annual Report on Social Responsibility” category at the international competition in the area of corporate commu- nications MarCom Awards (USA). 100 101 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / SUSTAINABLE DEVELOPMENT POLICY Stakeholder Relations Stakeholder Interactions in 2013 Being one of the leading energy companies, Federal Grid builds relationships of trust with all stakeholders through an open and constructive dialogue with them. We consider stake- holder interaction to be a way of consolidating resources, to meet challenges and to achieve common goals. Understand- ing and analysing key stakeholders’ expectations and posi- tions on the issues that are vital for the Company underpins the improvement of corporate social responsibility processes. Shareholders and investment community General Meeting of Shareholders Public authorities of RF subjects and energy companies Meetings of the Company’s managers with investment analysts Consultative meetings with individual minority shareholders Cooperation agreements on UNEG development and improvement of the efficiency and reliability of electric grids and electric grid facilities of UNEG Personnel Young specialists’ attraction and retention programmes The Dynasty Programme Doors Open Days Summer and Winter Olympics Student Teams Suppliers and contractors Signing agreements with major partners, including: InventLLC, MICEX-RTS, Vnesheconombank, the Eurasian Development Bank and Alstom Grid B+ GRI APPLICA- TION LEVEL 2012 SOCIAL RESPONSIBILITY AND CORPORATE SUSTAINABILITY RE- PORT OF FEDERAL GRID COMPANY 102 103 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / HR POLICY HR Policy Personnel structure Our employees are our most valuable asset. Federal Grid Company’s integrated system of HR management is aimed at ensuring the balance between the optimal use of em- ployees’ performance results, the achievement of corporate strategic goals and the provision of attractive social benefits and guarantees. One of the priorities of the Company’s HR policy is rotating and retaining the quantitative and qual- itative characteristics of personnel to ensure the reliable performance and dynamic development of the electric grid complex. In 2013, the implementation of our HR policy ensured the availability of a skilled workforce with the minimum level of employee turnover and the development of a corporate cul- ture and conditions that promoted the optimal use of work- force capacity. 2013 Employee Headcount per Branch In 2013, the implementation of HR policy ensured the availability of a skilled workforce with the minimum level of employee turn- over and the development of a corporate culture and conditions that promoted the optimal use of HR capacity Federal Grid Company employed, on average, 25,123 peo- ple in 2013. Dynamics of Employee Headcount in 2011–2013 A 3% increase in the total number of employees compared with the previous year was caused by the creation of new jobs to ensure the reliable operation of Olympic power fa- cilities, improving repair and maintenance quality as well as implementing plans for commissioning and energising new UNEG facilities. Measures aimed at improving labour efficiency and effec- tiveness of business processes resulted in a 5% decrease of the number of administrative and managerial employees. The employee turnover rate increased by 1.5% to 7.8% compared with 2012. The Company’s staffing level is rather high, standing at 98.2% of its target value as of 31 December 2013. 104 105 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / HR POLICY Staff Sufficiency in 2011–2013, % Personnel Structure by Categories in 2011—2013,% Material incentives We have developed a compensation system that takes into account the position categories, performance results of the Company’s branches and structural divisions, specifics of re- gional labour markets and the individual contribution of each employee. We continue to meet our commitments on wage indexation for our workers by the value of actual growth in the con- sumer price index in accordance with the provisions of the Sectoral Tariff Agreement of the Russian Federation Energy Sector for 2013–2015.. We develop measures that take into account the labour market as well as social and economic conditions in the domestic economy to maintain the level of our employees’ wages and salaries. Employment benefits are another effective tool that the Company uses to increase the Company’s social attrac- tiveness and improve employee motivation. Over the last few years, the number of employees who have been through higher education has increased because we have raised the skill and qualification requirements for employees. During 2013, the average employee age was 39 years. 69% of our employees are younger than 40 years old. Average wage/salary in 2011—2013, RUB Employee income structure Personnel Structure by Educational Level in 2011—2013, % Personnel Structure by Age in 2011—2013,% 106 107 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / HR POLICY Availability of managerial personnel reserve as of the end of 2013 (% of positions covered) Personnel Reserves of Federal Grid Company Two types of personnel reserve have been created in the Company: “tactical” and “strategic”. A tactical personnel reserve for the production and technical facilities of Federal Grid — MES (backbone electric grids),was created to improve the reliability of grid facilities and to establish a succession pool of qualified candidates for vacant positions. The HR reserve for the position of PMES’ director was creat- ed to minimise HR risks related to professional level of direc- tors of PMESs (backbone electric grid enterprises). In order to develop the professional competencies of can- didates from the tactical personnel reserve, a mentorship programme was launched which required each candidate to complete his individual training plan under the supervision of his mentor. At the end of 2013, 243 employees have complet- ed their individual training plan. Since 2011, as a part of our activities on the development of strategic personnel reserve we have implemented, together with the Skolkovo Moscow Management School, an educa- tion project aimed at training mid-level managers. In 2013, 46 mid-level managers received training under the second integrated programme, “Leaders of Change”, and 40 manag- ers who were trained under the first programme took part in the Foresight Sessions on development management in the Company. Type of personnel reserve Number of reservists in 2013, persons Number of reservists appointed to superior positions target positions others Tactical personnel reserve for production and technical facilities of Federal Grid – MES Personnel reserve for the position of PMES’s Director 459 96 36 4 65 14 108 109 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / HR POLICY Personnel Training and Development Having personnel with a high level of professional qualifi- cation is one of the key factors driving the reliable opera- tion of UNEG. In 2013, 16,154 employees were involved in various types of training, which is 63% of the Company’s overall work- force. Share of employees trained in 2013, and training costs/salary budget ratio, % Employee training in 2013 – breakdown by employee categories In June 2013, a Personnel Training Centre of the Compa- ny’s Sochinskoe PMES was opened to provide profession- al training for employees engaged in ensuring the reliable power supply during the Sochi 2014 Winter Olympics and Paralympics. Since then, it has trained 1,103 employees within the following areas: standard programme of ad- vanced training; specific training courses; training on team- work skills in emergency situations, stress-resistance skills and managerial skills. All employees sent to Sochi from the Company’s branch- es – MES received the mandatory advanced training aimed at developing their professional knowledge and skills, as well as testing by the methods of integrated diagnostics and professional stress correction. To build its HR capacity in the energy sector, Federal Grid implements activities aimed at providing young employ- ees with opportunities for professional growth and aims to attract talented younger people to address the long-term issues involved in the innovative development and modern- isation of the electric grid complex. In 2013, 77 employees of MESs, as well as students and post-graduates from spe- cialised higher-education institutions, took part in the Youth Round Table “Accessible Grids: Investment attractiveness or social infrastructure? Youth dimension” held within the 2013 St. Petersburg Youth Economic Forum. For detailed information on training and retraining of Federal Grid Company employees in 2013 see Appendix to the Annual Report.on the memory stick attached IN 2013 8,297 EMPLOYEES WERE TRAINED IN PERSONNEL TRAINING CENTRES OF FEDERAL GRID COMPANY Having personnel with a high level of professional qualifica- tion is one of the key factors driving the reliable operation of UNEG. In 2013, 16,154 employees were involved in various types of training, which is 63% of the Company’s overall work- force. Executive Office, MES Volga, MES East, MES Western Siberia, MES North-West, MES Siberia, MES Ural, MES Centre, MES South In all regions where Federal Grid operates, we have created a network of training centres. Personnel Training Centres include a set of special facilities: training simulators, lab- oratories with relay protection and emergency automatic equipment, and electric grid training areas with prototype equipment of various voltage levels. It allows us to organise emergency response exercises and to offer our employees both theoretical knowledge and hands-on skills. In 2013, 8,297 persons were trained in the Company’s Per- sonnel Training Centres, and 257 emergency response ex- ercises were organised. 110 111 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / HR POLICY Strengthening Corporate Culture Non-Governmental Pension Programme They came out to clean up the socially important territories of Moscow city. A non-governmental pension programme for the Compa- ny employees was approved in 2004. Implementing this programme had a great motivational effect on our employees, rejuvenating them, and provid- ed our employees with decent non-governmental pen- sions, which in turn retained highly qualified personnel. In 2013, RUB306 million was allocated for the non-gov- ernmental pension fund. Since the programme launch, a non-governmental pension from Federal Grid funds has been granted to 4,072 employees. The Company’s corporate culture brings employees to- gether as a united team, providing motivation for fruitful work, encouraging their initiatives and facilitating commu- nications. Our Company holds various activities within the Dynas- ty Programme aimed at fostering labour traditions and ensuring generational continuity. In 2013,we organised visits of our employees’ children to the Company’s production facilities, where they took part in a draw- ing contest, “Energy of Olympics”, and celebrations for veterans dedicated to Victory Day and the Power En- gineers’ Day. On 20 April 2013, more than one thousand employees of the Company’s administration together with their families took part in a second annual Voluntary Saturday Work. We promote a healthy lifestyle, sport and physical activities among our employees, offering them partial reimbursement of gym membership. The Company’s volleyball and indoor soc- cer teams participate regularly in competitions for corporate leagues, including the annual Fuel and Energy Complex Cup. Every year, our employees’ team takes part in a chess tourna- ment in memory of Mikhail Botvinnik organised among power industry professionals by JSC R&D Centre of FGC UES. In 2013, the Company organised the first Winter Olympics for electric grid complex staff in Sochi. Those employees who demonstrated the best results in the competitions were included in the list of participants of the Sochi 2014 Olympic Torch Relay. Employees eligible for the NGPP: full-time employees with at least 10 years of uninterrupted service prior to the date when the right to labor pension is acquired In 2013, the Company organised the first Winter Spartakiada Games for electric grid complex staff in Sochi. Besides the teams from Federal Grid branches, there were teams from the distribution grid companies of JSC Russian Grids that took part in the Spartakiada. Those employees who demonstrated the best results in the competitions were included in the list of participants of the Sochi 2014 Olympic Torch Relay. 112 113 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / HR POLICY Housing Policy Our Housing policy is an important tool for attracting and retaining the Company’s key personnel. The Company has a Corporate Housing Programme that allows us to address the ever-present issue of attracting personnel to remote power facilities. We also have a long-term programme aimed at providing corporate assistance to improve employees’ housing con- ditions. The programme includes compensation of mort- gage interests, loaning and furnishing securities for loans. Furthermore, our Company compensates the employees’ rental costs during a year when their activities involve mov- ing to another place. Young employees are eligible for this benefit during the first three years of their employment. Awards Policy Our employees are entitled to awards if they have rendered great service to the State, to the fuel and power industry or to the Company, and if they demonstrate high production and management efficiency, or achieve great results in the operation, construction and re-construction of electric grid facilities. Awards were given to 2051 employees of the Company and its subsidiaries and associates during the reporting year, including 80 employees who were awarded by the Russian Ministry of Energy for their services to the industry. Twen- ty-one employees received State awards of the Russian Federation for their services to the State. Four employ- ees were given the title “Honoured Power Engineer of the CIS” for their services to developing integrated pro- cesses in the power industries of CIS countries. ALLOCATED TO CHARITY IN 2013 RUB 104 MLN Social Policy Youth Policy Implementation In cooperation with educational institutions, the Company is addressing the issue of finding and supporting young and promising professionals. Working with students, we focus on assisting them to ob- tain skills directly at the Company’s facilities and involving them in innovative research. During the reporting year, more than 1,200 students and teachers took guided tours of the Company’s production facilities. Seven hundred and fif- ty students underwent practical training at the facilities of Federal Grid Company; temporary jobs were created for 200 of them. In 2013, the traditional annual Day of Federal Grid Company was organised in the industry-specific institutions with par- ticipation of more than 2,500 students from 40 higher-edu- cation institutions. In October 2013, a showcase of innovative solutions of high- er-education institutions – Federal Grid’s partners — was held within the UPGrid-2013 International Electric Power Forum. The Company supports institutions’ initiatives on improving the structure and content of bachelor-level and master-level programmes, as well as educational programmes for power engineers with a view to adapt them to up-to-date produc- tion requirements. Our qualified professionals assist, upon request, higher-education institutions in developing topics for yearly essays and degree theses considering the spe- cifics of electric grids. Seventeen employees of the Com- pany’s branches are members of Thesis Boards and State Examination Boards. We also contributed to upgrading laboratory facilities of higher-education institutions, providing equipment needed for research. In 2013, a charitable donation for these pur- poses was provided to Siberian Federal University, National Research University Moscow Power Engineering Institute (MPEI) and the Development Fund of MPEI. In 2013, Federal Grid together with its Research & De- velopment Centre held a nationwide youth contest, “En- ergoproryv”(Energy Breakthrough), of innovative projects and developments in the field of smart energy. There were 120 applications from across the country, and the best projects were presented at a scientific/practical conference. From 30 June to 6 July 2013, the Company’s specialists took part in an innovative forum of young power engineers, “Forsazh-2013”, held in Kaluga oblast. The Youth Round Table “Accessible Grids: Investment at- tractiveness or social infrastructure? Youth dimension” was held in June 2013 within the XVII St Petersburg Economic Forum with the participation of Federal Grid. Our Company contributes to the development of indus- try-specific secondary vocational education and interacts with 14 specialised secondary schools providing assis- tance in equipping their laboratories and organising practi- cal training. We pay particular attention to our relations with Far Eastern Power Engineering College (in Vladivostok) and the Power Engineering College in Makhachkala. We continued our tradition of promoting student construc- tion teamwork at the Company’s facilities. During the re- porting year, more than 900 students (63 teams) from 35 higher-education institutions and three specialised second- ary schools worked at 50 facilities. Charity Projects In 2013, Federal Grid Company spent RUB104 million on charitable projects. The spending limits for charitable pur- poses are approved by the Company’s Board of Directors in the annual business plan. Health and safety Our health and safety measures are aimed at eliminating workplace injuries and occupational diseases, promoting safe conduct and developing accident-prevention skills among employees, as well as at continuously improving working conditions. In 2013, the number of accidents remained on the level of 2012 (six accidents). The number of fatal accidents fell by half compared with the previous year. To improve production safety, we take precautions to safe- guard our employees before conducting any kind of repair work. We assess risks to employee safety and develop 114 115 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / SOCIAL POLICY corrective actions, produce health and safety films and conduct regular safety checks on work carried out by our repair teams. Furthermore, during the reporting year we im- plemented the following health and safety initiatives: • A project on the use of mobile video recorders aimed at recording the most dangerous actions of employees working on electrical installations with further correc- tive actions. • A focus of Labour Protection Days was changed to in- crease efficiency and prevent violations of safety rules. • The Road Traffic Safety Month was organised. • Operation of 50 permanent and 17 mobile health and safety offices was organised to promote safe working conditions and to train personnel to use safe practices. • Stress-release rooms for substation personnel were retained. • A review competition was conducted for the best organisation of work in the area of health and safety among the Company’s branches. Industrial Safety In 2013, Federal Grid Company operated 278 hazardous industrial facilities (HIFs) registered with the State Registry. To ensure safe operation of HIFs, to prevent accidents and to ensure emergency preparedness, we have taken the fol- lowing measures: • • drafting and implementing documents that regulate the safe operation of HIFs insurance of civil liability for causing harm caused by to an accident at an HIF • registration/exclusion/re-registration of HIFs with the State Register • industrial safety training and testing of personnel Injury and Fatality Rates at the Company’s Facilities Fire Safety During 2013, two fires occurred at the Company’s substa- tions owing to defects of high-voltage bushings of the au- totransformers. No fires occurred in the protected zones of high-voltage power lines. Fires at the Company’s facilities in 2009–2013 116 117 The energy saving and energy efficiency initiatives for 2013 approved under the Programme include the following key areas: Process electricity consumption in UNEG 22,261.5 mln kWh 98.7 mln kWh 108,852 Results of implementation of the Energy Saving and Energy Efficiency Programme in 2013 Volume Process impact of the mea- sures taken to reduce the consumption of energy/fuel Economic impact of the measures taken to reduce the consumption of energy/fuel • Reducing the process energy consumption in UNEG Electricity consumption in buildings 35.7 mln kWh 0.8 mln kWh Thermal energy consumption in buildings 50.6 thousand Gcal 1.8 thousand Gcal Gasoline consumption 9.1 mln liters 26.3 thousand liters Diesel consumption 7.1 mln liters 18.6 thousand liters 2,519 1,823 727 541 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / ENERGY SAVING AND ENERGY EFFICIENCY Energy Saving and Energy Efficiency Energy saving and improving energy efficiency are some of the top priorities in Russia’s technological development. To comply with the Federal Law “On Energy Saving and Improv- ing Energy Efficiency” No. 261-FZ dated 23 November 2009, our Company has developed an Energy Saving and Energy Efficiency Programme for 2010–2014.* The purpose of this Programme is to ensure saving and rational use of energy resources by improving the energy efficiency of Federal Grid facilities and equipment. The Federal Grid energy saving and energy efficiency initia- tives in 2013 were organised in accordance with the following documents: • Federal Law “On Energy Saving and Improving Ener- gy Efficiency, and on Introducing Amendments into Certain Legislative Acts of the Russian Federation” No. 261-FZ • Resolution of the RF Government “On the Procedure for Establishing Requirements for Energy Saving and En- ergy Efficiency Programmes of Organisations Engaged in Regulated Activities” No. 340 dated 15 May 2010 • Decree of the Federal Tariff Service (FTS of Russia) “On Establishing the Requirements for Energy Saving and Energy Efficiency Programme of JSC FGC UES for 2010 – 2014” No. 401-e dated 25 August 2010 • Energy Saving and Energy Efficiency Programme of Federal Grid Company for 2010 – 2014 (hereinafter, the “Program”) • Fitting the buildings, structures, and installations that are part of Federal Grid facilities with metering devices for all types of energy and energy carriers, including water, natural gas, thermal energy, and electrical en- ergy • Reducing the electrical and thermal energy consump- tion in buildings, structures, and installations owned by Federal Grid • Reducing the consumption of fuel and lubricants used by Federal Grid to provide the electricity transmission services through UNEG, per 1 km of distance traveled by motor vehicles, as well as the consumption of motor fuels by vehicles. To ensure implementation of the Programme at the Ex- ecutive Office and the branches of Federal Grid (MES) a Decree of Federal Grid Company No. 750 was issued on 6 December 2013 “On Organising the Implementation of the Energy Saving and Energy Efficiency Programme of JSC FGC UES for 2013 – 2014 and Developing the Pro- gramme for 2015 – 2019”. By decrees of the branches, leaders were appointed re- sponsible for the coordination, implementation, and mon- itoring of the Programme implementation activities, and taskforces were formed to analyze implementation of the Programme and develop solutions based on the analysis. Federal Grid pilot projects on energy saving and energy efficiency: 1. AT 1 heat recovery at the Nizhegorodskaya 500/220/10 kV SS 2. Optimising operation of the transformer cooling sys- tems 3. Using plasma lamps for lighting of the open switch- gear 4. Using “light tubes” for lighting of office buildings 5. Automation of the lighting system controls 6. 7. Introduction of an automated heating station Improving energy efficiency of the lighting installations at the administrative building of the Upper Don PMES. Detailed information on the Federal Grid pilot projects on energy saving and energy effi- ciency is available in Appendix to the Annual Report on the memory stick attached Federal Grid continues to implement the energy manage- ment system compliant with the international standard ISO 50001:2011 “Energy management systems — require- ments with guidance for use”. To ensure compliance with that standard, the Company is currently conducting work on the development, improvement, and certification of the corporate energy management system of the Executive Office and two branches of Federal Grid – MES Volga and Samarskoe PMES. ECONOMIC EFFECT FROM THE IMPLEME- NTATION OF THE ENERGY SAVING AND ENERGY EFFICIENCY PROGRAMME RUB114.5 MLN * The Programme was approved by resolution of the Management Board of Federal Grid (minutes No. 979/2 dated 27 July 2011) 118 119 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / ENVIRONMENT Environment Our Company is pursuing a responsible approach to en- vironmental protection which aims to increase environ- mental safety levels and to ensure the reliable and envi- ronmentally safe transmission and distribution of power. We operate in compliance with our Environmental Policy, which includes technical and organisational measures in- tended to mitigate the negative environmental impact of the Company’s operations. In 2013, a new version of the Environmental Policy of Federal Grid Company was drafted and approved by the Management Board, and in 2014 it will be submitted for approval to the Board of Directors. the Environmental Doctrine and the Development Strat- egy of the Russian Electric Grid Complex until 2030, the Concept was approved by the Company’s Manage- ment Board and the Technical Council of the electric grid complex. To ensure a high level of environmental management, we are committed to embed voluntary international environ- mental standards in our practices. Since 2011, the Com- pany’s Executive Office and MESs have been working on the systematic implementation and certification of the Environmental Management System (EMS) for compli- ance with the requirements of the international standard ISO 14001:2004. To define methods of and approaches to the implemen- tation of the Environmental Policy, in 2013 we prepared a Concept of Environmental Development of the Elec- tric Grid Complex which describes the principles and tools of environmental activities, mid- and long-term milestones, environmental risks and risk mitigation solu- tions. Prepared in accordance with the requirements of In 2013, the EMS was developed, successfully imple- mented and certified for compliance with ISO 14001:2004 in the Company’s major branch –MES Centre. Auditors from the independent certification company SGS Vostok Limited confirmed its efficiency, effectiveness and suita- bility for continuous improvement. During the reporting period, a compliance audit of the Environmental Man- Environmental Costs in 2009–2013, RUB million Air Emissions in 2009–2013, tonnes agement Systems of the Company’s Executive Office and the branches MES South and MES North-West was also performed, and their certification status was confirmed. The Company’s main activity, which is the electricity transmission, is much less harmful to the environment compared with other power industry sectors, as the Company’s technological processes do not produce any emissions, discharges or waste; these occur only in the course of operational activities and so their harmful effect is kept to a minimum. The total amount of the Company’s environmental costs and investments in 2013 was RUB203.53 million, of which RUB73.1 for current environmental costs, includ- ing costs for the EMS implementation and environmental personnel training. Every year charges for negative impact on the environ- ment for all of the Federal Grid Company increase slight- ly owing to the commissioning of new facilities and the standardisation of new previously unrecorded sources of emissions and discharges. In 2013, these charges in- creased by 6% to RUB7.54 million. At the same time, one should note an annual decrease of overcharges result- ing from the receipt of necessary permits for almost all branches of the Company. Total volume of air emissions in 2013 increased owing to an increase in the emission of gaseous and liquid pollut- ants, which is driven by the extended inventory of sourc- es of emissions (transformers, welding stations, garages, workshops, etc.) in the Ural, South, Volga, North-West and Western Siberia MESs. Water at the Company’s facilities is consumed main- ly through the centralised water supply. We also use imported water and draw it from both surface and un- derground water sources. The decrease in water con- sumption in 2013was a result of measures taken for the maintenance, repair and reconstruction of water supply facilities in the Company’s branches – MESs and PMESs, and the subsequent reduction of water loss. In the course of operations of the Company’s branches – MESs and PMESs–wastes of I-VI hazard classes are gen- erated. The increase of waste generation volumes is due to the commissioning of new facilities, as well as mainte- nance and repair activities, including construction waste and the removal of outdated equipment in all branches. 120 121 SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT / ENVIRONMENT Water Consumption in 2009–2013, million m3 Waste Generation Volume in 2009–2013, thousand tonnes • The IV All-Russian Environmental Congress. • At the end of the year, the Chairman of the Com- pany’s Management Board, Andrey Murov, and the Russian Representative Office of the World Wildlife Fund (WWF) signed a cooperative agreement that envisages cooperation in such areas as improvement of efficiency and environmental safety of the Com- pany’s facilities, promotion of renewable sources of energy and protection of biodiversity. It is the first time in history that an agreement with a non-govern- ment environmental organisation has been signed by a Russian electric grid company. Our major tasks for 2014 in the environmental area are as follows: • Development of the long-term programme for the environmental development of Federal Grid for the period up to 2030. • Inclusion of environmental requirements and criteria to the list of indicators for the Company’s strategic programmes, such as the Unified Technical Policy of the Electric Grid Complex, the Innovation Pro- gramme and the Investment Programme. • • Improvement of environmental control and report- ing. Implementation and certification of the Environmen- tal Management System of MES East, confirmation of certification status of the Executive Office and the branches MES South, MES North-West and MES Centre, and preparation to be made for the certifica- tion of the Company. • Revision of the Company’s corporate standards for environmental safety of electric grid facilities. The year 2013 was officially declared the Year of Ecological Culture and Environmental Protection in the Russian Fed- eration. Federal Grid took an active part in activities held within the year such as: • • • The VII All-Russian Conference “Ecology and Pro- duction”, where Federal Grid Company was declared a winner of the “100 best organisations of Russia” competition in the “Environment and environmental management” category The X World Conference on Sport and Environment held by the IOC in Sochi The I International Ecological EU–Russia Forum held in Marbella, Spain • World Environment Day (4 June), when Federal Grid Company held a videoconference with represent- atives from the Ministry of Energy and the Ministry of Natural Resources, and environmental commu- nities 122 123 124 125 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Governance system Corporate Governance Rating TARGET 2013 7+ ACTUAL 2013 7+ TARGET 2014 7+ Corporate governance principles Corporate Governance Rating In December 2012, the Russian Institute of Directors as- signed a National Corporate Governance Rating Score of 7+ to Federal Grid Company. This rating proves that the Company complies with Russian corporate legislation, fol- lows the majority of recommendations of the Russian Code of Corporate Conduct* and a number of best international practices and its owners have a low risk of experiencing losses related to the quality of corporate governance. During the reporting period, the Company demonstrated its adherence to high standards of corporate governance, meet- ing liabilities to shareholders and other interested parties. In February 2014, Federal Grid Company’s National Corporate Governance Rating was confirmed at a 7+ level. Federal Grid is committed to maintaining a high level of corporate governance, so we intend to continue work in this direction. A main task for us in this field will be bring- ing our internal documents, rules and procedures in line with new corporate governance requirements and recom- mendations following the adoption of a new Russian Code of Corporate Governance and the new listing rules of the Moscow Stock Exchange. Our corporate governance system is based on strict com- pliance with Russian law and the principles set down in the Russian Code of Corporate Conduct and in the Com- pany’s Corporate Governance Code. We also aim to keep up with the best Russian and international corporate gov- ernance standards, including the globally recognised prin- ciples developed by the Organisation for Economic Coop- eration and Development (OECD). Recognising the need to improve corporate governance systems in order to ensure the Company’s competitive- ness, sustainability and attractiveness to investors, we constantly monitor and implement good governance standards in all structural divisions, branches, subsidiaries and associates of Federal Grid Company. The following principles underlie Federal Grid’s corporate governance policies and procedures: • • Transparency – we are committed to the timely and accurate disclosure of all material information on the Company’s business, including its financial status, social and environmental indicators, operating re- sults, ownership and governance structure. Federal Grid makes this information freely accessible for all interested parties. Accountability – our Board of Directors is accounta- ble to all shareholders in accordance with the applica- ble legislation, and the Company’s executive bodies are accountable to the General Meeting of Sharehold- ers and the Board of Directors. • Fairness – we are committed to protecting share- holder rights and treating all shareholders, owning the same quantity of shares of the same type (category), equally. • Responsibility – Federal Grid recognise the rights of all stakeholders, as provided for by applicable legisla- tion, and aims to cooperate with them for the purpose of the Company’s growth and financial stability Federal Grid’s Code of Corporate Governance, approved by the Board of Directors in November 2012, is a frame- work document aimed at improving the systematisation of corporate governance, ensuring greater transparency and confirming the Company’s readiness to comply with the highest standards in this area. The Company also adopted the Code of Corporate Ethics focused on improving the level of corporate culture in all its structural divisions. Federal Grid Company has adopted internal documents which regulate activities of the governing and control bod- ies and other issues of the Company’s corporate govern- ance system. CORPORATE GOVERNANCE PRINCIPLES OF FEDERAL GRID COMPANY TRANSPARENCY ACCOUNTABILITY FAIRNESS RESPONSIBILITY The full set of internal documents is available on our website, www.fsk-ees.ru, and the Investors / Corporate Governance / Cor- porate Documents section * Information on compliance with the Russian Code of Corporate Conduct is contained in Appendix to the Annual Report on the memory stick attached 126 127 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Governing and control bodies Federal Grid Company has a well-developed organisational structure of governing and control bodies that interact well with each other. The General Meeting of Shareholders is the supreme governing body of Federal Grid Company. The Board of Directors is responsible for overall leadership and providing strategic guidance, as well as for supervising the Company’s Management Board, which is in charge of the day-to-day management of Federal Grid. The Chairman of the Management Board is the Company’s Chief Executive Officer. Committees under the Board of Directors aim to im- prove the efficiency and quality of the Board’s performance. Federal Grid has an efficient control system, both externally (independent external auditor and Audit Commission) and internally (Company’s divisions of internal audit and control). Organisational Structure of Governing and Control Bodies of Federal Grid Company n o i t c e e l l o r t n o c d n a d n a s t r o p e r s n o i t a d n e m o c c e r General Meeting of Shareholders The General Meeting of Shareholders (GMS) is the su- preme governing body of Federal Grid Company. In ac- cordance with the Federal Law “On Joint Stock Compa- nies” and the Company’s Articles of Association, matters within its competence include, among others, payment of dividends, approval of annual reports and annual fi- nancial statements, election of the external auditor, re- organisation and liquidation of the Company, election of members of the Board of Directors and the Audit Com- mission, approval of large transactions and related par- ty transactions and other important matters relating to Company business. When preparing and holding a GMS, the Company follows recommendations of the Russian Code of Corporate Conduct ensuring the smooth execution of shareholder rights including the following: • Shareholders holding at least 2% of the voting shares are provided with an opportunity to exercise their rights as stipulated by the Articles of Association and cur- rent legislation, upon submitting a statement of their securities account (if their right to shares is recorded in a securities account) without submitting any other documents as evidence of their rights. • Notice on the GMS is sent (or handed over) to each person included in the list of those authorised to partic- ipate in the GMS at least 30 days prior to the meeting. The notice is also to be published in the newspaper Rossiyskaya Gazeta. • • Information (materials) on the agenda of the GMS is available on the Company’s website at least 20 days prior to the meeting. Functions of the Counting Board are performed by the independent registrar of Federal Grid Company. Annual General Meeting of Share- holders The 2013 Annual General Meeting of Shareholders (AGM) of Federal Grid Company was held on 27 June 2013. In accordance with the AGM agenda, the shareholders ap- proved the Company’s annual report and annual financial statements, elected the Board of Directors and approved the external auditor for 2014. The shareholders decided not to pay dividends on common shares for 2012, since the Company incurred a loss in the accounting period. The AGM also made a resolution to approve a related party transaction involving Directors’ and Officers’ liability insur- ance. The Minutes of the 2013 AGM are available on our website, www.fsk-ees.ru, section About Us / Corporate Governance / Shareholders Meetings. Extraordinary General Meeting of Shareholders On 11 November 2013, an Extraordinary General Meeting of Shareholders was held which made a resolution on the early termination of powers of the Chairman of the Com- pany’s Management Board and on the election of a new Chairman, as well as on the election of the Audit Com- mission. The Minutes of the Extraordinary General Meeting are available on our website, www. fsk-ees.ru, About Us / Corporate Govern- ance / Shareholders Meetings section. Board of Directors The Board of Directors is a Company’s governing body re- sponsible for the strategic guidance in the name and on behalf of all its shareholders. The Board also supervises the executive bodies and ensures the effectiveness of internal control and risk management systems. The Board of Directors’ full responsibilities are set out in the Articles of Association and are clearly differentiated from those of the General Meeting of Shareholders and the Company’s executive bodies. The Board’s meetings are held on a regular basis, in accordance with the approved work plan and when the need arises, but at least once every six weeks. The Board shall include 11 members. Federal Grid Compa- ny’s Articles of Association provide for obligatory membership of representatives of the Market Council, a non-profit partner- ship uniting, on a membership basis, electric power industry entities and large electric and thermal energy consumers. 128 129 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM The Company’s Board of Directors has a balanced set of knowledge, experience and professional skills required for its effective performance. The Company also aims to maintain a balance on the Board with respect to all shareholders’ interests. The Federal Grid Company’s Board of Directors includes repre- sentatives of minority shareholders and independent directors Composition of the Board of Directors Elected by the General Meeting of Shareholders on 27 June 2013 (as of 31 December 2013). Information about board members is disclosed with their consent. Composition of the Board of Directors acting from 29 June 2012 to 27 June 2013 Name Status Position (as of the election date) 1. Ernesto Ferlenghi Non-executive director, Chairman of the Board of Directors Vice President of Eni S.p.A. (Italy), Head of the Representative Office of Eni (the CIS). 2. Boris Ayuev Non-executive director 3. Oleg Budargin Executive director 4. Boris Kovalchuk Non-executive director 5. Vyacheslav Kravchenko Independent director Chairman of the Management Board of JSC System Operator of Unified Energy System Chairman of Federal Grid Company’s Management Board Chairman of the Management Board of JSC INTER RAO UES Chairman of the Management Board of Non-Profit Partnership Market Council for the Organisation of an Efficient System of Wholesale and Retail Trade of Electric Energy and Power; 6. Andrey Malyshev Non-executive director, Deputy Chairman of the Board of Directors President of JSC Group E4 7. Vladimir Rashevsky Independent director 8. Elena Titova Independent director 9. Denis Fedorov Non-executive director 10. Rashid Sharipov Independent director 11. Ilya Scherbovich Independent director General Director, Chairman of the Management Board of JSC SUEK Managing Director, First Deputy Chairman of the Management Board of Morgan Stanley Bank LLC General Director of JSC Centerenergoholding, General Director of Gazpromenergoholding LLC Deputy General Director of KFK- Consult LLC President, member of the Management Board of United Capital Partners LLC Oleg Budargin Chairman of the Board of Directors General Director of JSC Russian Grids Federal Grid Board member since 2010 Georgy Boos President of BOOS LIGHTING GROUP MC LLC Federal Grid Board member since 2013 Born in 1960 Born in 1963 Education: Norilsk Industrial Institute (degree in Industrial and Civil Engineering) Education: Moscow Power Engineering Institute in 1986 PhD in Technical Sciences. From 2007 to 2009 – Assistant to the Plenipotentiary Repre- sentative of the Russian President in Siberian Federal District. From October 2009 to November 2013 – Chairman of Fed- eral Grid Company’s Management Board. Positions in governing bodies of other organisations: member of the Supervisory Board of JSC Russian Regional Development Bank; member of the Board of Directors of JSC INTER RAO UES; Chairman of the Supervisory Board of Non-Profit Partnership Association of Solar Energy En- terprises; Chairman of the Board of Directors of JSC Mos- cow United Electric Grid Company. From December 2003 to September 2005 – Depu- ty of the 4th State Duma of the Federal Assembly of the Russian Federation, Deputy Chairman of the State Duma. From September 2005 to September 2010 – Governor of Kaliningrad Region. Positions in governing bodies of other organisations: member of the Board of Directors of JSC Russian Grids; member of the Board of Directors of JSC Sheremetyevo International Airport. Share in the Company’s ordinary stock: 0.000644%. Holds no shares in the Company. 130 131 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Pavel Grachev Independent Director General Director of Polyus Gold International Limited Federal Grid Board member since 2013 Boris Kovalchuk Vyacheslav Kravchenko Andrey Murov Independent Director Chairman of the Management Board of JSC INTER RAO UES Federal Grid Board member since 2012 Deputy Chairman of the Board of Directors Deputy Minister of Energy of the Russian Federation Federal Grid Board member since 2012 Chairman of the Management Board of Federal Grid Company Federal Grid Board member since 2013 Born in 1973 Born in 1977 Born in 1967 Born in 1970 Education: St Petersburg State University (degree in Jurisprudence) University of Trieste (Italy) (degree in Jurisprudence) Education: St Petersburg University (degree in Jurisprudence). Institute of Advanced Training for Executives and Experts of Fuel and Energy Sector Non-profit partnership Corporate Educational and Research Centre of UES. From 2002 to 2006 – Managing Partner of the Russian branch of the law firm Pavia e Ansaldo. From 2006 to 2011 – Legal Department Head, Managing Director of JSC Nafta Moskva. Positions in governing bodies of other organisations: Chairman of the Board of Directors of Nafta Moskva (Cy- prus) Ltd. From 2006 to 2009 – Head of the Department of National Priority Projects of the Russian Government, Assistant to the First Deputy Prime Minister of the Russian Federation. From April to November 2009 – Deputy Director General for Development of State Nuclear Corporation ROSATOM. From November 2009 to June 2010 – Acting Chairman of the Management Board of JSC INTER RAO UES. Positions in governing bodies of other organisations: Board Chairman of OGK-1, JSC Mosenergosbyt, CJSC Kam- baratinskaya Hydro Power Station-1, TGK-3; Board member of JSC St Petersburg Sales Company, Irkutsk JSC of Energy and Electrification, JSC Russian Regional Development Bank; member of the Management Board of the RSPP. Education: St Petersburg State University (degree in Jurisprudence). Inter-disciplinary Institute of Advanced Training and Retraining for Executives (a special retraining course in Financial Management). State University of Civil Aviation (degree in Freight Regulation and Air Transport Management). PhD in Economics. From 2007 to 2012 – General Director of JSC Pulkovo Airport. From 2012 to November 2013 – Deputy General Director, Acting General Director, Executive Director, member of the Management Board of JSC Holding of the Inter-regional Distribution Grid Companies (since 04.04. 2013 – JSC Russian Grids). Positions in governing bodies of other organisations: Chair- man of the Board of Directors of JSC Inter-regional Distri- bution Grid Company of the North-West; member of the Board of Directors of JSC Russian Grids. Education: Lomonosov Moscow State University (degree in Jurisprudence). From 2004 to 2006 – Deputy Director of the Department of Structural and Investment Policy in Industry and Energy of the Ministry of Industry of the Russian Federation. From 2006 to 2008 – Director of the Department of Structural and Investment Policy in Industry and Energy of the Ministry of Industry of the Russian Federation. From 2008 to 2010 – General Director of RN Energo LLC. From 2010 to 2012 – General Director of JSC United Energy Service Company. From 2012 to September 2013 – Chairman of the Management Board of Non-profit Partnership Market Council and Chairman of the Management Board of JSC Trade System Administrator of the Wholesale Energy Market. Positions in governing bodies of other organisations: Board member of JSC Financial Settlements Centre, JSC Trade System Administrator of the Wholesale Energy Market, JSC INTER RAO UES, JSC Russian Grids, JSC System Opera- tor of Unified Energy System. Holds no shares in the Company. Holds no shares in the Company. Holds no shares in the Company. Holds no shares in the Company. 132 133 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Sergey Serebryannikov Denis Fedorov Ernesto Ferlenghi Sergey Shmatko Independent Director Department Head, Professor of Moscow Power Engineering Institute Federal Grid Board member since 2013 Independent Director General Director of JSC Centerenergoholding Federal Grid Board member since 2011 Head of the Representative Office of Eni (the CIS) Federal Grid Board member since 2008; Board Chairman from 2011 to 2013 Special Representative of the President of the Russian Federation on International Cooperation in the Electric Power Industry. Federal Grid Board member from 2008–2010 and since 2013 Born in 1952 Born in 1978 Born in 1968 Born in 1966 Education: Electromechanical Faculty of Moscow Power Engineering Institute (degree in Insulating and Cable En- gineering). PhD in Technical Sciences. Education: Bauman Moscow State Technical Universi- ty (degree in Economics and Management). Moscow Power Engineering Institute (degrees in Economics and Industrial Heat Power Engineering (postgraduate stud- ies)). PhD in Economics. Education: University of Rome Tor Vergata (Faculty of Mathematics Physics and Natural Science) Education: Ural State University (Faculty of Political Econ- omy). Marburg University in the FRG (Economy). Russian Federation of the Military Academy of the General Staff of Armed Forces of the Russian Federation (Advanced Aca- demic Courses in Defence and Security). PhD in Technical Sciences From 2004 to 2005 – Pro-Rector for Research of Mos- cow Power Engineering Institute (Technical University). From 2005 to March 2013 – Rector of Moscow Power Engineering Institute. From 2003 to 2006 – Head of the Department of Invest- ment Technologies and Technological Projects of EuroSi- bEnergo-Engineering LLC and the Investment Department of Corporation Gasenergoprom LLC. From February 2006 to April 2007 – Adviser to the General Director of Mezhre- giongas LLC. From 2006 to 2008 – General Director of JSC Mezhregionenergosbyt. From 2007 – Head of the Depart- ment of Electric Power Sector Development and Marketing in Power Generation of JSC Gazprom. From 2009 – Gen- eral Director of GazpromEnergoholding LLC. Positions in governing bodies of other organisations: member of the Management Board of CJSC FortisEnergy; Board Chairman of JSC Second Generating Company of the Wholesale Electricity Market, JSC Tumen Energy Ser- vice Company, Non-Profit Partnership Council of Power Producers; Board member of JSC Mosenergo, JSC INTER RAO UES, Heat Retail Company LLC, Non-Profit Partner- ship Centre of Innovative and Energy Technologies. From 2003 to 2004 – Regional Director of Eni for Kazakh- stan, Regional Manager of Agip Caspian Sea and Agip KCO in Astana, Kazakhstan. From 2005 – Vice President of Eni S.p.A. From June 2008 to May 2012 – Minister of Energy of the Russian Federation. In June 2012, by presidential decree, was appointed a member of the Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security of the Russian Federation. Positions in governing bodies of other organisations: Board member of Eni Energy LLC and JSC Russian Grids. Honorary Consul of the Republic of Italy in Russia. Positions in governing bodies of other organisations: Chairman of the Board of Directors of JSC Russian Grids; Chairman of the Supervisory Board of Non-Profit Partner- ship Scientific and Technological Council of Unified Energy System; Board member of JSC AK Transneft Holds no shares in the Company. Holds no shares in the Company. Holds no shares in the Company. Holds no shares in the Company. 134 135 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Nikolay Shulginov First Deputy General Director of JSC SO UES Federal Grid Board member since 2013 Born in 1951 Education: Novocherkassk Polytechnic Institute. PhD in Technical Sciences. From 2002 to 2004 – member of the Management Board, Director on Technical Audit of JSC System Operator – Central Dispatch Administration of Unified Energy System (SO – CDA UES). Positions in governing bodies of other organisations: mem- ber of the Supervisory Board of Non-Profit Partnership Sci- entific and Technological Council of Unified Energy System. Share in the Company’s ordinary stock: 0.000809% In 2013, the Board of Directors held 25 meetings, of which two were in the form of joint presence, and considered 261 issues. Board of Directors’ Performance Report on the Company’s Business Priorities In 2013 the Board of Directors’ activities were focused on creating favorable conditions for achieving the Compa- ny’s strategic objectives and for further strengthening of its electric power infrastructure. Federal Grid’s achievements in the reporting year be- came possible, to a large extent, because of the well coordinated efforts of the Board of Directors and the Company’s management aimed at overcoming impacts of uncertainty on financial markets and slowdown in eco- nomic growth on the Company and the whole industry. One should note strong cooperation of the Board and the Company’s executives on key issues of its business operations, managing its share capital and subsidiaries and associates. In 2013, the Board of Directors held 25 meetings, of which two were in the form of joint presence, and con- sidered 261 issues. During the reporting period, the Board of Directors adopted the following documents: • Federal Grid Insurance Program for 2014 • Federal Grid Regulations on the Credit Policy (amended version) • Calculation method and target values for a key per- formance indicator (KPI) - Meeting Schedules of Technological Connection - to be included in a KPI structure for the Chairman of the Company’s Man- agement Board and the Heads of branches involved in technological connection • Regulations of Russian Grids on Uniform Technical Policy in Electric Grid Sector. The Board made the following key decisions: • Approval of a long-term electro-technical sup- ply agreement with Siemens Transformers LLC, which provides production to be localised in Rus- sia and aims to support and develop production of high-technology transformer equipment conforming to up-to-date technical specifications • Pre-approval of transactions which may entail liabil- ities denominated in foreign currency • Resolution on expediency of the Company’s partic- ipation in venture funds via co-investing its property rights for innovative technologies developed within the framework of the Company’s R&D Programme • Resolution on placement of non-convertible inter- est-bearing certified bearer bonds with mandatory centralised custody of Series 30-39 • Resolution on increase of the Company’s share cap- ital by additional issue placement • Approval of the Company’s business plan for 2014 and key targets for 2015-2018 • Setting Federal Grid’s procurement policy with re- spect to facilitating access to procurement for of small and medium-sized enterprises. The structure of issues considered by the Board of Directors in 2013* * This structure does not include 151 issues of related party transactions’ approval For more details on the Company performance see Section Performance Overview of the Report (p. 34) 136 137 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Committees of the Board of Directors The committees of the Company’s Board of Directors are established to hold preliminary discussions on the most im- portant matters that fall within the Board’s competence and in order to develop recommendations for the Board on these matters. The Committees’ work shall enhance the efficiency and effectiveness of the Board of Directors’ performance. When appointing members to the committees the Board of Directors is guided by the need to include individuals with extensive experience and expertise in the relevant ar- eas, and follows the stock market requirements imposed on issuers whose securities are included in Quotation Lists A and B. Federal Grid’s Board of Directors has four committees: for Audit, HR and Remuneration, Strategy, and Investment. Ac- tivity of the committees is regulated by the respective Reg- ulations approved by the Board of Directors. HR AND REMUNERATION COMMITTEE Key functions AUDIT COMMITTEE Key functions • Evaluation of candidates for the Company’s external auditors and drafting recommendations to the Board of Directors regarding the appointment of external auditors, the conduct of annual independent audit and exter- nal auditors’ fees • Review of the Company’s financial statements and results of the external audit of the financial statements with respect to their compliance with RF legislation, International Financial Reporting Standards, Russian Account- ing Standards, other legal regulations Evaluation of the Company’s internal control system • • Approval of internal audit plans in the Company Membership During the period from 11 September 2012 to 27 June 2013, the Committee comprised the following members: • Development of principles and criteria for remuneration and material incentives of members of the Board of Di- rectors, the Management Board and the Audit Commission • Development of recommendations regarding the material terms and conditions of contracts with members of the Board of Directors, the Chairman and members of the Management Board • Development of criteria for selecting potential nominees to the Board of Directors, the Management Board and preliminary evaluation of the said candidates 1. Rashid Sharipov, Chairman, Independent Director 2. Elena Titova, Independent Director 3. Denis Fedorov 4. Vladimir Rashevsky, Independent Director 5. Ilya Scherbovich, Independent Director • Regular assessment of performance of the Chairman and members of the Management Board, and drafting On 28 November 2013, the following members were appointed to the Committee by the Board of Directors: recommendations to the Board of Directors regarding their possible reappointment Membership During the period from 11 September 2012 to 27 June 2013, the Committee comprised the following members: 1. Denis Fedorov, Chairman 2. Elena Titova, Independent Director 3. Ilya Scherbovich, Independent Director 1. Denis Fedorov, Chairman, Independent Director 2. Boris Kovalchuk, Independent Director 3. Sergey Serebryannikov, Independent Director Activities in 2013 The Committee held five meetings and considered a number of important issues, including: • Review of the external auditor’s report on Federal Grid Company Group interim consolidated IFRS financial On 28 November 2013, the following members were appointed to the Committee by the Board of Directors: statements for 6 months of 2012 1. Denis Fedorov, Chairman, Independent Director 2. Boris Kovalchuk, Independent Director 3. Sergey Serebryannikov, Independent Director Activities in 2013 The Committee held two meetings, and the following issues were considered: • Recommendations to the Board of Directors with respect to preliminary approval of the Company’s Annual Report 2012 and its submission to the General Meeting of Shareholders • Recommendations to the Board of Directors on issues of preparation and holding the 2013 Annual General Meeting of Shareholders • Review of the external auditor’s opinion on 2012 financial statements and recommendations regarding a can- didate for external auditor • Recommendations to the Board of Directors to approve the Directors’ and Officers’ liability insurance contract, which was a related party transaction • Review of the report on insiders’ dealings in the Company’s securities • Recommendations to the Board of Directors to approve the Strategy of Federal Grid Company’s internal con- • Approval of the Committee work plan for H1 2013 • Recommendations to the Board of Directors to approve the Report on the KPIs’ achievement in H2 2012 trol system development • Recommendations to the Board of Directors regarding the external auditor’s fees for 2013 and 2012 138 139 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM STRATEGY COMMITTEE Key functions • Consideration of and making recommendations to the Board of Directors on the following issues: • Measures and programmes for the development of the Unified Energy System (UES) of Russia, including devel- oping the Unified National (all-Russian) Electric Grid (UNEG), including isolated energy systems • Measures to carry out technological connections to the electric grids • Processes related to the effective functioning of the wholesale electric energy market, the technological man- agement of electric grids that are part of the UES of Russia • Control over implementation of investment projects to develop electric grids and the UES of Russia • • Other issues related to the development of UNEG Information disclosure by a subject of natural monopoly in the electric power industry Membership During the period from 11 September 2012 to 27 June 2013, the Committee comprised the following members (positions are indicated as of the appointment date) : 1. Vyacheslav Kravchenko, Chairman of the Strategy Committee, Chairman of the Management Board of Non-Profit Partnership Market Council 2. Andrey Malyshev, President, member of the Board of Directors of JSC GROUP E4 3. Evgeny Miroshnichnko, Director of Strategic Development of the Strategy and Investment Alliance of JSC INTER RAO UES 4. Anatoly Dyakov, President of the Unified Energy Complex Corporation and the Non-Profit Partnership Scientific and Technical Council of UES 5. Igor Kozhukhovsky, General Director of CJSC APBE 6. Roman Berdnikov, First Deputy Chairman of the Management Board of Federal Grid Company 7. Igor Khvalin, Deputy Chairman of the Management Board of JSC FGC UES 8. Vladimir Fortov, Member of the Presidium of the Russian Academy of Sciences (RAS) 9. Nikolay Shulginov, First Deputy Chairman of the Management Board of JSC SO UES 10. Alexey Sukhov, Deputy Chairman of the Management Board of JSC ATS 11. Alexander Rogov, Head of the Energy Sector Development Department at the Energy Sector and Energy Market- ing Development Division of JSC Gazprom 12. Andrey Naryshkin, Deputy Chief of Staff of the Chairman of the Board of Directors of JSC FGC UES On 31 January 2014, the Company’s Board of Directors appointed 17 new members of the Strategy Committee, including three Board members (Vyacheslav Kravchenko – the Committee Chairman, Nikolay Shulginov and Ernesto Ferlenghi), and 14 external experts. Activities in 2013 The Committee held two meetings. The most important issue among those considered within the reporting period was the Development Strategy of JSC Russian Grids which was discussed during the joint meeting of the Compa- ny’s Strategy Committee and the Strategy Committee of Russian Grids’ Board of Directors. The recommendations were made to improve the document with consideration of the Committee members’ opinions. INVESTMENT COMMITTEE Key functions • • Expert evaluation of new investment projects and programmes, submitted for consideration of the Company’s Board of Directors Timely informing of the Company’s Board of Directors about risks in the area of investment activity, to which the Company and its subsidiaries and associates are subjected • Making recommendations to the Company’s Board of Directors on issues that fall under the competence of the Committee Membership During the period from 11 September 2012 to 27 June 2013 the Committee comprised the following members (posi- tions are indicated as of the appointment date) : 1. Andrey Malyshev, Chairman of the Investment Committee, member of the Board of Directors of JSC GROUP E4 2. Alexander Ilyenko, Director for Assets Management of JSC SO UES 3. Roman Berdnikov, First Deputy Chairman of the Management Board of JSC FGC UES 4. Andrey Murov, Deputy Chairman of the Management Board of JSC FGC UES, Chairman of the Management Board of Non-Profit Partnership Market Council 5. Valery Goncharov, Deputy Chairman of Federal Grid Company’s Management Board 6. Vyacheslav Kravchenko, Chairman of the Management Board of Non-Profit Partnership Market Council 7. Ilnar Mirsiyapov, member of the Management Board, Head of Strategy and Investment Unit of JSC INTER RAO UES 8. Sergey Serebryannikov, Rector of Moscow Power Engineering Institute 9. Alexander Rogov, Head of the Energy Sector Development Department at the Energy Sector and Energy Marketing Development Division of JSC Gazprom 10. Vladimir Fortov, Member of the Presidium of the RAS 11. Andrey Naryshkin, Deputy Chief of Staff of the Chairman of the Board of Directors of JSC FGC UES 12. Sergey Vasilyev, Director of the Department of Electric Power Industry Development of the Russian Ministry of Energy On 31 January 2014, the Company’s Board of Directors appointed 17 new members of the Investment Committee, in- cluding two Board members (Sergey Shmatko – the Committee Chairman, and Ernesto Ferlenghi), 2 Company officers and 13 external experts. Activities in 2013 The Committee held two meetings. The recommendations were made to the Board regarding approval of the Company’s Investment Programme for 2013 and the draft Investment Programme for 2014–2018. 140 141 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Attendance of Board members at Board meetings and Committee meetings during 2013 Board member The Board of Directors Investment Com- mittee Strategy Com- mittee HR and Remuner- ation Committee Audit Committee Board members during the year 2013 Oleg Budargin Boris Kovalchuk Vyacheslav Kravchenko 96% 72% 92% 50% 100% Denis Fedorov 100% 100% 100% 100% 100% 100% Ernesto Ferlenghi 96% Board members until 27 June 2013 Boris Ayuev Andrey Malyshev Elena Titova Vladimir Rashevsky Rashid Sharipov 100% 100% 57% 71% 50% Ilya Scherbovich 100% Board members since 27 June 2013 Georgy Boos Pavel Grachev Andrey Murov Sergey Serebryannikov 55% 81% 100% 100% Sergey Shmatko 100% Nikolay Shulginov 100% 100% 100% 100% 75% 100% 100% 100% Management Board Composition of Management Board The Management Board and the Chairman of the Man- agement Board – collective and sole executive bodies – are responsible for the day-to-day operations of the Company and the implementation of the strategy estab- lished by the Board of Directors and the shareholders. The competence of the Chairman of the Management Board includes all matters of day-to-day management of the Company apart from those reserved to the General Meeting of Shareholders, the Board of Directors and the Management Board. The Management Board’s competence covers the follow- ing matters: • Development of the Company’s business priorities and the respective implementation plans During 2013, substantial changes were made to the composi- tion of the Management Board. On 29 August 2013, the Board of Directors made a decision to terminate the authorities of the First Deputy Chairman An- drey Cherezov, who was a Chief Engineer, and appointed Vladimir Dikoy to this position. The authority of Oleg Budargin, the Chairman of the Compa- ny’s Management Board, was terminated by a resolution of the Extraordinary Meeting of Shareholders on 11 November 2013, and Andrey Murov was appointed as the new Chairman. On 28 November 2013, the authorities of the following Man- agement Board members were terminated by the Board of Di- rectors: Roman Berdnikov, Nikolay Varlamov, Yuriy Mangarov and Sergey Sergeev. • Reporting on execution of decisions made by the General Meeting of Shareholders and the Board of Directors The following new members of the Management Board were appointed: Valery Goncharov, Maria Tikhonova, Dmitry Shish- kin and Leonid Mazo. • Addressing other matters of the Company’s day- to-day operations in accordance with the decisions of the General Meeting of Shareholders and the Board of Directors, as well as other matters referred to the Management Board by the Chairman of the Management Board 142 143 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Composition of the Management Board as of 31.12.2013 Information about the Management Board members is disclosed with their consent. Andrey Murov Valery Goncharov Andrey Kazachenkov Vladimir Dikoy Chairman of the Management Board Member of the Management Board since 2012 First Deputy Chairman of the Management Board Member of the Management Board since 2013 First Deputy Chairman of the Management Board Member of the Management Board since 2010 Deputy Chairman of the Management Board – Chief Engineer Member of the Management Board since 2013 Born in 1970 Born in 1963 Born in 1980 Born in 1954 Education: St Petersburg State University (degree in Jurisprudence). Inter-disciplinary Institute of Advanced Training and Retraining for Executives (a special retraining course in Financial Management). State University of Civil Aviation (degree in Freight Regulation and Air Transport Management). PhD in Economics. From 2007 to 2012 – General Director of JSC Pulkovo Airport. From 2012 to November 2013 – Deputy General Director, Acting General Director, Executive Director, member of the Management Board of JSC Holding of the Inter-regional Distribution Grid Companies (since 04.04. 2013 – JSC Russian Grids). Positions in governing bodies of other organisations: Chairman of the Board of Directors of JSC Inter-regional Distribution Grid Company of the North-West; member of the Board of Directors of JSC Russian Grids. Education: Leningrad Shipbuilding Institute in 1987. PhD in Economics. From 1998 to 2000 – Finance Director of State Enterprise Fuel and Energy Complex of St Petersburg. From 2000 to 2001 – General Director of CJSC Lenteplosnab. From 2001 to 2004 – Chairman of the Regional Energy Commission of the Administration of St Petersburg. From October 2004 to June 2005 – Deputy Minister of Regional Development of Russia. From 2005 to 2006 – Deputy Director for Economics and Finance of TGK-1. From December 2006 – Deputy Director for Economics and Finance of JSC Roszheldorproject. From June 2012 – General Director of JSC Roszheldorproject. In July 2012, was appointed Deputy Chairman of the Management Board of JSC FGC UES. Since 13 November 2013 – First Deputy Chairman of the Management Board of JSC FGC UES. Member of the Company’s Management Board since 28 November 2013. Education: St Petersburg State Engineering and Economic University (degrees in Management and Economics and Management in Engineering Industry). MBA at the University of Wisconsin (Madison, USA) Special programmes in Economics and Finance at The IMD (Switzerland) and INSEAD (France) business schools From 2004 – Adviser to Finance Director, Deputy Finance Director of JSC Lenenergo. From 2005 – Head of Corporate Finance Department of JSC OGK 1. From October 2009 – Adviser to the Chairman of the Management Board of JSC FGC UES. From November 2009 – Deputy Chairman of the Management Board of JSC FGC UES. From May 2012 – First Deputy Chairman of the Management Board of JSC FGC UES. Positions in governing bodies of other organisations: Chairman of the Board of Directors of JSC Lenenergo, Deputy Chairman of the Board of Directors of JSC Moscow United Electric Grid Company. Education: Moscow Power Engineering Institute (degree in Electric Power Supply of Industrial Enterprises, Cities and Agriculture). PhD in Technical Sciences. From 1997 to 2002 – Chief Engineer, First Deputy Director of territorial subdivision of JSC RAO UES of Russia – Central Interconnected Electric Grids, Head of the Electric Grids Department of JSC RAO UES of Russia. From 2002 to 2009 – Head of the Electric Grids Department, Head of the Department of Regional Management of Federal Grid Company, Deputy Director General for Production of JSC Glavsetservice of UNEG. From 2009 to 2013 – Deputy Chief Engineer of Federal Grid Company. Positions in governing bodies of other organisations: member of the Board of Directors of JSC Glavsetservice of UNEG and JSC Tomsk Transmission System. Holds no shares in the Company. Holds no shares in the Company. Share in the Company’s ordinary stock: 0.000552%. Share in the Company’s ordinary stock: 0.0000220534%. 144 145 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Maria Tikhonova Leonid Mazo Deputy Chairman of the Management Board Member of the Management Board since 2013 Deputy Chairman of the Management Board Member of the Management Board since 2013 Dmitry Shishkin Internal Control Director Member of the Management Board since 2013 Vladimir Shukshin Member of the Management Board since 2012 Born in 1980 Born in 1977 Born in 1967 Born in 1959 Education: Volga-Vyatka Academy of Public Service (degree in Public and Municipal Administration, Higher School of Economics with MBA Finance). PhD in Economics. Education: Moscow State University, Russian Academy of Public Service (a professional retraining course). PhD in Economics. Education: Higher School of the KGB of the USSR named after Dzerzhinsky (degree in Jurisprudence) Education: State Central Institute of Physical Culture, FSB Academy of the Russian Federation. Russian Academy of Public Service under the President of the Russian Federation. Ph.D in Political Science. From 2003 to 2005 – engineer of JSC Nizhnovenergo. From 2005 to 2008 – specialist, Deputy Head of Property Relations Department of Fuel and Energy Complex of the Federal Energy Agency. From 2008 to 2012 – held senior management positions at the Ministry of Energy of the Russian Federation, including the position of Department Head for Corporate Management, Pricing, Control and Audit in the Fuel and Energy Complex. From October 2013 – Deputy Chairman of the Management Board of JSC FGC UES. Positions in governing bodies of other organisations: member of the Board of Directors of JSC Institute Energosetproekt, member of the Audit Commission of JSC RusHydro. From 2001 to 2008 – Chief of the Secretariat of the First Deputy Chairman of the Government of Moscow Region. From 2008 to 2009 – held senior positions in Expostroy, Planstroyexpo and Energocentre. From 2009 to 2011 – Deputy General Director for sales and service development of JSC MOESK. In 2011 – Deputy General Director for Strategy and Development of JSC Technopromexport From 2011 to 2012 – Deputy Executive Director for Development and Client Relations, Deputy General Director of JSC IDGC Holding. From 2012 to 2013 – General Director of Moscow Cable Grids, a branch of JSC MOESK. From August 2013 – General Director of JSC Centre for Engineering and Management of Construction of the Unified Energy System. From 1985 to 2009 – served in the Armed Forces of the Russian Federation. From 2009 to 2012 – Deputy Director for Security of Gazprom EP International Services B.V., Moscow. From February to October 2013 – Security Director of JSC Moscow Unified Electric Grid Company. From 1998 to 2005 – Adviser to the Mayor of Moscow. From 2005 to 2010 – Deputy Chief of Staff of the Mayor and Moscow Government. From October 2010 to 2011 – Deputy Mayor of Moscow in Moscow Government for coordination and work with law enforcement agencies. From January to June 2012 – Deputy General Director for Security of JSC IDGC Holding. From June 2012 to May 3013 – Deputy Chairman of the Management Board of JSC FGC UES. From April 2013 – Deputy General Director for Security of JSC Russian Grids. Positions in governing bodies of other organisations: Chairman of the Board of Directors of JSC IDGC of North Caucasus. Holds no shares in the Company. Holds no shares in the Company. Holds no shares in the Company. Holds no shares in the Company. 146 147 CORPORATE GOVERNANCE / GOVERNANCE SYSTEM Activities of the Management Board in 2013 In 2013, the Management Board held 83 meetings and considered issues on Federal Grid Company’s business priorities and perspective business plans, as well as other issues related to the Company’s day-to-day operations in accordance with the decisions of the General Meetings of Shareholders and the Board of Directors. Valery Sedunov Member of the Management Board since 2012 Born in 1950 Ivanovo Power Engineering Education: Institute (degree in Production Automation and Electric Power Distribution). From 2002 – First Deputy Director General – Chief Engineer, General Director of the branch of Federal Grid Company – MES Centre. Share in the Company’s ordinary stock – 0.000027% In the reporting year, there were no dealings in the Company’s securities by the Chairman and members of the Management Board. Key Performance Indicators The KPIs, their target values and calculation methods are sub- ject to approval by the Company’s Board of Directors. The tar- gets are set with consideration of aims and objectives stated in the RF Electric Grid Complex Development Strategy. KPI’s Target and Actual Values in 2013 , annual Cost reduction for the acquisition of goods (work, services) per unit of output of not less than 10% per year within three years in real terms, not less Efficient implementation of the Cost Management Programme (CMP), not less EBITDA, RUB million, not less No major accidents 2013 Target 2013 Actual 10% 10% 10.25% 13.8% 91.037 96.297 0 0 Electric energy losses in the grid used by Federal Grid Company to provide electrici- ty transmission services, not less 4.48% 4.28% Meeting schedules for commissioning power facilities and implementing plans for financing and disbursing capital investments, not less 90% 99.6% KPI’s Target and Actual Values in 2013, semi-annual No fatal workplace injuries or group accident with at least one person severely injured Financial stability indicator, i.e. the financial leverage ratio Meeting schedules for financing and implementing investment programmes on a cumulative total from the beginning of the year, not less 2013 Target 2013 Actual First half of the year Second half of the year First half of the year Second half of the year 0 1.5 0 1.5 0 0 0.33 0.44 90% 90% 99.2% 99.57% Average duration of energy transmission interrup- tions, hours/connection points, ea - 0.0475 - 0.0199 Remuneration of the governing bodies Federal Grid’s Remuneration Policy is based on our under- standing of an efficient motivation system to be one of the main conditions for improving the performance of members of the Board of Directors and the Company’s senior executives. Board of Directors The Director’s remuneration criteria are set by the Regula- tions on Remuneration and Compensation by members of the Board of Directors of Federal Grid Company, as approved by the Annual General Meeting of Shareholders on 29 June 2012. 148 149 Details on remuneration, benefits and compensation paid to members of the Company’s Management Board, including the chief executive officer (CEO), in 2013 (RUB thousand)* Control System Internal Control and Risk Management CORPORATE GOVERNANCE / GOVERNANCE SYSTEM The amount of remuneration to each Board member for his/ her contribution to the operations of the Board of Directors depends on the following factors: • total number of Board of Directors’ meetings held dur- ing the previous corporate year; number of meetings attended by the Board member; and the Company’s revenues for the respective fiscal year. • • Remuneration for the Chairman of the Board of Directors is increased by 30%. Increase is also set for members of the Board for their work in committees: the Chairman of the Committee receives a 20% bonus, and a Committee member receives 10%. Compensation for expenses of members of the Board of Directors is not provided. Remuneration for contributions to the Management Board’s operations Salary Bonuses Commission Benefits The total remuneration for each Board member, given all premiums, cannot exceed RUB900,000. Other types of remuneration Since the Company incurred a loss for the 2012 fiscal year, the 2013 GMS resolved to pay no remuneration to the Board of Directors. Committees of the Board of Directors Payment of remuneration to members of the committees of the Board of Directors is made based on the Regulations on Remuneration of Members of the Committees of the Board of Directors of Federal Grid Company, as approved by the Board of Directors on 16 December 2010. The above Regulations do not apply to committee mem- bers who are members of the Board of Directors, or mem- bers of the collective executive body and/or the sole execu- tive body of the Company. TOTAL * Including remuneration paid to all members of the Man- agement Board in 2013 taking into account changes in the composition of the Management Board. Details on remuneration, benefits and compensation paid to the Company’s chief executive officer (CEO), in 2013 (RUB thousand)* Remuneration for contributions to the Management Board’s operations On a quarterly basis, committee members shall be paid re- muneration for each meeting attended. The amount of re- muneration is equal to three minimum monthly wage rates for a first category worker. Remuneration to the Chairman of the Committee is increased by 50%. The total amount of remuneration paid to members of the Board committees in 2013 was RUB342,600. Salary Bonuses Commission Benefits Management Board Payments to the Company’s senior executives are regulat- ed by Federal Grid’s internal documents and depend on achievement by him or her of individual key performance indicators (KPIs). Other types of remuneration TOTAL * Including remuneration paid to all persons who performed functions of the Company’s Chief Executive Officer in 2013 0 84,409 157,901 0 0 262,845 505,155 0 19,884 29,498 0 0 19,889 69,271 Main principles of Internal Control and Risk Man- agement System Operation • Risk Management Policy; • Procedure for Applying the Risk Management Policy. The Federal Grid’s Internal Control System (ICS) is an inte- grated part of the Company’s governance system admin- istered by the authorised bodies and officers. Our Internal Control System has been designed to ensure: The above documents set tasks and objectives of the risk management system, its processes (elements), including the procedures for risk identification and assessment, planning of risk management actions and risk reporting. In accordance with the Risk Management Policy the major objective of the risk management system is to reduce risks to an acceptable level set by the Company’s Management Board. Federal Grid’s Risk Management Policy is aimed at improving the Company’s short and long-term perfor- mance, as well as ensuring the sustainable and continu- ous operation and development of the Company through the timely identification, assessment and treatment of risks that threaten its efficient economic operation and good standing, the health of its employees, the environment and the property interests of shareholders and investors. • • • • implementation of the State policy regarding the Elec- tric Power Industry; security, effectiveness and efficiency of business ac- tivity of the Company and its subsidiaries and asso- ciates; reliability of all types of reporting of the Company and its subsidiaries and associates; compliance with applicable Russian laws and internal regulations of the Company. To ensure the ICS’s effective operation and the achieve- ment of the Company’s objectives, the Board of Directors approved the Regulations on Internal Control System of Federal Grid Company (minutes No. 170 dated 3 August 2012). The above ICS Regulations set the objectives, tasks and operating principles of the Internal Control System, as well as the structural components of the internal control framework including the risk management system. Ac- cording to the Regulations, the risk management system includes: • • analysis of business processes aimed to identify events that can negatively affect the achievement of the Company’s goals; risk assessment with regard to their significance and probability; • planning of risk treatment actions. In order to give effect to the provisions set by the ICS Reg- ulations regarding the risk management system, the Com- pany’s CEO has approved the following documents 150 151 CORPORATE GOVERNANCE / CONTROL SYSTEM Participants in Federal Grid’s Internal Control System Authorities and Responsibilities of the Participants of the Risk Management System Management Board Considers and approves a Risk Matrix, Risk Summary and risk minimisation actions Risk Owners members of the Management Board, Deputy Chairmen of the Management Board and the Heads of the Company’s structural units Ensure efficient risk management including risk identification and assess- ment, and provision in the budget and business-plans of the amounts required for financing the risk management actions Owners of Control Procedures Staff of the Company’s structural units Organise and implement control procedures within the business processes Identify and assess risks, plan and implement on reducing risk probability and/or risk implications Internal Control and Risk Management Department Plans and performs internal audit of the risk management system Analyses risk factors and operational and investment efficiency enhancement potentials in the course of long-term planning of operating and investing activities Organises the risk management system and evaluation of its efficiency Following the results of the control conducted by the Audit Chamber of the Russian Federation at the Federal Grid’s facilities aimed to evaluate the efficiency of handling public funds when preparing for the 2014 Winter Olympics and Paralympics in Sochi and developing the city of Sochi as an alpine climatic resort, the Company issued a Decree No 785 dated 26 December 2013 which provides for the review of the regulations and administrative documents of the Company and its subsidiaries that regulate the ex- isting internal control system. The above document also provides for drafting and submitting for the approval of the Chairman of the Management Board the Programme for improving the quality of the Company’s internal control system. In 2014, measures are expected to be implement- ed aimed at improving the Internal control and risk man- agement system of Federal Grid Company. 152 153 CORPORATE GOVERNANCE / CONTROL SYSTEM Key Risk Factors and Information about Risk Management Actions RISK DESCRIPTION RISK IMPACT RISK MITIGATION ACTIONS Risk of employee injury at the Company’s facilities, resulting in damages to health or death The Company’s health and safety sys- tem is effectively achieving objectives whereby employees develop skills of safe behaviour in the workplace and dangerous situations are prevented, thus minimising the risk of accident. • Take actions to raise the level of health and safety at the Company’s facilities • Develop and update internal rules and regulations pertaining to health and safety and employee in- jury prevention in the Company. RISK DESCRIPTION RISK IMPACT RISK MITIGATION ACTIONS Industrial safety (p. 117) System-wide interruptions in perfor- mance and failures to supply elec- tricity to customers, either due do equipment failures or to natural disas- ters could eventually cause significant economic and reputational losses for the Company. Besides, they could affect the volume of losses in its electric grids. Industrial risks Operational and tech- nological risks Risks are related to high physical wear and obso- lescence of electricity grid assets, violations of ser- vice conditions and oper- ational regimes of electric grid equipment, damages of equipment, wrong per- formance of relay protec- tion of automatic controls and automatic emergency response system, the use of inefficient and obsolete technologies and failure to implement the repairs programme in full. Operational and tech- nological risks are also related to possible emer- gency situations at the grid facilities due to natural disasters (hurricanes, rain storms, icy rains, high river water, river floods, snow blocks, etc.) • Implementation of the corporate Investment Programme, which includes projects that aim to achieve the following goals: – Reduce the degree of wear of fixed assets – Renovate electric grid facilities – Ensure delivery of capacity by power plants and reliability of cross-regional electric power ex- changes – Upgrade switchgear equipment – Upgrade and develop automated process control systems – Improve grid manageability and observability – Clear the routes for overhead transmission lines – – • (OHTLs) Improve energy efficiency Expand the pool of backup electric power sourc- es, vehicles and special-purpose machinery for post-accident repairs Implement maintenance and repair plans and tar- geted programmes for the replacement of obso- lete OHTLs and equipment at substations • Oversee implementation and update of Regula- tion of JSC Russian Grids on the Unified Techni- cal Policy in the Electric Grid Complex • Educate, oversee and certify employees who run process equipment • Conduct emergency response drills and onsite inspections in the Company’s branches • Operations of permanent duty teams in the re- gions. These teams are to conduct emergency and recovery work at the grid facilities. Establish emergency reserve of equipment • Implement the Property Insurance Protection Programme • Operations of the Company’s branch, i.e. Technical Supervision Centre, which was established to main- tain current technical supervision over the condition of the Company’s energy facilities and technical su- pervision at facilities that are under upgrade, tech- nical renovation and at newly constructed facilities. Improving reliability (p. 41) Investment activities (p. 57) Environmental risks The environment may be adversely affected by emergency situations that are caused by the physical wear of electric grid infrastructure facilities or the violation of their op- erational conditions. The Company’s equipment contains trichlordiphenyl, which may in some cases pollute the environment and cause injury to em- ployees and the public. The Company may be fined if it violates Russian environmental law. Government controlling authorities can impose sanctions on the Company if it violates the procedures of usage, stor- age or disposal of trichlordiphenyl-con- taining equipment. The likelihood of these risks is as- sessed as very low. Industry risks Risk related to govern- ment tariff regulation (changes in the tariff decisions or parame- ters of tariff regulation) The Company derives its main income from pay- ments for electric power transmission services via UNEG. The size of these payments is based on tariffs that are approved by the Federal Tariff Service of Russia as rates for maintenance of the power grid facilities that are integrated with UNEG, and rates of rules-based technological losses of electric power in UNEG in the Russian regions. • Restrictions on the growth of tariffs on power transmission via UNEG and revi Factors that cause the risk of limitation on sources of tariffs for the Company’s operations and investments: • According to the Social and Eco- nomic Outlook for 2012–2014 that was approved by the Russian Government, a decision was taken to postpone indexation of prices (tariffs) for goods (services) of nat- ural monopolies, including electric grid companies from 1 January to 1 July of the next calendar year in order to curb the growth of prices and tariffs on goods (services) of natural monopolies in 2012–2014 • Based on the outcomes of the 2013 St Petersburg Economic Fo- rum, the President of the Russian Federation signed several orders aimed at curbing the growth of tariffs of natural monopolies for a five-year period • On 19 November 2013, the Rus- sian Government approved an Action Plan to cap the final cost of goods and services provided 154 155 • • The Company’s Environmental Policy approved by the Board of Directors is the tool of environ- mental risk mitigation The design of any new facility involves the drafting of a special environmental section that takes into account all requirements of Russian environmen- tal protection laws • All projects for construction and renovation of power grid facilities undergo environmental due diligence by the State authorities • The Company implements a targeted programme of full decommissioning and detoxification of trichlordiphenyl-containing equipment • Work is in progress to gradually involve all Com- pany branches in the existing system of envi- ronmental management and subsequent issue of certificates of consistency with international standard ISO 14001:2004 “Environmental Man- agement System”. Environment (p. 120) • – – – – – • Management of risks related to tariff regulation implies a further implementation of actions that aim for higher operational and investment efficien- cy. The Company approved a large-scale cost-cut- ting programme with the following objectives: To cut the costs of information services To optimise the costs of facility maintenance, in- cluding the costs of utilities To reduce the costs of leasing office space To reduce the costs of business travel To reduce the costs of insurance in tender-based contract awards To reduce the costs of the operational programme by using the Company’s own resources in the performance of some works, lowering prices of procured works and materials without reducing their physical volumes and making some reduc- tions in targeted repair programmes In November 2013, the Company established the Operating Efficiency Committee. This Commit- tee is mandated to review, approve and oversee programmes to improvement of operating and investment efficiency The Efficiency Committee approved several pro- grammes to reduce operational costs and raise the Company’s investment efficiency: – • • CORPORATE GOVERNANCE / CONTROL SYSTEM RISK DESCRIPTION RISK IMPACT RISK MITIGATION ACTIONS RISK DESCRIPTION RISK IMPACT RISK MITIGATION ACTIONS • sion of parameters of ong-term regulation by the FTS The Company re- ceives lower revenues from power trans- mission because the payment procedure is changed but these changes have not been taken into account when tariffs were set. Risks of failing to meet the parameters of the investment programme approved by the Minis- try of Energy Risks of failing to meet the parameters of the Company’s investment programme may mate- rialise if scheduled due dates of project imple- mentation are not met or if projects that had not been envisaged are included in the invest- ment programme or if the actual costs of the investment programme facilities overrun their budgeted costs. The investment programme parameters can also be breached if the Company fails to obtain the neces- sary cash funds. by infrastructure companies while maintaining their financial sustain- ability and investment attractiveness • Rules of non-discriminatory ac- cess to electric power transmis- sion services and delivery of these services, approved by Resolution No. 861 of the Russian Govern- ment (dated 27 December 2004), stated that on 1 July 2014 there will be transition to the payment for the Company’s electric power transmission services on the basis of its actual consumption • Amendments were made in 2013 to Resolution “On Pricing in Reg- ulation of Prices (Tariffs) in the Electricity Sector” No. 1178 of the Russian Government (dated 29 December 2011), According to these amendments, as of 1 July 2014, long-term tariffs on the Company’s services will be capped by tariffs that were effec- tive on 30 June 2014, which ef- fectively means that tariffs will be frozen at their 2013 level. The investment plan for the coming five years includes draft adjustments of Federal Grid Company’s investment programme for 2014 and the invest- ment programme for 2015-2019. Draft investment programmes have been sent to the Ministry of Energy. Reso- lution No. 159 of the Government of the Russian Federation (dated 27 Feb- ruary 2013) “On Making Amendments to the Rules of Approval of Investment Programmes of Electricity Sector Facil- ities with State Participation, and Grid Organisations” became effective. This Resolution may expose the Company to risks because facilities that are not included in the regional plans may be excluded from this Investment Pro- gramme. Given that the Investment Programme parameters are used when the Com- pany’s tariffs for power transmission are set, non-implementation of the In- vestment Programme will result in the downward adjustment of gross reve- nues in the subsequent periods. – – – • • • • • • • The 2014 Programme for the Optimisation of the Power Transmission Costs The 2014 Programme for the Optimisation of Costs of Purchases for Compensation of Losses The Programme for the Optimisation of IT Costs In order to mitigate risks related to changes in the procedure of calculating the volume of the Com- pany’s power transmission services, the Compa- ny sent letters to the Federal Tariff Service, the Ministry of Economic Development and the Minis- try of Energy asking them to consider postponing transition to payments for actual consumption of capacity The Company draws high-quality rationale mate- rials to back up application for tariff setting/revi- sion. Tariff regulation (p. 92) Cost optimisation (p. 81) The Company has initiated actions to implement an action plan (“road map”) to establish and de- velop mechanisms of public control over natural monopolies (in which the power consumers will take part), as approved by Directive No. 1689- r of the Government of the Russian Federation (dated 19 September 2013) “On the Approval of the Concept of the Establishment and Develop- ment of Mechanisms of Public Control over Natu- ral Monopolies (With Participation of Customers)” and Action Plan (“road map”). Oversee implemen- tation of capital investment financing plan and consistency with the work completion deadlines The Company approved an anti-corruption policy in order to avoid exposures to fraud during pro- curement during the implementation of the Invest- ment Programme; actions are taken to assess the good faith and reliability of counterparties In order to mitigate risks of breaching the param- eters of the Investment Programme, the Compa- ny’s Efficiency Committee approved the Invest- ment Efficiency Programme, which envisages a reduction of investment costs in 2014. In order to mitigate the risk of having some facil- ities excluded from the Investment Programme, the Company makes sure that its officers take part in the drafting and approval of the Scheme of Territorial Planning of Energy Facilities in the Rus- sian Federation by the Ministry of Energy The risk of a shortage of funding sources for the Investment Programme is minimised via borrow- ings: in 2013, the Company signed agreements about credit facilities and successfully placed in- frastructure bonds. Investment activities (p. 57) Procurement (p. 52) Debt portfolio (p. 95) Financial risks Risk of the counter- parties’ default on their obligations to the Company This risk is related to untimely or incomplete fulfilment by customers and/or counterparties of their obligations to pay the Federal Grid Company for its services or supply of goods and/or services. Currency risk Currency risk is related to uncertainty about fluc- tuations of the currency exchange rates and affects the performance of obligations with respect to procured imported equipment. Liquidity risk Liquidity risk is related to possible losses that may be caused by the Com- pany’s inability to meet its obligations in full. Payments transmis- for electricity sion services are the primary revenue source for the Federal Grid Company. According to Russian law, the Compa- ny must sign contracts for electricity transmission services with all custom- ers that meet certain criteria. If a cus- tomer fails to make timely payments for electricity transmission services, the Company is allowed to suspend the delivery of these services to this cus- tomer. However, the Company is not allowed to terminate the contract with a non-paying customer unilaterally. If the Company faces non-payment and delayed payments (in particular if this situation continues for a long pe- riod because the Company is unable to discontinue services to non-paying customers), this may have a substan- tial adverse effect on the Company’s financial standing and performance. Deterioration of the business envi- ronment for counterparties may also affect the Company’s estimated cash flows and assessment of impairment of financial and non-financial assets, as well as its ability to service bonds. • • The Efficiency Committee approved the Pro- gramme for Improving the Receivables Manage- ment and Contractual Discipline/Claims Manage- ment in 2014 The Company established the Receivables and Payables Management Committee which has been operating as a permanent body • Analyse a given counterparty’s financial standing at the procurement stage and subsequent moni- toring at the stage where contractual obligations are performed • Contract supervising managers to monitor the status of receivables • Settle overdue accounts receivable (claims management, court reclamation of debt, claims offsetting, debt restructuring via court and in the off-court manner) Initiate amendments to existing legislation and regulations in order to strengthen financial re- sponsibility/liability of non-payers • Management’s Discussion and Analysis (p. 74) The Company receives its revenues from the electricity transmission ser- vices in roubles, and only a small share of revenues is billed in foreign currency. • • The Company’s current loan payments are also in roubles. Therefore, its financial standing, liquid- ity, sources of financing and perfor- mance are not substantially exposed to fluctuations of currency rates. Economic risks related to exchange rate appreciations and increased in- flation are relevant to the Company to the extent that they affect the costs of imported equipment which is procured under its Investment Programme. Federal Grid has investment-grade credit ratings. It services loans and credit in strict accordance with sched- ules. The Company controls its payments level and for- eign currency obligations: the Board of Directors sets a limit on foreign currency transactions The Company implements an Import Substi- tution Programme (equipment, materials and technologies) at its facilities in 2011–2014. The Programme targets the priority procurement of high-tech equipment produced in Russia. Management’s Discussion and Analysis (p. 74) Import substitution policy (p. 56) • • • The Company controls its debt level and credit standing in compliance with its Regulations on Credit Policy The Company maintains a high level of undrawn open loan facilities in the largest Russian and foreign banks The Company builds a diversified loan portfolio in terms of instruments and maturities. Financial position (p. 88) Debt portfolio (p. 95) 156 157 CORPORATE GOVERNANCE / CONTROL SYSTEM RISK DESCRIPTION RISK IMPACT RISK MITIGATION ACTIONS Audit Commission Interest rate risk This risk is largely related to changes of interest rates on loans and bank credit. In order to finance its Investment Pro- gramme for 2013–2017, the Company made large borrowings, thus increas- ing its exposure to interest rate risks. Unfavourable changes in the capital markets (such as a substantial in- crease of interest rates) may result in larger costs of debt service. A large share of the Company’s floating rate facilities includes clauses about re- payment of these debt obligations be- fore maturity if the coupon rate reaches or exceeds 10% per annum. There- fore, the risk that the floating interest rate will increase is partially hedged, and the Company perceives interest risk as low. • • The Company seeks to arrange most of its bor- rowing at fixed rates The Company controls its debt levels and cred- it standing, including the process of planning its investments • Credit-standing criteria and targets are set in the Company’s Regulations on Credit Policy, which is approved by the Board of Directors The Company services loans and credit in strict compliance with schedules. • Financial position (p. 88) Debt portfolio (p. 95) • The Audit Commission is a permanent body which is elected annually by the General Meeting of Shareholders and is re- sponsible for exercising control over the Company’s financial and operational activities, its governing bodies and structural units. The main tasks of the Audit Commission are as follows: confirmation of the reliability of data contained in the • Company’s annual report, accounting balance sheet, and profit and loss statement; analysis of the Company’s financial position, identifi- cation of ways for improving the financial position of the Company, and developing recommendations to the governing bodies; organisation and performance of audits (revisions) of the Company’s financial and operational activities, includ- ing: review of financial, accounting, payment and set- tlement, and other documents related to financial and operational activities; control over the preservation and use of the fixed assets; control over expenditures in ac- cordance with the approved business plan and budget; control over formation and use of reserve and other spe- cial-purpose funds; audit of timeliness and correctness of payment of dividends and bond interests. • Members of the Audit Commission elected by the Extraordinary General Meeting of Shareholders on 11 November 2013 Anna Drokova Year of birth: 1985 Education: Higher School of Economics, Master’s degree in Economics Position: Deputy Head of Secretariat of the Chairman of the Board of Directors of JSC Russian Grids Vladimir Khvorov Year of birth: 1947 Education: higher, Moscow Power Engineering Institute Position: leading expert of the Department of the Ministry of Economic Development of Russia Anna Nesterova Year of birth: 1982 Education: higher Position: Deputy Director for Social Projects branch of Non-Profit Autonomous Organisation Agency for Strategic Initiatives Members of the Audit Commission hold no shares in Federal Grid Company. Remuneration of the Audit Commission members Education: higher, State University of Management (Mas- ter’s degree in Jurisprudence), Russian State University of Trade and Economics Position: Head of the Department of organisations of Fuel and Energy Sector of the Department of Property Relations and Privatisation of the Federal Agency of State Property Management On 30 June 2008, the General Meeting of Shareholders approved the Regulations on Remuneration and Com- pensation to Members of the Audit Commission of Federal Grid Company. The above-mentioned Regulations do not provide for mandatory payments to members of the Audit Commission. In 2013, no remuneration was paid to the Au- dit Commission members. Leonid Neganov Year of birth: 1972 Education: higher, Moscow Engineering Physics Institute, Higher School of Economics (degree in Management) Position: Minister of Energy of Moscow Region Karim Samakhuzhin Year of birth: 1988 158 159 CORPORATE GOVERNANCE / CONTROL SYSTEM Auditor As required by the laws of the Russian Federation, the Gen- eral Meeting of Shareholders of Federal Grid Company ap- points, on an annual basis, an auditor to perform a statutory audit of the Company’s accounting statements. Company by property interests, and are non-affiliated with the Company and/or with its affiliates. The auditor’s pro- fessional level and the cost of their services are the main criteria for selecting an audit firm. On 27 June 2013, the General Meeting of Shareholders ap- proved RSM Top-Audit LLC (renamed RSM RUS LLC on 20 August 2013) as the Company’s auditor under the Russian Accounting Standards (RAS) and the International Financial Reporting Standards (IFRS). RSM RUS LLC is a full member of the leading international auditing and consulting organi- sation RSM International and a member of the self-regula- tory organisation of auditors, Non-Profit Partnership Auditor Association Sodruzhestvo. Auditor Selection In order to select an independent auditor, the Company holds an open tender among organisations which have a general audit licence and are not connected with the Based on the tender results, the Audit Committee of the Board of Directors makes a recommendation to the Board to consider a winner as a candidate to be pro- posed for an approval by the Annual General Meeting of Shareholders. Auditor Remuneration The Board of Directors has set the maximum amount pay- able to the external auditor for auditing the Company’s fi- nancial statements under RAS and IFRS for 2013 at RUB25 million including VAT. During the reporting period, the external auditor did not provide any non-audit services to the Company. Managing Subsidiaries and Associates As of 31 December 2013, Federal Grid had 21 subsidiaries and associates mostly operating in the energy industry, in- cluding supporting electric grid facilities. The following internal documents have been adopted to regulate the Company’s relationship with its subsidiaries and associates, as well as other entities in which Federal Grid has an ownership interest: • Procedure for Interaction with Subsidiaries and Associ- ates of Federal Grid Company • Regulations on Managing Subsidiaries and Associates and other Entities in which Federal Grid Company has an ownership interest • Standard for Structural Units of Federal Grid Company on Building Positions and Instructing Representatives of the Company in General Meetings of Shareholders and Boards of Directors of Subsidiaries and Associates The Procedure for Interaction with Subsidiaries and Asso- ciates of Federal Grid Company, approved by the Board of Directors, serves as a basic document setting corporate procedures through which the Company manages its sub- sidiaries and associates. The main forms of interaction between the Company and its subsidiaries and associates are as follows: • Consideration by the Board of Directors of issues re- garding positions of the Company representatives on draft resolutions on agenda items of General Meet- ings of Shareholders and meetings of Boards of Direc- tors of subsidiaries and associates • Participation in drafting proposals and decision-mak- ing by governing bodies of subsidiaries and associ- ates through the Company representatives in Gener- al Meetings of Shareholders and meetings of Boards of Directors of subsidiaries and associates • Procedure for KPI calculation and target achievement evaluation in Subsidiaries and Associates of Federal Grid Company • Consideration by the Management Board of issues within its competence that relate to interaction between the Company and its subsidiaries and associates. • Federal Grid Company’s Order on Approval of Stand- ards and Model Regulations on Managing Subsidiaries and Associates, and other regulatory and administra- tive documents of Federal Grid Company For further details on Federal Grid’s partici- pation in subsidiaries, associates and other organisations see Appendix to the Report on the memory stick attached. 160 161 CORPORATE GOVERNANCE / CONTROL SYSTEM Anti-Corruption Activities Implementation of the Company’s Anti-Corruption Policy ACTUAL 2012 ACTUAL 2013 The Anti-Corruption Policy’s tasks are as follows: Economic effect of anti-corruption measures in procurement, RUB mln 116.9 450.0 • minimising the risk of involvement in corrupt practices on the part of members of the Board of Directors, the Chairman and members of the Management Board and the Company’s employees, irrespective of their position • preventing corrupt practices A special-purpose structural unit – the Department of Op- erational Control and Compliance – is responsible for the organisational support that underpins the implementation of the Anti-Corruption Policy. In 2013, there were three main areas surrounding the imple- mentation of the Anti-Corruption Policy. We consider corruption to be one of the systemic threats to the stability and national security, and fighting corruption is among our priority tasks. • ensuring liability and compensation for harm caused by corruption The following anti-corruption measures were implemented in 2013: • monitoring the effectiveness of anti-corruption meas- ures • The procedure for the declaration of conflicts of inter- ests by the Company’s senior managers. • Scheduled and unscheduled audits aimed at detect- ing corrupt practices in the activities of the Company’s subsidiaries and associates. • Anti-corruption review of 2011 organisational and ad- ministrative documents in the Company’s Executive Office and branches. • Anti-corruption review of transaction documents under 11,644 transactions, including procurement proce- dures, followed by specific actions aimed at preventing and/or compensating losses and missed profit. The economic effect of anti-corruption measures in 2013 significantly exceeded figures reported in 2012 and amount- ed to more than RUB450 million. Enhancement of functions performed within anti-corrup- tion activities and compliance procedures Improvement of regulatory framework For the purpose of preventing possible corrupt practices, we started to monitor the financial condition of our existing and potential counterparties. We also arranged monitoring of pro- curement procedures within our investing activities. In 2013, we continued to develop our internal anti-corruption regulatory framework and adopted a number of organisational and administrative documents on certain anti-corrup- tion procedures, including Regulations on handling conflict of interests and Procedures for handling information on the chain of ownership (including beneficiaries) of procurement participants (potential counterparties) and counterparties of Federal Grid. Automation of activities In 2013, we performed testing and commissioning of the computer-aided system Record- ing of the Company Counterparties’ Beneficiaries, which has been created to collect and analyse information on counterparties’ owners. • • establishing legal mechanism preventing bribery of those responsible for anti-corruption measures in the Company ensuring awareness and compliance with anti-corrup- tion legislation and the requirements of the Anti-Cor- ruption Policy by the Company employees. Main Principles and Tasks of the Anti-Corruption Policy In 2012, the Board of Directors approved Federal Grid’s An- ti-Corruption Policy, which aims to design and implement measures for the prevention of corruption, eliminate its root causes and conditions, and strengthen anti-corruption atti- tudes among employees. The implementation of our Anti-Corruption Policy is based on principles which are in line with the best international anti-corruption practices, including: • zero tolerance towards corruption in all its forms and manifestations • minimisation of the risk of business relations with coun- terparties which may be involved in corrupt practices • • • • the mission of top management – members of the gov- erning bodies and senior managers - should form an ethical standard for the non-acceptance of any forms of corruption at all levels, making their own behaviour an example to others prohibition of granting privileges or immunities from li- ability for corruption to certain groups of employees prohibition of any impediments to access to informa- tion about corrupt practices and anti-corruption meas- ures continuous monitoring of, and control over, Anti-Cor- ruption Policy implementation. 162 163 CORPORATE GOVERNANCE / SHARE CAPITAL Share capital Share Capital Structure* As of 31 December 2013, the charter capital of Feder- al Grid Company amounted to RUB633,570,507,998 and was divided into 1,267,141,015,996 ordinary regis- tered non-documentary shares with a nominal value of RUB0.50 each. In accordance with the Company’s Articles of Association, the number of authorised shares was 79,664,807,835 or- dinary registered shares with a nominal value of RUB0.50 each and a total nominal value of RUB39,832,403,917.5. Authorised ordinary shares offer the same rights as out- standing ordinary shares. In November 2013, the Board of Directors adopted a res- olution to increase Federal Grid Company’s share capital by placing additional ordinary registered shares with a total value of RUB4,715,699,886.5 through an open sub- scription. On 21 November 2013, the additional issue was registered by the FFMS of Russia under the state registration number of 1-01-65018-D. The Company pro- vided its shareholders with a pre-emptive right to acquire shares of additional issue. On 20 February 2014, the additional ordinary share issue was completed with a price of RUB0.50 per share. Dur- ing the additional issue, 7,524,307,067 shares (79.78% of the total number of securities of the additional issue to be placed) were placed. As a result of the placement, the Company received funds in the amount of RUB3,762 billion. The Russian Federation, which acquired shares to the amount of RUB3,756 billion, was the main participant in the additional issue. The remainder of the outstanding shares, in the amount of RUB6 million, was acquired by minority shareholders. The Company has allocated funds received from the additional issue for constructing and commissioning electricity transmission lines to improve the reliability of power supply in the Republic of Sakha and Buryatia, as well as facilities for the Winter Olympics in Sochi. Information on the Company’s share capital history can be found on our corporate website, www.fsk-ees.ru, in Investors / Share Infor- mation / Share Capital History section. For further details on each of the Company’s securities issue, see Appendix to the Report on the memory stick attached. The Company has more than 400,000 shareholders. The JSC Russian Grids, which owns 80.6% of the share capital, is the Company’s majority shareholder. The Rus- sian Federation, represented by the Federal Agency for State Property Management (Rosimushchestvo), owns 0.00000000055% of the share capital. On 17 June 2013, Russian Grids and Rosimushchestvo signed a shareholders’ agreement regarding the holding of shares, present or future, and voting in Federal Grid Company. To improve interactions with shareholders, Federal Grid Company analysed its shareholder register and identified the key groups of holders of ordinary shares and depos- itory receipts. As of the end of 2013, the Company’s free float was on average 19.4%. The main minority share- holders of the Company are institutional investors and holding structures, with retail investors accounting for 2.82%. Share Capital Structure of Federal Grid* * Information is disclosed with the consent of the respective shareholders. 15% of the Company’s free float includes foreign in- stitutional investors, such as major funds focused pri- marily on Russia, whose assets under management ex- ceed USD1 billion: Vanguard Emerging Markets Stock Index Fund (USD62 billion), East Capital Russian Fund (USD1.2 billion), Market Vectors ETF Trust Russia ETF (USD1 billion), and BlackRock funds. Geographical Breakdown of Foreign Investors As before, the largest share of foreign investments belongs to American (43%) and Scandinavian (36%) shareholders. Investor Breakdown by Investment Horizons * Data as of 31 December 2013 (without taking into account data for shares of additional issue, placement of which was completed in 2014). The Company’s shareholders are predominantly long- term investors, with low portfolio turnover, and holdings that (on average) exceed two years. 164 165 CORPORATE GOVERNANCE / SHARE CAPITAL Stock Market Shares of Federal Grid Company are traded on the “B” quo- tation list of the MICEX Russian Stock Exchange, which is a member of JSC Moscow Exchange Group. The fundamen- tal appeal of the Company’s stock is underpinned by its inclusion in key Russian and foreign indices: MSCI Russia, MSCI Emerging Markets, MICEX Index, RTS Index, Sector Index (Micex PWR) and Vienna Stock Exchange Indices (Russian Traded Index, the RTX Energy). 2013 TARGET 2014 TARGET Return on initial invested capital, % 7.8 10 Federal Grid’s Share Information 2013 Share Performance Global equity markets closed mixed in 2013: the index of developed countries MSCI World has increased by 24%, while the index of emerging MSCI EM declined by 5%. The difference in absolute values of these indi- cators has more than doubled, reaching its maximum since 2001. The Russian market grew – the MICEX index added 2%, which is far below the growth rate of the MSCI World but yet looks better than MSCI EM behaviour. Share category Nominal value MICEX Ticker LSE Ticker ISIN Ordinary registered non-documentary RUB0.50 FEES FEES RU000A0JPNN9 Bloomberg Code FEES RX Electricity Sector, Federal Grid Company’s shares Electricity industry equities were major underperformers – the Micex PWR sector index went down by 39.5%. The in- dicator declined quicker than the market, largely because of the tighter tariff policy followed by a decision about zero indexation of tariffs in 2014. In 2013, Federal Grid Company shares lost 55.2%, strong- ly underperforming the Micex PWR sector index. In February and March, shares were under pressure of spec- ulations regarding the parameters of a stock valuation of Federal Grid Company and Russian Grids for Russian Grids’ additional issue within the electric grid sector reorganisation. Since April 2014, the Russian Government’s proposals to tighten the tariff policy for natural monopolies (these pro- posals were finalised in a decision to freeze tariffs in 2014) have had an additional adverse material impact on Federal Grid Company equities. Another adverse effect on Federal Grid Company’s equi- ties was the exclusion of Russian Grids’ shares from MSCI Russia because equities related to the conversion ratios were under pressure following the aggressive selling of Russian Grids shares. At year-end, Federal Grid Company shares recovered somewhat, supported – among other factors – by a state- ment from Russian Grids’ CEO that emphasised the read- iness of the holding company and its subsidiaries to pay 25% of IFRS net profit as dividend. Key Parameters of Federal Grid Company Share Trading 2011 2012 2013* units 476,111,513,800 619,919,120,000 989,348,930,000 RUB 159,370,754,044 147,513,331,183 116,812,022,883 units RUB RUB RUB mln, shares 2,043,606 2,698,318 3,235,854 0.21111 0.481 0.2811 0.1513 0.3768 0.20104 0.07508 0.226 0.09016 1,255,948 1,260,387 1,267,141 RUB, mln 351,163.1 253,904.89 114,600.23 Volume Number of deals Low High Period end Number of shares Capitalisation at year end * T+2 trade results are calculated from 2 September – date of Moscow Exchange’s switch to this trading mode as a basic one. Source: Moscow Exchange website, moex.com For further details of our shares’ trading, please refer to the section Investors / Share Information / Interactive Stock Chart of our website, www.fsk-ees.ru 166 167 GDR Price and Trading Volume, LSE CORPORATE GOVERNANCE / SHARE CAPITAL Global Depository Receipt Programme On 30 June 2008, Federal Grid Company launched a global depository receipt (GDR) programme, which was not listed under Regulation S and Rule 144A. From 1 June 2013, the Programme’s depository bank is the Bank of New York Mellon (BNY Mellon). In 2011, the Company completed a technical listing of de- pository receipts on the Main Market of the London Stock Exchange (LSE), which began trading Federal Grid Com- pany GDRs on 28 March. As of 31 December 2013, the GDR programme had 5.6 million receipts, representing 0.221% of the Company’s share capital. The maximum number of GDRs that the Company is allowed to issue is 287,269,492,431. GDR Programme Highlights Regulation S Rule 144A Ratio 1 GDR: 500 shares 1 GDR: 500 shares International Code ISIN: US3133542015 CommonCode: 036273577 ISIN: US3133541025 CommonCode: 0362733372 Price per GDR at year end USD 1.35 Number of GDRs as of 31 December 2013 2,221,960 — 3,384,725 GDR Programme as a Percentage of the Company’s Share Capital For further details on trading in the Company’s depository receipts, please refer to our website www.fsk-ees.ru, section Investors / Share Information / Interactive Stock Chart. Updates about the GDR programme are also available on the LSE website at www.lon- donstockexchange.com under Federal Grid Company’s ticker: EEES. 168 169 CORPORATE GOVERNANCE / SHARE CAPITAL Dividend Policy Our dividend policy strikes a balance between shareholders’ interests and the Company’s business needs, including en- hancing its investment attractiveness and capitalisation. The full text of the Regulations on Dividend Pol- icy is available at our website www.fsk-ees.ru, Section Shareholders and Investors. The Company’s Board of Directors approved the Regulations on Dividend Policy of Federal Grid Company setting the divi- dend policy principles, mechanisms for determining the size of dividends, procedure, period and form of dividend payment. In accordance with the Regulations, the minimum payout rate is set at 10% of net profit under RAS. The General Meeting of Shareholders may, by ordinary res- olution, declare dividends in accordance with the respective rights of the shareholders, but not exceeding the amount recommended by the Board of Directors. The Board makes its recommendations based on financial results, seeking to balance the interests of the Company and its shareholders. Payment of dividends for 2006—2012 2006 2007 2008 2009 2010 2011 2012 Dividend per share, kop. 0.16 0.08 Total accrued, RUB mln 587.9 380.0 Total paid, RUB mln 587.9 380.0 Paid to accrued dividend ratio, % 100 100 — — — — — — — — 0.21 2,577.7 2,569.3* 99.67 — — — — — — — — * Dividends were paid in full to all shareholders registered in the Company’s shareholder register excluding the amount of RUB 8,383,793.57 to those shareholders who had not timely informed about changes in their personal data or who had submitted incorrect payment details. No dividends were declared for 2008, 2009, 2011 and 2012. 2013 Dividends In accordance with Clause 2 of Article 42 of the Federal Law “On Joint Stock Companies” and Clause 7.5 of Article 7 of Federal Grid Company’s Articles of Association, dividends shall be paid out from the Company’s net income deter- mined under the Company’s accounting statements. According to Federal Grid Company’s 2013 accounting statements, there was a loss of RUB25,898 million. The main reasons for the loss were a negative margin on the revaluation of financial investments in shares listed on the stock market and a reflection of activities on the ac- crual and recovery of doubtful debt provisions. In 2014, the Company’s Annual General Meeting of Shareholders will make a resolution on the 2013 div- idend payment. Shareholders have proposed to resolve not to pay 2013 dividends on the Company’s ordinary shares. Information Policy Our Information Policy is based on the following funda- mental principles of information disclosure: • terms and conditions of regulated services • regularity and promptness • availability of information • completeness and reliability of disclosed information • maintenance of a reasonable balance between the openness of the Company and protection of its com- mercial interests. The Regulations on Information Policy of Federal Grid Company approved by the Company’s Board provide the main principles of information disclosure and establish the list of information subject to disclosure as well as the rules for information disclosure. We believe that openness is one of the key elements for improving the efficiency and sustainability of the Com- pany’s activities, and for strengthening relations with its stakeholders. In addition to strict compliance with the requirements on mandatory disclosures, we maintain an ongoing dialogue with our stakeholders, assess their informational needs and strive to meet them promptly. In accordance with the Federal Law “On Natural Mo- nopolies”, as well as with the Standards of Information Disclosure by participants of the wholesale and retail electricity and capacity markets, our Company, being a natural monopoly entity and a participant of the Whole- sale Electricity and Capacity Market (WECM), provides free access to information about its activities, including information on: • tariffs for services with regard to which State regu- lation is applied • key indicators of financial and operational activities • the main consumer specifications of regulated ser- vices • the technical accessibility of regulated services • registration and implementation of applications for technological connections to the Company’s infra- structure • • technological, technical and other activities related to technological connections to the Company’s in- frastructure investment programmes, their projects and imple- mentation • modes of purchase, cost and on the amount of goods required for rendering regulated services. Information disclosure channels Federal Grid Company’s main disclosure channel is our corporate website www.fsk-ees.ru, which is updated regularly and provides information on material facts and events, governance structure and the Company’s busi- ness results. The website presents the Articles of Asso- ciation and other internal documents, information of af- filiated entities, securities, dividend payments, quarterly and annual reports and sustainability reports, annual and interim financial statements under RAS and IFRS, materials for General Meetings of Shareholders as well as resolutions adopted by the GMS and the Board of Directors. In addition to publishing significant information on its website, the Company discloses information on the web- site of Interfax agency, on the home page of the London Stock Exchange and in the print edition of Rossiyskaya Gazeta, as well as disseminating price-sensitive informa- tion through the RNS portal. We consider an annual report one of the most important tools for the Company to communicate with its share- holders, investors and other stakeholders. When prepar- ing our annual reports we not only comply with legislative requirements but also actively strive to provide our stake- holders with additional information on various aspects of the Company’s activities. Our efforts in this area were recognised: in November 2013, the 2012 annual report of Federal Grid Company became the winner of the Best Annual Report (non-fi- nancial sector) at the 15th Annual Report Competition held by the Expert Rating Agency. The interactive ver- sion of the Company’s annual report won third place 170 171 CORPORATE GOVERNANCE / SHARE CAPITAL at the 16th annual competition run by Rynok Tsenykh Bumag magazine and the social network investor.ru in partnership with Bank of Russia Financial Markets Service. Information policy in the area of long-term development Federal Grid Company manages UNEG. To ensure the most efficient development of UNEG, the Company’s ac- tivities must be coordinated with other governing bodies of the Russian electric power industry. The Company’s policy of information openness in the field of UNEG long-term development is based on properly informing current and potential custom- ers about the existing procedures of long-term devel- opment and the possibilities for clients to participate in these procedures. The effectiveness of interaction and the fullness of in- formation exchange with electric power entities are ensured by virtue of the principles of transparency at all stages of decision-making and the regular provi - sion of all interested parties with up-to-date and reliable data on actions expected in the area of UNEG devel- opment Investor Relations Investor Calendar * Date March 11th April 4th May Event 2013 Annual Results (RAS) FY2013 Annual Financial Report (FSA), FY 2013 Financial Results (IFRS) Q1 2014 Financial Results (RAS) Before June 30th Annual General Shareholders Meeting July August October H1 2014 Financial Results (RAS) H1 2014 Financial Results (IFRS) Q3 2014 Financial Results (RAS) * Dates may be subject to change. Information IR Release Financial Statements IR Release Financial Statements Presentation IR Release Financial Statements IR Release Financial Statements Annual General Meeting Presentation IR Release Financial Statements IR Release Financial Statements Presentation IR Release Financial Statements the long-term financing of interregional distribution grid companies. The active work of our IR staff was highly appreciated by the investment community. Thus, in July 2013, Fed- eral Grid Company became one of three companies to be shortlisted for the awards “Best Investor Rela- tions by a CEO, mid cap” and “Best Investor Relations by a CFO, mid cap” by IR magazine (Russia & CIS). Further information on our IR events can be found in the section Shareholders and Investors / IR releases of our website, www.fsk-ees.ru The list of investment analysts monitoring Fed- eral Grid Company’s performance is available in section Shareholders and Investors / Analysts of our website, www.fsk-ees.ru IR Team Vladimir Baklanov Head of Investor Relations Tel: +7 (495) 710 9064 Email: baklanov-vv@fsk-ees.ru Egor Toropov Tel: +7 (495) 710 9333 ext. 2275 Email: toropov-ev@fsk-ees.ru Federal Grid Company is a public company, one of the top blue chips of the Russian energy sector. We strive to maintain strong relationships with the investment com- munity, paying a great deal of attention to communicat- ing with analysts and investors, at investment forums, conferences and in personal meetings. The main task of our investor relations (IR) is to provide our shareholders, current and potential investors, and analysts with accurate and up-to-date information on the Company’s affairs and its prospects. We also consider it important to get feedback from this community, which helps to set a development strategy in line with the financial market participants’ perceptions. Federal Grid representatives hold regular meetings with minority shareholders and investors with a view to en- hance their awareness of the Company’s activities, to identify investment needs and to define optimal ways for investing in Federal Grid’s securities. In March 2013, within the policy of improving investment attractiveness among retail stock market participants, Federal Grid held a meeting in St Petersburg with minority shareholders – individuals. The meeting was organised in collaboration with staff members of the Company’s Cor- porate Governance Department with the assistance of the ALOR Stock Trading Institute. The participants were given the Company’s performance results and discussed prospects for investing in its securities. In June 2013, a meeting with minority shareholders was held during preparations for a General Meeting of Share- holders. In November 2013, the Chairman of the Management Board of Federal Grid Company, Andrey Murov, held a meeting with investors. At the meeting, Mr Murov told investors about the Company’s 2014–2018 strategy for development of the national backbone grid complex and about areas of potential growth under the regulatory tariff freeze. In June 2013, Federal Grid’s representatives within the delegation of Russian Grids’ companies took an active part in the 17th St Petersburg International Economic Forum. The First Deputy Chairman of the Company’s Management Board, Andrey Kazachenkov, attended a working session of Russian Grids’ delegation with the EBRD President, Suma Chakrabarti. The participants discussed issues regarding cooperation within agree- ments made earlier on financing the Company’s invest- ment programme and the potential for cooperation with 172 173 ADDITIONAL INFORMATION / DISCLAIMER Additional Information Disclaimer This annual report (hereinafter – the Annual Report) was prepared based on information available to Federal Grid Company and its subsidiaries and associates at the time this Report was compiled. The Annual Report includes, among other things, state- ments regarding the Company’s future operations based on management’s current forecasts and assessments. There are a number of objective factors that could cause actual results to differ materially from the above forecasts and assessments. The Annual Report contains certain forward-looking state- ments regarding business operations, economic and finan- cial indicators of the Company, its business plans, projects and expectations. The Annual Report may also contain es- timates of price changes, production and consumption vol- umes, costs, expenses, development prospects and other similar factors, as well as forecasts on industry and market development, beginning and end dates of certain projects of the Company. Such forward-looking statements can be identified by the use of the terminology such as “intend”, “strive”, “project”, “expect”, “estimate”, “plan”, “anticipate”, “assume”, “may”, “could be”, “will be”, “continue” or similar words and expres- sions or variation thereon. By their nature, forward-looking statements involve risks and uncertainties, both general and specific, that may cause the relevant assumptions, forecasts, projections and other for- ward-looking statements do not materialise. In view of the above risks, uncertainties and assumptions, the Compa- ny cautions that its actual results may differ materially from those expressed or implied in such forward-looking state- ments. These statements are neither promises nor guarantees, and the Company shall not be liable for any losses incurred by legal entities and individuals who relied on forward-look- ing statements. Such forward-looking statements repre- sent, in each case, only one of many possible scenarios and should not be viewed as the most likely scenario. Except as required by applicable legislation, the Company does not undertake any obligation to release publicly any updates and revisions of such forward-looking statements whether as a result of new information or future events. Contacts Joint Stock Company Federal Grid Company of Unified Energy System (SC FGC UES) Address: 5A Academica Chelomeya str., Moscow 117630, Russia Call centre: 8 800 200 1881 For calls from neighbouring countries and beyond: Tel: +7 (495) 710 9333 Fax: +7 495 710 9655 E-mail: info@fsk-ees.ru Website: http://fsk-ees.ru IR Service: Vladimir Baklanov Head of Investor Relations Tel: +7 (495) 710 9064 Email: baklanov-vv@fsk-ees.ru Egor Toropov Tel: +7 (495) 710 9333 ext. 2275 Email: toropov-ev@fsk-ees.ru Company Auditor (RAS): Full name: RSM RUS Limited Liability Company Short name: RSM RUS LLC Address: 4 Pudovkina str., Moscow 19285, Russia INN: 7722020834 OGRN: 1027700257540 Phone: +7 495 363 2848 Fax: +7 495 981 4121 E-mail: mail@top-audit.ru SRO Membership: Full name: self-regulatory organisation Non- for-Profit Partnership “Audit Association “Sodruzhestvo” Address: 21/4 Michurinsky prospect, Moscow 119192, Russia statements. According to this requirement, KPMG CJSC was appointed as Auditor for Federal Grid Company’s IFRS consolidated financial statements for 2013 (as adopted by the EU). Company Auditor (IFRS) Full name: Closed Joint-Stock Company KPMG Short name: CJSC KPMG Legal address: office 3035, 18/1 Olympic prospect, Moscow 119192, Russia Postal Address: Tower Complex Block, 10 Presnenskaya Naberezhnaya, Moscow 123317, Russia INN: 7702019950 OGRN: 1027700125628 Phone: +7 495 937 4477 Fax: +7 495 937 4499 E-mail: moscow@kpmg.ru SRO Membership: Full name: Non-for-Profit Partnership “Audit Chamber of Russia” Address: building 3, 3/9, 3rd Syromyatnichesky pereulok, Moscow 105120, Russia Company Registrar Full name: Closed Joint-Stock Company “Registrar Society STATUS” Short name: CJSC STATUS Address: building 1, 32 Novorogozhskaya str., Moscow 109544, Russia Phone: +7 495 974 8350 Fax: +7 495 678 7110 E-mail: info@rostatus.ru| License number: 10-000-1-00304 Issue date: 12.03.2004 Validity period: non-expiry Issuing authority: FFMS of Russia Depositary Full name: Non-Banking Credit Organisation Closed Joint-Stock Company National Settlement Depository Short name: NSD According to the terms of the dealer agreement in respect to the bond issue programme entered into by Federal Grid Company and Federal Grid Finance Limited, one of the following companies: PricewaterhouseCoopers, Ernst&Young, Deloitte, KPMG or one of its affiliates shall be appointed as an auditor for Federal Grid Company IFRS consolidated financial Address: building 8, 1/13 Sredny Kyslovsky pereulok, Moscow License number: 177-12042-000100 Issue date: 19.02.2009 Validity period: non-expiry Issuing authority: FFMS of Russia 174 175 ADDITIONAL INFORMATION / GLOSSARY Glossary Abbreviations APCS ACPP ALCS BRELL CDC CEO CFO CHP CIS Automated Process Control System Annual Comprehensive Procurement Programme Automated Lighting Control System Belarus, Russia, Estonia, Latvia and Lithuania Contract for Delivery of Capacity Chief Executive Officer Chief Financial Officer Combined Heat and Power The Commonwealth of Independent States CIS EPC CIS Electric Power Council COSO The Committee of Sponsoring Organisations of the Treadway Commission Commission for Operating and Engineering Coordination of Collective Operation of CIS and Baltics Energy Systems Central Tender Commission COTC CTC DECT DHS DSS EBITDA EBRD EMS ESS Dedicated Heating Station Digital Substation Earnings before Interest, Taxation, Depreciation & Amortisation ) European Bank for Reconstruction and Development Environmental Management System Energy Storage System ESUPCN Energy System’s Unified Process Communications Network EurAsEC Integration Committee of Eurasian Economic Community FFMS FOCN GDR GIS Federal Financial Market Service Fibre-Optic Communications Network Global Depository Receipt Gas-Insulated Switchgear GLONASS Global Navigation Satellite System GMS GRI GRES HPP HIFs HPB HR General Meeting of Shareholders Global Reporting Initiative State District Power Plant Hydro Power Plant Hazardous Industrial Facilities high power batteries Human Recourses HSCSR High-speed controlled shunt reactor HTS HVL IES ISIN High temperature superconducting High Voltage Line Illuminating Engineering Society International Securities Identification Number ISGAN International Smart Grid Action Network IDR IDGC ICS IPS JSC KPI MES Issuer Default Ratings Inter-regional Distribution Grid Company Internal Control System Integrated Power System Joint Stock Company Key Performance Indicator Backbone Electric Grid Digital European Cordless Telecommunications IFRS International Financial Reporting Standards 176 177 ADDITIONAL INFORMATION / GLOSSARY MPEI NGPP NPP OECD OHTL OSIR RAS PABX PMES PTC PTL R&D RAB RPAS RPD RUIE Moscow Power Engineering Institute Non-Governmental Pension Program Nuclear Power Plant Organisation for Economic Cooperation and Development Overhead Transmission Line Outage Schedule Implementation Rate Russian Accounting Standards Private Automated Branch Exchange Backbone Electric Grid Enterprise Permanent Tender Commission Power Transmission Line Research and Development Regulatory Asset Base Relay Protection and Automation System Rate of Process Disturbances Russian Union of Industrialists and Entrepreneurs Units of measure bn billion kWh Kilowatt-hour Gcal gigacalorie GW gigawatt km kv kilometer kilovolt kW kilowatt l litre mln million MVA megavolt-ampere MW megawatt p.p. Percentage point Appendices, on the memory stick attached • audit Commission’s Report • Information on Compliance with the FCSM Code of Corporate Conduct • Information on Major Transactions and on Transactions made by Federal Grid Company in 2013, which are recognised under the RF laws as related party transactions, and are subject to approval by the Company’s authorised governing bodies • Information on the Actual Performance of Assignments of the President and the Government of the Russian Federation SPS AAG Smart Power System with an Active Adaptive Grid • Information about the Structure of the Property Portfolio of Federal Grid Company SS TPP UES UNEG VoIP WECM Substation Thermal Power Plant Unified Energy System Unified National Electric Grid Voice over IP Wholesale Electricity and Capacity Market VRP ACS Voltage and Reactive Power Automatic Control System VSAT WWF Very Small Aperture Terminal World Wildlife Fund • Information about Land Plots of Federal Grid Company • RAS Annual Financial Statements • Additional Information by Section of the Annual Report Information materials, on the memory stick attached • management Report 2013 • IFRS Consolidated Financial Statements 178 179 NOTES 180 

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