The information on risk factors - Quarterly report "Interregional Distribution Grid Company of Centre", Joint-Stock Company

The information on risk factors
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4.5. Analysis of tendencies of development in the sphere of primary activity of the issuer
The following indicators of economy development were forecasted in the concept of the long-term social and economic development of the Russian Federation worked out by Ministry of Economic Development in 2007:
GDP dynamics at different scenarios of economy development (according to the data of 2009) (average annual gain rates, percentage points):
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2010-2012
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2013-2015
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2016-2020
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GDP growth rate (conservative forecast)
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2,9
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3,5
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3,1
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GDP growth rate (moderate – optimistic forecast)
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4,2
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6,3
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6,9
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The world financial and economic crisis which came into active stage at the end of 2008 introduced its adjustments to the country economy development. The main macroeconomic indicators reduced in 2009. Thus, GDP fall by 8,5%, industrial production – by 10,8%, inflation level was 8,8%.
In experts’ of Ministry of Economic Development of the Russian Federation opinion, in 2010 the country economy will be able to avoid stagnation and come to the growth (about 3-4%) which will depend on not only the world conjuncture improvement, but increase of efficiency and competitiveness of the Russian economy, its innovativeness, recovery of confidence between economic entities.
Taking into account the stated factors, Ministry of Economic Development is planning to achieve the average annual GDP growth rate equal to 6,5% by 2020.
In 2009 the Russian power industry faced two main problems. Firstly, the crises resulted in the significant reduction of electric power consumption - 4,6%. Secondly, in 2009 investment in the industry reduced. The abovementioned extensive plans on expanding capacities will be postponed by a year or even by two years.
The principal parameter for construction of the industry development model is power consumption dynamics. Forecasts of power consumption rate changes expressed by different experts do not give rise to optimism. Ministry of Energy forecasts in 2010 power consumption increase at 2-3% level, and according to estimate of non-commercial partnership “Market council” the increase will be at most 0,5%. In the long term power consumption growth rates will be lower than 3%, because our economy has serious potential to reduce specific power consumption. Analysts consider 1-2% growth rates in the long term to be more real.
As a whole, estimate of the market prospects of the Russian electric power companies depend completely on the country economy development and re-investment opportunities which are the determining factors both for fundamental estimate of value of companies and capital inflow in the industry.
Now the issuer carries out its activity in two main directions: transmission of electric energy and technological connection to electric grids. Thus technological connection to electric grids defines development of the company, growth of volumes of transmission of electric energy, expansion of geographical covering of territories with electric grids, and increase in capitalization. Tendecy of development of the given kind of activity is defined by development of regions of the zone of activity of the issuer: development of the industry, agriculture, household sector, construction of habitation, etc, it allows estimate them as favorable as a whole even under conditions of the current economic crisis.
For creation of favorable conditions of development of regions, the issuer actively cooperates with local enforcement authorities and large consumers in the sphere of planning. The result of this work is steady demand for electric capacity, which is the ground for formation of the issuer’s investment program.
Considerable development trend in the field of the issuer’s activity is possibility of the issuer’s business diversification in the part of structure of rendered services. Recent adoption of the law on power efficiency from the one part will reduce power consumption within the scale of economy, but from the other part it will create opportunity for services in the field of increase of power efficiency of electric power consumers. At present the issuer works out the concept of access to the market of rendering services in the field of power efficiency.
The above-stated information is given according to the opinions expressed by the issuer's governance bodies.
Opinions of the issuer's governance bodies concerning the presented information coincide. There is no a special opinion of members of the issuer's Board of Directors concerning the presented information.
4.5.1. Analysis of factors and conditions influencing the issuer's activity
Factors and conditions influencing activity of the issuer and results of such activity:
First of all, it is necessary to point out a number of factors determining the condition of the economy as a whole and, therefore, influencing on the power industry:
Dynamics of prices for oil (according to forecasts of Ministry of Economic Development, level of prices for oil will not significantly change in 2010-2012 and will be about 60$/barrel);
Manufacturer price index (growth at 8% level per year is forecasted);
Interest rates for raising credit funds (by 2012 it is forecasted their gradual reduction against the background of credit risk reduction).
Besides, there factors specific for the power industry. It is necessary to point out the most significant factors influencing on the results of the issuer’s activity on electric power transmission and technological connection ensuring:
- state regulation of tariff making in the field of electric power transmission;
- power consumption dynamics on the scale of the Russian Federation (in particular, economic slowdown under economic crisis conditions caused power consumption reduction in 2009 by 4,6% as compared to 2008);
- inflation (it is forecasted at 8% level which is not critical for the industry condition);
- changes in legislative framework in the sector and Russian Federation, first of all, adoption of the Federal law “On power saving and power efficiency increase and introduction of changes to separate legislative acts of the Russian Federation” (No. 261-FZ dated November 23, 2009);
- condition fixed assets in the industry (according to some estimates, depreciation achieves 60%);
- plans of economic development of regions of Russia developed by the Government of the Russian Federation and MERT (Russian Ministry of Economic Development and Trade) for the reporting and next years and in the long term for 3, 5 and 10 years.
The forecast concerning duration of the effect of the specified factors and conditions:
- In conditions of realization by the issuer of an exclusive kind of activity (rendering services on transmission of electric energy), there will not be changes regarding the authority under regulation of tariffs for services on transmission of electric energy in the near future. As for the limiting levels of tariffs for services on transmission of electric energy, the issuer does not predict sharp fluctuations of the given indicator aside increases or reduction in the near future, however, it is possible for the State to restraint growth of ultimate levels of tariffs in relation of previously planned schedule within the framework of anti-crisis measures.
- In 2010, according to forecasts of MEDT and Ministry of Industry and Energy, industrial production is expected to grow up in 1,7-3,1% and power consumption - in 0,4-0,5% in the Russian Federation.
- Increase of consumer price index in 2010 is forecasted at 7,5-10% level which is not critical for the industry.
- Significant changes in the legislative base of the industry, besides the abovementioned are not forecasted in the nearest future.
- At present the world economic crisis went out from the active phase and recession of the Russian economy slowed considerably. According to different forecasts, the term of growth of the Russian economy up to pre-crisis level is end 2010 – middle 2011.
The actions taken by the issuer and actions to be taken by the issuer in the future for an effective use of the given factors and conditions:
The issuer takes the following measures for effective use of factors, which influence on the issuer’s activity:
- interaction with the Federal tariff service and Tariff regulation bodies of constituent entities of the Russian Federation in the field of economic reasoning of expenses included in tariffs, introduction of changes in the law of the Russian Federation in the field of price formation for services of natural monopolies with the purpose of accounting of interests of distribution grid companies at establishment of tariffs for electric power in retail market;
- full scale implementation of RAB tariff making system;
- conceptual working out of possibility of access to the market of rendering services in the field of power efficiency increase of electric power consumers;
- development and approval of long-term programs of development of regions of activity zones of the issuer’s branches with regional and local authorities;
- reduction of costs and optimization of the issuer’s investment program.
The ways applied by the issuer, and ways to be applied by the issuer in the future for decrease in negative effect of factors and conditions influencing activity of the issuer: Scheduled transition to long-term regulation of tariffs for services on transmission with use of investment capital profitability method, reduction of internal costs.
Material events/factors which may greatly affect an opportunity of reception by the issuer in the future of the same or higher results in comparison with the results obtained for the last reporting period, and also probability of occurrence of such events (occurrence of factors):
The most essential risk which can have significant negative influence on results of activity of the issuer is reduction of profit component under conditions of the economic crisis connected with the following factors:
- reduction of power consumption by large consumers;
- reduction of payment discipline of power sales companies.
The issuer considered the risk of this event as the risk, which is able to make considerable influence on financial result of activity as well as to lead to deficit of financing of the issuer’s investment program within middle-term perspective.
The issuer estimates this risk probability as high, consequences for the issuer’s activity from the risk events vary from average to severe.
At the same time consequences of the risk events can be minimized:
- improvement of regulatory and legal basis in the field of energy, which is able to reduce considerably risks of income shortage, increase of accounts payable and cash shortages in the issuer’s activity;
- optimization of internal expenses of the issuer;
- state support for enterprises – large consumers of electric power;
- state financial support to cover deficit of the issuer’s investment program.
Essential events/factors which may improve results of activity of the issuer, and probability of their occurrence and also duration of their action:
The essential event which within middle-term and long-term perspective may have a significant positive influence on results of the issuer’s activity is in the field of tariff formation transition to system of the regulation based on fair RAB (Regulated Asset Base). Now the main regulating and normative documents in the given area were prepared, as of 31.03.2010 new methods are already at production operation stage in some regions of the issuer – namely, in Belgorod, Lipetsk, Tver, Kursk and Yaroslavl regions. Nevertheless, at present the RAB system has not been launched yet in pilot regions, therefore now it is difficult with a sufficient degree of definiteness to predict financial consequences of occurrence of this event. Under the current unfavorable economic conditions, however, to forecast temporary decrease of efficiency of RAB system (in connection with incompliance with the intended norm of profitability, which is actually has been fixed in the market environment), but RAB effectiveness is increasing considerably within the long-term perspective under conditions of economy growth.
Other essential factor which can positively influence estimation of the company in long-term prospect is an active innovative activity in the field of construction of the management system and introduction of the modern software products for management of distributive grid complex of the issuer. Already now the issuer invests much money in implementation of such modules of the transaction systems as SAP IS-U, TORO; the company participates in a number of pilot projects, including the project of construction of the enterprise asset management system. Besides, the active policy in the field of formation of the integral system of stakeholder relations is performed. The company holds regular meetings with representatives of the investment community for increase of the level of openness and transparency of business. Results of innovative activity will be estimated and put on the balance of the issuer as immaterial assets in the process of estimation carrying out. We estimate duration of the given factor as a constant process.
Besides, the essential factor which may have a significant positive influence on financial result is at present a high level of losses in networks. IDGC of Centre, JSC developed and realizes the program of AIMEMS (automated information and measuring energy metering system) which in the intermediate term prospect will have a significant influence on behavior of commercial losses aside their decrease. Implemented program of integration of communal grids will have considerable influence on dynamics of decrease of commercial losses. The given factors will have a significant positive influence in the intermediate term prospect.
4.5.2. Competitors of the issuer
The main kind of activity of the issuer is transfer of electric energy and technological connection of consumers to the grid infrastructure.
The Company branch “Belgorodenergo” is the one grid company in the territory of its region which has technological connection to the Unified national power grid (UNPG). The other branches of the Company occupy the dominant position in the regional markets of electric power transmission services and are level 1 grid companies. In a number of regions of the market zone of electric power transmission service sale by the Company branches there are other territorial grid companies providing similar electric power transmission services, but their market stake is insignificant.
Basing on the own information, at present the stake of IDGC of Centre, JSC is about 85% (in terms of conventional units) in the technological connection market. In the technological connection market the principal competitors of the Company are territorial grid organisations (TGO, MUE) in such regions as Bryansk region, Voronezh region, Kursk region, Lipetsk region, Orel region, Tambov region, Tver region, Yaroslavl region. In such regions as Belgorod region, Kostroma region and Smolensk region, where city power grids are in lease or in property of IDGC of Centre, JSC, the market stake is 100% (net of the large consumers that have own power grids).
At present the issuer performs active work with local authorities relating to integration of territorial grid organisations into the issuer’s activity.
V. Detailed data on the persons forming a part of governance bodies of the issuer, bodies of the issuer undertaking control over its financial and economic activities, and brief data on the staff (employees) of the issuer
5.1. Data on the structure and competence of the issuer’s governance bodies
Full description of structure of the issuer’s governance bodies and their competence in accordance with the issuer’s Articles of Association (constituent documents):
Structure of the issuer’s governance bodies in accordance with the issuer’s Articles of Association:
1. General Meeting of Shareholders.
2. Board of Directors.
3. Management Board.
4. General Director.
General Meeting of Shareholders is the highest governance body of the issuer.
The competence of the issuer’s governance bodies in accordance with the issuer’s Articles of Association.
In accordance with the clause 10.2. of the Issuer’s Articles of Association, the following items are related to the competence of the General meeting of shareholders:
1) introduction of changes and amendments in the Articles of Association or approval of the Articles of Association in new edition;
2) restructuring of the Company;
3) liquidation of the Company; appointment of the Liquidation Commission and the approval of the interim an final liquidation balances;
4) determination of the quantity, nominal value, category “type” of the declared shares and the rights provided by the said shares;
5) increase of the charter capital by way of the increase of the nominal value of shares or by way of placement of additional shares;
6) reduction of the charter capital of the Company by way of decreasing the nominal value of the shares, through the acquisition by the Company of the part of shares with the view of reducing their total amount or with the view of repaying of the acquired or paid out shares;
7) fractioning and consolidation of the shares of the Company;
8) making the decision on the placement by the Company of bonds converted into shares and other emission securities, converted into shares;
9) determination of the quantitative structure of the Board of Directors, the election of its members and the early termination of their powers;
10) election of the members of the Auditing Commission of the Company and the early termination of their powers;
11) confirmation of the Auditor of the Company;
12) making the decision on the transfer of powers of the single executive organ of the Company to the managing organization “manager” and on the early termination of his/her powers;
13) approval of annual reports, annual accounting balances, including the report on profit and losses of the Company, distribution of its profits including payment “announcement” of dividends, except for the profit distributed as a dividend by the results of the first quarter, half a year, nine months of the financial year and the losses of the Company by the results of the financial year;
14) payment “announcement” of dividends by the results of the first quarter, half a year, nine months of the financial year;
15) determination of the procedure for holding the general meeting of the shareholders of the Company;
16) making the decision on the approval of deals in cases envisaged by Article 83 of the Federal Law “On Joint Stock Companies”;
17) making the decision on the approval of large deals in cases envisaged by Article 79 of the Federal law “On Joint Stock Companies”;
18) making the decision on the participation in holding companies, financial and industrial groups, associations and other unions of for-profit organizations;
19) approval of the internal documents regulating the activity of the organs of the Company;
20) making the decision on paying the members of the Auditing Commission of the Company of remunerations and/or compensations;
21) making the decision on paying the members of the Board of Directors of the Company of remunerations and/or compensations;
22) solution of other questions envisaged by the Federal law “On Joint Stock Companies”.
Items related to the competence of the General meeting of shareholders cannot be transferred to the Board of Directors, the Management Board and the General Director of the Company for resolution.
The General meeting of shareholders is not entitled to consider and adopt resolutions on the items, which are not related to its competence by the Federal Law "On joint-stock companies".
In accordance with the clause 15.1. of the Issuer’s Articles of Association, the following items are related to the competence of the Board of Directors of the Company:
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setting the priority directions of the activity and development strategy of the Company;
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convocation of the annual and extraordinary general shareholders meetings of the Company, except for the cases stipulated by item 14.8 of Article 14 of this Charter as well as announcement of the date of a new General meeting of shareholders instead of unheld one by the reason of the quorum absence;
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Approval of the Company general shareholders meeting agenda;
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Election of the Secretary of the Company general shareholders meeting;
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Definition of the date of drawing up the list of persons entitled to participate in the Company general shareholders meeting, approval of expenses estimate for holding of the General meeting of shareholders of the Company and solution of other issues connected with preparation and carrying out of the Company general shareholders meeting;
6) introduction for the decision of the general meeting of the shareholders of the Company of issues envisaged by subparagraphs 2,5,7,8,12-20 of Item 10.2 of Article 10 of this Charter, as well as on the reduction of the authorized capital of the Company through the reduction of the par value of the shares;
7) placement by the Company of bonds and other emission securities except for the cases stipulated by the legislation of the Russian Federation and this Charter;
8) approval of the decision on the emission of securities, emission prospect of securities, the report on the results of the emission of securities, approval of the reports on the results of the acquisition of the shares of the Company from its shareholders, reports on the redemption of shares, reports on the results of the demands by the shareholders of the Company on the redemption of the shares owned by them;
9) determining the price (monetary value) of the property, the price of the placement and acquisition of emission securities in cases envisaged by the Federal Law “On Joint Stock Companies” as well as while solving issues stipulated in sub-items 11, 23, 24, 40 of Item 15.1. of Article 15 of this Charter;
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