OJSC Kubanenergo
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Address to Shareholders by the Chairman of the Board of Directors

Dear Shareholders!

The year 2014 was a significant milestone in the history of all of Russia, and of Kuban in particular. Holding the Winter Olympic Games and the Paralympic Games in the city of Sochi placed additional responsibility on the managers and employees of OJSC Kubanenergo, in whose district the Sochi energy region is located. Thanks to support from Rosseti group of companies, OJSC Kubanenergo completed large-scale reconstruction of its energy complex, and successfully managed the task of providing reliable power supplies to Sochi infrastructure facilities during the Olympic Games. Finally, OJSC Kubanenergo formed reserves of power reliability for the Sochi distribution grid complex for several decades to come.

The work of the Board of Directors of OJSC Kubanenergo during the reporting year was aimed at fulfilling the interests of the Company’s shareholders, increasing the level of trust in the Company on the part of shareholders, creditors, and investors, and ensuring uninterrupted power supplies to consumers, while increasing energy efficiency, and modernizing and expanding electric power infrastructure.

The Board of Directors of OJSC Kubanenergo held 23 meetings in 2014, at which key questions of the Company’s strategic development were examined. The Company’s business plan for 2015 was approved (including the company’s investment program), as was the program of electric supplies and increasing energy efficiency for 2015-2019 and the perspective development plan for 2014-2018. The Board of Directors also determined the Company’s priority business directions. Moreover, the Board approved a series of documents in the fields of risk management, internal control, internal audit, lowering injury risk, innovational development, energy supplies, increasing energy efficiency, fighting corruption, and purchasing, technical, personnel, and social policies of the Company. Particular attention was given to reviewing reports of the General Director for all of the Company’s business units.

Magadeev R.R.

Overall, the Company follows all corporate management principles recommended by the Code of Corporate Management of the Bank of Russia.

The implementation of distribution grid facilities of federal significance was completed in 2014. These facilities ensured the functioning of infrastructure for the 2014 Winter Olympic Games in the city of Sochi.

The Company also continued to implement large-scale projects for construction and reconstruction as part of the medium-term and long-term program of measures to improve the reliability of power grid facilities of the Black Sea coast of the Krasnodar Territory.
The Company plans to build large power facilities for the applicant LLC Gazprom Invest in 2015 as part of the construction project “Expansion of the unified gas supply system to ensure gas supplies to the “South Stream” gas pipeline”.

In order to bring the Company to a breakeven level of financial and economic activities, particular attention has been paid for many years to work on optimizing the costs of OJSC Kubanenergo. In order to achieve these goals, the Company fulfills a Program of Cost Management. Thus, the Company’s overall economized effect in 2014 was RUB 1,565 mln which was 16% better than planned.

Pursuant to the directives and instructions of the Government of the Russian Federation to reduce administrative and management costs during the period by not less than 15% of their actual value in 2013, the Company achieved savings of administrative expenses in the amount of RUB 92 mln which is 15.3% lower than the 2013 level.

The volume of electricity supplies to the Company’s electric grids in 2014 amounted to 87% of the total supply in the region. The share of other grid organizations serving the region is small (13%), and these organizations do not have a significant impact on the Company. The share of the Company’s electricity supply in 2014 was maintained at the previous year’s level, while the total value of supplies in the region was higher than the 2013 level, and reached 25 billion kWh. The high rates of reconstruction and renovation of the Company’s power grid facilities, as well as the dynamic growth in connections to the grid, suggest that the company will maintain a dominant position in the regional market for electric power transmission in the future.

The Company provided reliable and uninterrupted power supplies overall to consumers in the reporting year. The target level of reliability and quality of service set by the regulator – the Regional Energy Commission-Department of Prices and Tariffs of the Krasnodar Territory – was fulfilled by the Company. The average duration of accidents involving a break in power supplies to consumers, despite growth in the total number of technological failures (accidents), remained at the same level.

The Company’s priority directions for achieving the highest level of maturity of control functions by 2018 were defined as improving the system of internal control, risk management and internal audit. To this end, the Board of Directors approved the policies of internal control, risk management, and internal audit in 2014, and assessed the risks of primary and secondary business processes. The Company began integration of the risk management and business planning systems.

During the reporting year, by decision of the Board of Directors of OJSC Kubanenergo, the Company’s organizational structure was amended. These changes are related to improvement of the Company’s organizational and functional structure, bringing it in line with the standard organizational structure of an inter-regional network company with a two-level operational management system, thereby optimizing the number of administrative staff. The main organizational changes took place in the segment of development and implementation of services, the technical segment, and the public relations segment. This made it possible to create a more efficient chain of command, consistent with the Company’s objectives and functions.

OJSC Kubanenergo confirmed its high level of corporate governance and information transparency in 2014. Taking part in the All-Russian open competition of annual reports of joint stock companies, OJSC Kubanenergo was awarded three first place awards: for “Best Annual Report in the Infrastructure Sector”, “Best Electronic Annual Report”, and “Best Annual Report from the Krasnodar Territory”.

OJSC Kubanenergo’s main goal for 2015 is a accident-free passage of the seasons of peak loads, timely receipt of a certificate of readiness, implementation of investment and maintenance programs, and minimizing excessive losses. It’s no less important to address the issue of increasing accessibility and transparency of grid connections, and the reliability and quality of services provided. Particular attention is paid to management of the Company’s business reputation, increasing its transparency, and social responsibility.

I’m sure that OJSC Kubanenergo has all of the necessary resources to achieve these goals. I sincerely thank the Company's management and all employees of the Company for their professional and effective work, which, with the support and trust of shareholders and the state, is the key to the success of sustainable development of the power distribution complex of the Krasnodar Territory and the Republic of Adygea in the future.

Chairman of the Board of Directors
OJSC Kubanenergo                                                                                          S.V. Sergeyev