3.1. The economy and industry in 2009*
3.1.1. Results of economic development in 2009

In 2009, economic development in Russia was affected by the global economic crisis and was uneven. Drastic deterioration of external economic conditions, a decrease in exports, capital outflow and suspension of bank credit resulted in a significant reduction of investment activity and recession in the industry during the first half of 2009. GDP dropped by 10.4% compared to the same period in 2008. Economic decline in Russia stopped by mid-2009. GDP has increased every month since June. Hence, in the third quarter, changes in production with seasonal adjustments showed positive results, and in the fourth quarter the rate of growth increased.

Reduction of the GDP in 2009 is mainly due to a decrease in investment demand. Investment in fixed capital was reduced by 17%. In the first quarter investment decreased by 8.1% compared to the previous quarter, and in the second and third quarters that reduction continued, although at a slower pace, and only by the end of the year did investment become stable.

In 2009, all industrial facilities in Russia showed weaker performance results compared to 2008. However, the production decrease slowed in all industries. In January–December, processing facilities have shown the highest production decrease (16%) due to significant manufacturing reduction of other non-metal mineral products (24.8%), machinery and optical equipment products (31.6%), transportation means and equipment (38.0%), while the mining industry has shown the lowest production decrease (1.2%).

The poor financial conditions of industrial facilities, insufficient domestic and external demand for industrial products, low investment in industrial production had an adverse impact on industrial production.

In December 2009, industrial production increased by 2.7% compared to December 2008 and 1.5% to November which is a result of further production increase of electricity, gas and water distribution, and the end of recession. In the processing industry (an increase of 0.7% was reported for the first time from the beginning of 2009), due to positive dynamics in most processing businesses development on account of compensation effect of the low-cost basis in December 2008, there was a significant decrease speed reduction in production of other non-metal mineral products, transportation means and equipment, and a significant increase of chemical production (+33%), leather processing, leather products and shoes manufacturing (+24.3%), metallurgical production and metal products manufacturing (+16.5%).

*Based on information of the Ministry of Economic Development of the Russian Federation and Not-for-Profit Partnership Market Council, System Operator UES.


3.1.2. Power industry in Russia

The Russian power system is one of the largest in the world. The electricity sector is represented by over 440 thermal and hydroelectricity plants and 10 nuclear power plants with total installed capacity of 211.8GW.

On July 1, 2008 RAO UES, a natural monopoly was liquidated and competition-based sectors of the energy industry were separated. The wholesale electricity and capacity market was launched, and its liberalization process is underway. Significant investment was attracted by the industry following privatization of electricity assets.

Within the reform process, all federal power plants and generating assets of regional vertically-integrated companies were consolidated into wholesale and territorial companies, and the main hydroelectric generating assets in RusHydro, the foreign assets management was transferred to Inter RAO UES, FGC UES unified all high voltage grids, and 11 IDGCs (MRSKs) unified average voltage distribution grids. Also sales, repair and servicing companies were separated from vertically-integrated companies. System operator of UES became responsible for regional dispatch control. All energy assets in the Far East were transferred to RAO UES of East.

The Unified Energy System of Russia comprises seven unified energy systems: UES of Centre, Middle Volga, Ural, North-West, South, Siberia, and UES of East. Energy systems of Belarus, Estonia, Latvia, Lithuania, Georgia, Azerbaijan, Kazakhstan, Ukraine, Moldavia and Mongolia work in parallel with UES of Russia. The power system of Finland, being part of the Scandinavian power systems association NORDEL, operates along with UES of Russia through the Vyborg transmission centre. Some of the HPPs of the Kola power system operate in parallel with the Norwegian power system. Electric grids of Russia also provide electricity supplies to remote regions in China.

As at the end of 2009, the installed electricity capacity of the power plants of UES of Russia totalled 211.8GW. Installed electric capacity of UES of Russia increased in 2009 by 13.77GW by means of commissioning of the new facilities and the retrofitting of existing power plant equipment. Total electric capacity of 1.268GW was put in operation in 2009 at the power plants of UES of Russia, including power plants of the industrial facilities. Shutdown of the generating facilities of UES of Russia totalled 287.7MW.

Electricity generation by UES of Russia, including electricity production by power plants of the industrial facilities amounted to 957.1 bn kWh (a reduction of 4.9% compared to 2008), including:

The significant increase in electricity generation by HPPs (despite the accident at Sayano-Shushenskaya HPP) is a result of favourable hydrological situation in the European part of Russia and Siberia.

Electricity generation by wholesale and territorial generating companies amounted to:

In 2009, actual electricity consumption of UES of Russia totalled 942.8 bn kWh which is 9.7% less than forecast electricity consumption pursuant the annual balance sheet of the FTS of Russia and 4.7% less than in 2008. During the first nine months of 2009, electricity consumption of UES of Russia decreased by an average of 7%. In the fourth quarter of 2009, electricity consumption increased significantly. In November and December 2009, electricity consumption of UES of Russia increased by 2.5% and 4.7% respectively compared to the same periods in 2008. In December 2009, the electricity consumption almost reached the level of December 2007.


Maximum annual consumption of UES of Russia was reported at 5 p.m. on December 17, 2009 with an average air temperature of -22.6°С, and totalled 150,012MW. The load of RAO UES power plants reached 151,827MW. In 2009, the consumption load in UES of Russia and other power associations almost reached the level of consumption of 1990–1991. Furthermore, 2009 consumption in some regions exceeded the historic high.

The table below shows changes in electricity consumption in the regions covered by TGC-1.




As of the end of 2009, the wholesale electricity and capacity market of Russia was comprised of 47 power producers, 191 supplying companies, and three companies (RusHydro, Inter RAO UES and Irkutskenergo) acting as both producers and suppliers of electricity and capacity.

In early 2009, in Europe and Urals, the electricity prices in the liberalized market (“day-ahead” market) were much lower than the year before. The tendency for price growth was reported all the way from January until September 2009, and in April prices slightly exceeded the 2008 prices due to start of scheduled repairs of several nuclear power plants. In general, until October 2009, prices were below the 2008 level. Starting from October, the spot prices reached the 2008 level, further exceeding it in November, which is primarily due to a reduction of prices in the day-ahead market in 2008 following the global economic crisis. Significant price growth in December is explained by the need to switch on additional facilities which were in standby mode and operate using expensive back-up fuel, fuel oil and coal, resulting from sharp increase in power consumption due to temperatures below the long-term annual average.

In January 2009, in the Siberian Region, prices exceeded the previous year's level, and in February 2009 they dropped below 2008 prices. Prices decreased from February until June, mainly due to the increase of hydro generation share in the planned electricity output. On August 17, 2009, an emergency shutdown of Sayano-Shushenskaya HPP occurred, which resulted in a price increase, which along with an increase of consumption volume, continued through September-October 2009. In November, prices of the day-ahead market of Siberia reached the 2008 level. Similar to the European part of Russia, the major factor of growth was a low base effect of 2008.

The net power flow of export and import electricity supplies in 2009 is reported to be 14.6 bn kWh, which is 16.9% less than in 2008, and is a result of the reduction of export supplies to the Baltic and CIS countries (Transcaucasian countries and Belarus), and an increase in imports from Kazakhstan.

 

3.1.3. Significant events in the power industry of Russia in 2009
January

Pursuant to Decree of the Government of the Russian Federation No.205 of April 7, 2007, the share of electricity to be sold at free prices in the wholesale market from January 1 until June 30, 2009 increased to 30% of the total.

The Government of Russia approved the major directions of policy to improve usage of the renewable energy sources up to 2020. That Decree sets forth the share of electricity generation based on renewable energy sources and its consumption in the total electricity generation and consumption in Russia. It is assumed that by 2010 it will reach 1.5%, 2.5% by 2015, and 4.5% by 2020.

February

The Government of the Russian Federation adopted Decree No.118 of February 14, 2009 amending the rules for connecting power plants of individuals and legal entities to electricity grids, regarding the connection fee.

The Central Bank of Russia added strategic enterprises, including most of the largest power companies, to the list of companies whose notes and receivables may be used for credit. Earlier, the governmental committee approved the list of 295 strategic enterprises whose financial status is monitored by branch ministries and jurisdictions.

April

A meeting on development of the nuclear power industry was held at the Kalininskaya nuclear power plant headed by Vladimir Putin, Prime Minister of the Government of Russia. The meeting was devoted to construction of nuclear power plants and implementation of the approved plans for the installation of 26 nuclear power units over the next 20 years.

The Government authorized the Ministry of Energy to monitor investments in the power industry. The Ministry of Energy was requested to monitor implementation of the adjusted investment programs of the power industry companies for 2009.

May

The Government of the Russian Federation adopted Decree No. 411 of May 10, 2009 amending the Rules of Retail Electricity Market in the Transient Period of the Power Industry Reforming, which ensure equal rules for calculation of the electricity (capacity) volume purchased at regulated tariffs for all consumers in the retail market, except for residents.

July

Pursuant to the Decree No. 205 of April 7, 2007, starting from July 1, 2009 the share of electricity sold on the wholesale market increases to 50% of total market sales.

Restrictions on power supply to several regions of the Republic of Dagestan were introduced due to non-payments. On July 15, 2009 several unauthorized starts of the power substations were initiated by unknown persons, resulting in material damage to the power facilities of the Republic of Dagestan, many consumers were left without electricity.

Along with the forecast of social and economic development of Russia, the Government of Russia approved a 15% gas tariff increase in 2010, and the maximum electricity tariff increase for industrial consumers of 5%.

The Ministry of Energy developed and published a draft decree of the Government providing long-term competitive selection of price bids for capacity sales in the wholesale electricity and capacity market. In accordance with those regulations, the first long-term competitive selection of price bids for capacity sales with capacity to be supplied starting from January 1, 2011, will be held in December 2009. Then, in 2010 the competitive selection will be held with capacity supply periods starting from January 1 for 2012-2014, and after 2010, long-term competitive selection will be held annually, starting from 1 January of every fifth year the long-term competitive selection is provided.

The Supervisory Board of the Market Council decided to remove limitations on application of the ratio of readiness for electricity generation in December-February, thus increasing responsibility of the generating companies for their readiness to operations in the autumn-winter period. Should there be any failure or emergency, the company may receive no payment for the capacity.

August

On August 17, 2009, an accident occurred at the hydro generating unit no. 2 of Sayano-Shushenskaya HPP of RusHydro with destruction of the hydro generating units and flooding of the generating room. The accident resulted in drastic damage to units 7 and 9, partial destruction of the generating room building with its structure falling on units 3, 4 and 5. Seventy-five workers died.

A committee investigating the causes of accident at Sayano-Shushenskaya HPP of RusHydro and correction of its consequences, as well as arranging stable power supply to consumers of UES (Siberia) was created. The committee was headed by the Ministry of Energy, Sergey Shmatko.

JSC Trading System Administrator introduced restrictions on the price increases in the Siberian region in order to control the price growth following the accident at Sayano-Shushenskaya HPP.

September

The Government of the Russian Federation considered and approved the investment program of the power industry for 2010 with a total investment of RUR 779 bn, which had been developed by the Ministry of Energy of Russia based on priority implementation of the following projects: power supply to the high risk regions (Republic of Khakassia, Primorskiy Kray, Tyumen Power System, and Krasnodarskiy Kray), power supply for the Olympic Games facilities in Sochi, and the APEC summit in the city of Vladivostok, reconstruction of Sayano-Shushenskaya HPP, construction of grids for power supply of Baltic oil pipeline II (BTS-II) and the Eastern Siberia-Pacific Ocean oil pipeline. Furthermore, the Government of the Russian Federation considered and approved the transfer of FGC UES to RAB tariff regulation starting from January 1, 2010.

The Government of the Russian Federation adopted Decree No. 726 of September 14, 2009 amending several laws of the Government of the Russian Federation. The amendments were made with regard to electricity and heat power tariff regulation. Pursuant to the governmental resolution, the tariffs and their maximum rates may be revised and adjusted during the fiscal year.

The Ministry of Economic Development and the Federal Tariff Service raised the 2010 rate increase for free electricity tariffs for industrial consumers at 7.6% compared to the previously planned level of 5%. In 2010, a 10% increase of the regulated electricity tariffs for retail consumers was confirmed, as had been planned. Thus, the overall growth rate of the regulated electricity tariffs for 2010 was approved at 8%.

The Federal Tariff Service of the Russian Federation approved the increase of heat tariffs for 2010 of 15%.

October

The governmental committee for rectification of the consequences of accident at Sayano-Shushenskaya HPP headed by Igor Sechin, Deputy Chairman of the Government of Russia, approved the plan for reconstruction at Sayano-Shushenskaya HPP and the draft resolution of the Russian Government for reconstruction at the plant developed by the Ministry of Energy of Russia, in cooperation with the interested parties.

The Ministry of Energy of the Russian Federation drew up a list of regions with high risks of surpassing the autumn-winter load peaks and a list of technical and organizational actions to mitigate those risks. The list of high risk regions with regard to the autumn-winter peak loads for 2009–2010 includes Kuban (South-Western Region), Tyumen (Northern, Noyabrsk, Kogalym, Nizhnevartovsk, Nefteyugansk power regions) and Primorie, Sakhalin, and Khakassia power systems.

November

The State Duma of Russia adopted at its first reading the law on heat supply. That law establishes an overall system of legal regulation of relations in the field of heat supply, which arise in process of heat generation, transmission, distribution, sales and consumption.

The Federal Law No. 261-FZ of November 23, 2009 on Energy Savings and Improvement of Power Efficiency and Amendments to Several Regulations of the Russian Federation was adopted. The federal law is to control and regulate energy efficiency of the Russian economy through mechanisms of state regulation and control, power savings stimulation and state support. That law introduces notions such as power savings, power saving technologies, improvement of energy efficiency, and energy servicing contracts.

The Federal Tariff Service of Russia approved the consolidated forecast balance sheet of electricity generation and supplies for 2010, and approved the electricity tariffs for 2010 for the generating companies. In 2010 the average tariff growth rate for the generating companies is set at 3.6%. Tariff growth for WGC totals 5%, for TGC – 9.2%, and for nuclear power plants the tariff was decreased by 2.2%, while for HPPs by 6.4%.

The Government of Russia adopted a long-term strategy for development of the power industry up to 2030, according to which implementation of the power strategy should result in an increase of the installed electric capacity of the Russian power plants from 225GW in 2008 to 355-445GW in 2030 depending on the development scenario.

December

The Government of the Russian Federation adopted decree no.977 of December 1, 2009 on investment programs for power industry companies. The decree sets forth the criteria for the state-owned power industry companies, and grid companies to be referred to the companies, which investment programs need approval by the authorized federal executive body and executive bodies of the regions of Russia. The decree also sets forth rules for approving investment programs of state-owned power companies and grid companies, as well as the rules governing implementation of the investment programs by the power industry companies.

Pursuant to the Decree of the Government of the Russian Federation No. 643 of October 24, 2003 on Rules of the Wholesale Electricity Capacity) Market in Transient Period, System Operator UES carried out competitive capacity selection for capacity sales in 2010. Forty-eight generating companies took part in the tender, and 355 bids from power plants were received. Price parameters of the capacity bids, which were not accounted for in the balance sheet of the Federal Tariff Service for 2007, were submitted to the Market Council for their economic feasibility auditing.

On December 17, 2009 at 5 p.m. the annual consumption peak of UES of Russia was reported with an average daily air temperature of -22.6°С. Consumption volume totalled 150,012MW. The load of RAO UES power plants reached 151,827MW.

In December 2009, in European Russia and the Urals, the electricity prices in the day-ahead market increased by 16.5% compared to November 2009 and by 39.3% compared to December 2008.

 

3.2. Regions of the Company’s operations



St. Petersburg is the second largest industrial centre of Russia after Moscow. Over one fourth of the working population of St. Petersburg are employees of the industrial sector, which is one of the main sources of municipal budget funding.

Production facilities of St. Petersburg include over 500 large and medium-size plants with some of them being among the largest facilities in Russia. Mechanical engineering, metal-working, automotive, food and electricity industries mainly define the results of operation of the whole industry. The mechanical engineering industry is characterized by a predominance of complex science-intensive facilities: power machine building, turbine building, radio and electronics industry, instrument-making, diesel construction, printing and machinery building. Among the largest mechanical engineering plants are Power Machines, Izhora plants (OMZ group), the Almaz ship-building company, Nevsky plant (Roselectropromholding), Baltic plant, Admiral shipyard, Red October, Kirovsky plant, and LOMO.

According to estimates of the leading international and Russian rating agencies, St. Petersburg and Moscow are among the Russian regions with highest appeal for investors.




The Leningrad Region has historically been one of the most important regions of Russia and one of the most important ones in the Baltic Region. In the northern part it borders the largest lake in Europe: Ladoga Lake (18,100 sq km).

Within the region there are deposits of bauxite, clay, phosphorite, shale, granite, limestone, and stone.

The industry of the region is very diverse: fuel and power, non-ferrous metallurgy, pulp-and-paper, chemical, mechanical engineering and instrument-manufacturing industries, building materials production, mining and minerals industry, timber industry, chemicals and petrochemicals. Light industrial production is basically represented by over 360 medium-sized and large plants, over 3% of which have more than 3000 employees.

Over five thousand plants are registered in the Leningrad Region, including over fifty foreign financed plants. The share of the Leningrad Region in the total volume of industrial production of the North-Western Region accounts for approximately 12%.

Among the largest plants of the Leningrad Region are the Leningrad nuclear power plant (Concern Energoatom), Kirishinefteorgsynthes production plant (Surgutneftegaz), Transmash plant, BaselCement – Pikalevo, Volkhovsky aluminium, Bauxitogorsky alumina, Svetogorsk pulp-and-paper mill, and foreign owned companies, including Philip Morris Izhora, Kraft Foods, Caterpillar, Ford, Era-Henkel Tosno, Kress-Neva, and Svenwood Tikhvin.




The Republic of Karelia has an advantageous economic and geographical position (close to the main industrial highly-developed regions of Russia and Western Europe and a well-developed water transport system) and many natural resources. The Western border of Karelia coincides with the state borders of Russia and Finland being 723 kilometres long.

The contribution of Karelia to the Russian economy is primarily defined by the local natural resources-based industries (timber, woodworking, pulp and paper, ferrous metallurgy, building materials industries), as well as by the industries using fuel: mechanical engineering and non-ferrous metallurgy. Among the largest factories are: Petrozavodskmash, Onega tractor factory, Karelsky Okatysh (Severstal), Avangarde (ship-building plant), Vyartsilniy metallurgical plant, Lyaskelskiy paper mill, Segezhabumprom, Suoyarvskaya cardboard plant, Pulp-and-paper mill Pitkyaranta, Kondopoga factory, and the Nadvoitskiy aluminium factory of UC RUSAL.

The Republic of Karelia accounts for 10% of iron ore extraction in Russia, 23% of the paper production, 7.3% of the timber production and 4% of the carved wood production.




Almost all of the Murmansk Region is located in the Trans-Polar area. Maximum distance from north to south is 400 km, and 500 km from west to east.

The region possesses various natural resources. Over 60 large deposits of various minerals were found on the Kola peninsula. Today almost 30 different kinds of natural resources are extracted, the most important of them being phosphorus, titanium, iron, aluminium, copper, nickel, zirconium, and other rare metals. There are also significant reserves of mica, ceramic materials, and raw materials for construction materials, facing stones, semiprecious stones, and jobbing stones. Rich oil and gas deposits were found on the Barents Sea shelf, including the worldwide-known Shtokman gas condensate field.

Fishing, mineral resources, chemical industries and non-ferrous metallurgy are also well developed here. Among the largest factories are: Apatit (the city of Kirovsk), Kandalaksha aluminium plant, Kola mining & metallurgical company (Norilsky Nickel), and the Murmansk trawler fleet.

Scientific potential of the region includes the R&D groups of Kola Scientific Centre of the Russian Academy of Science.

 

3.3. Competitors
3.3.1. Heat market

Nevsky Branch

Today the heat market of St. Petersburg is supplied by the following companies:

There are also some heat producers with average heat output less than 1 mn GCal per annum with a share in the total heat useful output below 5%.

The major competitor of TGC-1 in the St. Petersburg heat market is city-owned TEC SPb, which operates large district and block boiler facilities. Today the production complex of TEC SPb includes 377 boiler plants and the total length of the heat grids is 5,321.8 kilometres, including 61% of the grids from the company’s heat power sources, and 35% of the grids from TGC-1 plants and 4% from in-house heat power sources. The total installed capacity of the boiler facilities of TEC SPb is 7,947.81 GCal/h.

In addition the heat supply system of St. Petersburg includes three departmental CHPPs, 48 boiler facilities of Lenteplosnab, 140 boiler facilities of Peterburgteploenergo, 28 boiler facilities of Peterburgenergosbyt, and 179 departmental boiler facilities.

In the Leningrad Region, the large heat producers are Kirishskaya GRES (WGC-6) and Leningrad Nuclear Power Plant (Concern Rosenergoatom). In the Leningrad Region TGC-1 operates the following heat power plants: Severnaya CHPP and Dubrovskaya CHPP.

On December 21, 2009, the Board of Directors of TGC-1 decided to establish a subsidiary – the St. Petersburg Heating Grid. Creation of St. Petersburg Heating Grid was a result of a trilateral agreement between the Administration of St. Petersburg, TGC-1 and GUP TEC SPb with the aim to unify the heating grids within the area of operations of CHPPs of TGC-1. At the initial stage St. Petersburg Heating Grid will exercise control over TGC-1 heat mains and inter-district grids of TEC SPb covered by TGC-1 which will be transferred to it under a lease agreement. In 2010, a share issue of St. Petersburg Heating Grid is planned with TGC-1 and TEC SPb participating in it through transfer of the leased grids as payment for the shares. The stake of the government of St. Petersburg in St. Petersburg Heating Grid will amount to 25-40% and will be defined proceeding following the results of independent evaluation of TGC-1 and TEC SPb assets. St. Petersburg Heating Grid will start heat transmission in early 2011.

Integrated management of these networks will lead to better allocation of funds for maintenance and reconstruction of heating grids, the monitoring of delivery of heat from generating station to consumers, as well as improving the responsiveness of maintenance divisions to breakdowns and emergencies. The establishment of St. Petersburg Heating Grid will also attract targeted investments for development of heating grids.

Karelsky Branch

The largest heat-generating facility of the Company’s Karelsky Branch is Petrozavodskaya CHPP. Other heat producers in the region have only small-sized local boiler facilities.

Kolsky Branch

Apatitskaya CHPP is the largest supplier of heat in the Kolsky Branch and the only source of heat for Apatity and the adjacent industrial area. Besides, TECOS is a large local producer and supplier of heat in Murmansk and the Murmansk Region. There is another supplier of heat, apart from Apatitskaya CHPP in the region: Murmanskaya CHPP, which is a subsidiary of TGC-1 and the largest supplier of heat to consumers in Murmansk.


3.3.2. Electricity market

For TGC-1 the day-ahead market is the most important competitive sector of the wholesale market. Kirishskaya GRES (Leningrad Region) of WGC-6 is the closest competitor in terms of production and technological cycles in liberalized sector of the wholesale market of the United Energy System of the North-West Region (First Price Zone).

To improve its competitiveness in the electricity market, TGC-1 carries out activities to solve the problem of grid constraints, optimization of thermal and hydroelectricity plants generation structure, implementation of the latest technologies and production retrofit. The regions served by TGC-1 are characterized as regions of growing industrial potential, which may facilitate an increase of the Company’s useful energy supply.

TGC-1 has the following advantages compared to competitors in the same market:

In St. Petersburg, the Republic of Karelia, the Leningrad Region and the Murmansk Region, electricity and capacity are produced, in addition to TGC-1’s generation, by Rosenergoatom Concern (Leningrad and Kola nuclear power plants), WGC-6 (Kirishskaya GRES) and Inter RAO UES (North-West CHPP), which exports electricity abroad.

Leningrad nuclear power plant

The Leningrad nuclear power plant is located in the city of Sosnoviy Bor in the Leningrad Region. The power plant includes four power generating units with a generating capacity of 1,000 MW each. The Leningrad nuclear power plant operates water-cooled graphite-moderated reactors. The annual electricity output totals 28 bn kWh.

Today Rosenergoatom Concern is constructing substitute facilities – so called Leningrad nuclear power plant no. 2. Rosenergoatom now constructs on the new site two power generating units of a new generation with an electric capacity of 1,172MW and heat capaciy of 250 GCal/h each. The two generating units of the Leningrad nuclear power plant no. 2 are to be commissioned in 2013 and 2014.

Kola nuclear power plant

The Kola nuclear power plant is located 200 kilometres to the south of Murmansk on the shore of Lake Imandra. The plant operates four VVER power units with a total capacity of 440MW each.

Kirishskaya GRES

The plant is located in the Kirishi Region of the Leningrad Region. The installed generating capacity of Kirishskaya GRES is 2,100MW of which 1,800MW operate in condensing mode and 300MW in cogeneration mode. The installed heat capacity of the plant is 1,200 GCal/h.

Today WGC-6 is implementing the investment project for refurbishment of the sixth power unit of Kirishskaya GRES by adding two 270MW gas turbines to the existing 300MW steam turbine unit.

North-West CHPP

North-West CHPP is a power plant with steam-and-gas binary cycle. The plant operates two power generating units with electric capacity of 450MW each.

 

3.4. Risk management

The Company’s risk management process is structured as follows: risk identification through evaluation of the risk effect, assessment of costs and benefits for all possible measures and selection and implementation of the risk mitigation measures.

For all risks identified by the Company at any time the Company selects and diligently follows the most appropriate risk management strategy: risk avoidance, mitigation, re-allocation, acceptance, financing.

The risk management process makes recourse to the integrated approach at all levels of the Company’s structure. The Board of Directors and Committees of the Board of Directors provide for strategic risk management. The General Director and members of the Board make joint decisions on techniques of risk management at the operational level (based on the proposals developed by profile divisions). The internal audit and control department ensures current monitoring and evaluation of risk management efficiency.

In 2009, the Company continued improving the risk management processes. The most promising tendencies of risk management development are as follows: development and regulation of key business processes, systematic data collection for risk map development, improvement of the internal audit and risk management methodology.

Proceeding from the results of 2009 all substantial risks were identified, and the possible consequences were evaluated along with prevention measures.


From the report of Standard & Poor’s on TGC-1 GAMMA rating assigned for 2009

Documentation of risk management procedures improving. It is a positive that TGC-1 has prepared risk management bylaws that specify the goals and steps of risk management process and define roles and responsibilities of the company’s employees, managers, and directors in this process. Risk management bylaws are going to be approved by the board of directors in November 2009. The company also plans to improve the documentation of business processes and control procedures.

Information about risks is disclosed in public reports. TGC-1 published the analysis of the major corporate risks and risk management activities in its 2008 annual report. Also, the company provided information about its progress in developing the internal functions and competencies in risk management.