SCM Group Annual Public Report 2008
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SCM Group Annual Public Report 2008

SCM Group Annual Public Report 2008

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SCM Group Annual Public Report 2008 Document Transcript

  • 1. 08 SYSTEM CAPITAL MANAGEMENT SCM Group public report Stability. Partnership. Growth
  • 2. SCM Group Public Report 2008 CONTENTS KEY FINANCIAL INDICATORS 2008 4 CEO STATEMENT 6 SCM GROUP EVENTS CALENDAR 2008 8 SCM GROUP CORPORATE TRANSFORMATION PROGRAM 12 ABOUT SCM GROUP 14 SCM GROUP HISTORY 15 CORPORATE CULTURE: MISSION, VISION, VALUES 16 SCM GROUP MANAGEMENT 17 SCM GROUP TARGET CORPORATE GOVERNANCE SYSTEM 24 SCM GROUP ASSET MANAGEMENT SYSTEM 28 SCM GROUP APPROACH TO RISK MANAGEMENT 29 SCM BUSINESS STRUCTURE - 2008 30 SCM GROUP’S BUSINESSES 32 CORE BUSINESS AREAS 33 Mining and metals 33 Energy 41 Financial services 48
  • 3. Contents OPPORTUNITY BUSINESSES 51 Telecommunications 51 Real estate 52 Media 53 Clay mining 55 Retail trade 57 Petroleum products retailing 58 SCM SPORT 60 ASSOCIATED COMPANIES 61 SOCIAL RESPONSIBILITY AND 62 SUSTAINABLE DEVELOPMENT KEY POST-REPORTING PERIOD 70 EVENTS – 2009
  • 4. SCM Group Public Report 2008 Key financial indicators 2008 ASSETS, US $ MILLION 19,944 18,075 2007 2008 EQUITY, US $ MILLION 9,709 7,664 2007 2008 EBITDA, US $ MILLION 5,441 2,756 2007 2008
  • 5. Key financial indicators 2008 REVENUE, US $ MILLION 15,985 9,563 2007 2008 PROFIT FOR THE YEAR, US $ MILLION 2,195 1,407 2007 2008
  • 6. SCM Group Public Report 2008 6 CEO statement I am proud to present to you SCM Group’s Public Report for framework of its long-term investment strategy. In line with 2008. The year was one which I am sure all of us will remem- its strategy of exiting from the brewing business, Sarmat ber for a long time. The swift economic growth of the first six and Krym breweries were sold, and the sale of Dnipro and months gave way rapidly to a downturn of comparable scale. Poltavpivo breweries was begun. SCM sold its stakes in Kre- However, SCM Group maintained its strong position, in spite menchug Steel Plant and Slavtyazhmash Plant because, as a of the unfavorable economic conditions, due to the stability minority shareholder in those enterprises, it was not able to given by reserves it accumulated during the earlier, success- substantially influence either the strategic decision-making, ful years. or their financial and business activity. We also exited from the shareholders of Donbass Trade Fleet and Azov Shipyard, Regardless of the changes in the global economy, our fun- following the strategy of setting out investment priorities. damental approach to doing business remains unchanged: deliberate diversification and long-term investment in assets At the same time, we continued working on the integration of that have strong profitability and value growth potential, pri- SCM Group and Smart Group assets in metallurgy within the marily in businesses we understand well. We are interested framework of Metinvest. in assets that are capable of creating value at every stage of the production cycle. The new economic reality did not alter We also continued the Group’s geographical expansion, fol- our business philosophy, but did lead to adjustment in our lowing a strategy of deliberate diversification and building priorities. As a result, the short-term development plans for vertically integrated holdings. In 2008 we started negotia- all the Group’s assets were adapted to respond to volatile tions to purchase United Coal Company (USA). On comple- market conditions. We believe it was the rigorous following tion of this transaction in 2009, SCM Group will be capable of this simple recipe for success that not only enabled SCM of providing its enterprises with metallurgical coal required to survive 2008, but also will also provide us with the neces- for high quality coke production. This will provide us with an sary competitive advantage for our future growth, when the additional competitive advantage in international markets. national and the global economies begin recovery. Simultaneously with our M&A activity, we continued to invest SCM Group’s stability during this challenging year was se- in the Group’s organic growth. The largest investments were cured through our balanced approach to market analysis; made in our mining and metals and energy businesses, par- efficiency in making effective, though sometimes unpopular, ticularly in equipment modernization and increasing produc- decisions; our conservative approach to soliciting external tivity. The total investments in Metinvest and DTEK’s organic funding; a clear set of priorities; and the main factor - our growth in 2008 amounted to $679 mn and $338 mn, respec- team of talented professionals. tively. In the second half of 2008 we focused on controlling liquid- In order to provide stability for SCM assets in financial serv- ity and maximizing the effectiveness of resource allocation, ices, as well as to fulfill our obligations to clients, and to setting priorities for investment projects and implementing maintain market share, the statutory capitals of banks and the most important of these, and exiting from projects and insurance companies in SCM’s portfolio were increased by assets which did not meet SCM’s investment strategy. soliciting funding from shareholders. As result, First Ukrain- ian International Bank’s statutory capital was raised to $350 All these measures allowed us to make a range of critical mn, and Dongorbank’s statutory capital rose to $100.6 mn. tactical decisions, with the Group’s long-term development The statutory capital of ASKA Insurance Company was in- strategy remaining unchanged. creased to $18.8 mn. In 2008, SCM exited a number of businesses within the The total investments in Brusnytsya, the Group’s conven-
  • 7. CEO statement 7 ience store chain development, amounted to $51.5 mn, achievements. We realize that some losses were inevitable, while the total investments in ESTA Group’s development but in spite of that our team was able to minimize the nega- (our real estate holding company) in 2008 exceeded $30 mn. tive impact of the recession on our enterprises and to main- tain trust in our relations with clients, financial markets, and In 2008 we completed the process of corporate transforma- local communities. I would like to thank everyone at SCM tion and continued to improve the Group’s corporate govern- Group for the outstanding performance and the tremendous ance structure. The clear and simple decision-making system effort they have shown in 2008, a year of extraordinary deci- allows SCM Group to make effective and timely decisions, sions and global challenges, as well as for their dedication which is especially important under increasingly uncertain and contribution to maintaining business stability. market conditions. Working towards long-term sustainable growth remains at the core of our strategy. Our largest businesses require con- stant and substantial capital investments. Clear and effec- tive management of our economic, environmental and social activities is our top priority, allowing us to constantly fulfill our obligations to society, government, and employees of our en- terprises. To increase the effectiveness of our social investments, we applied the international best practice of social partnership, in close cooperation with the local communities, as well as transformed the structure of the Group’s social projects. We focused our social sponsorship projects to concentrate on education, sport, and healthcare as priority directions, in which we continued to implement the most successful and effective projects. In 2009, we plan to continue to strengthen SCM’s position in key markets, with the emphasis being placed on the Group’s liquidity and effective resource allocation. We are fully aware that every downturn is always followed by an upturn and our goal is to be prepared to grow with the market, but preferably to exceed market growth dynamics. SCM Group is a strong business with significant growth po- tential. I sincerely regret that the global economic recession prevented us from fulfilling everything we planned for 2008 and forced us to review some of our investment projects. I truly believe that the responsible approach to performance of everyone of our team was the foundation of our success in 2008, and will be a building block for the Group’s further
  • 8. SCM Group Public Report 2008 8 SCM Group events calendar 2008 January 4 Metinvest and Indistrial Union of Donbass Corporation signed a long-term agreement for supply of iron ore, flux, and dolomite products January 6 Metinvest and Zaporozhstal signed a long-term contract for supplying iron ore, flux, and dolomite prod- ucts January 14 SCM obtained the approval of the Anti-Monopoly Committee of Ukraine to concentrate a stake of more than 50% in Donetskgormash’s statutory capital January 16 Azovstal Steel Plant’s quality management system received official certification of ISO 9001:2000 January 18 Metinvest obtained the European Commission’s approval to acquire Trametal S.p.A. (Itay) and Spartan UK Ltd (Great Briatin) Steel Mills January 28 Azovstal Steel Plant’s reconstruction of converter industry facilities reached its final stage January 29 SCM formed a publishing holding under the management of Segodnya Multimedia February 8 Azovstal Steel Plant produced 2 mn tonnes of slabs during its 15 years of cooperation with South Ko- rean Dongkuk Steel Mill Co, Ltd. February 20 News Television Channel obtained a satellite broadcasting license February 29 Khartsyzk Pipe Plant received the international ISO 3834 compliance certification for its pipe welding quality March 14 SCM presented its real estate sectoral holding – ESTA Holding March 14 DTEK was rated A+ in the All-Ukrainian Rating of Socially Responsible Companies by Gvardiya Maga- zine March 18 SCM obtained the approval of the Anti-Monopoly Committee of Ukraine to concentrate more than 50% stake in Kamensky Heavy Engineering Plant (Russia) March 18 Yenakiyevo Steel Plant completed the capital repairs to its converter March 24 SCM obtained the approval of the Anti-Monopoly Committee of Ukraine to concentrate more than 50% stake in CSS Telecommunications Company (Odessa) statutory capital March 25 Metinvest SMC opens its first metal service centre abroad – in Serbia
  • 9. SCM Group events calendar 2008 9 March 26 Krasnodonugol became Ukraine’s first coal mining enterprise to pass the Occupational Health and Safety Management Standard System audit and was granted the OHSAS 18001:2007 compliance certification April 4 SCM presented its revised CSR policies April 7 Shares in Oktyabrskaya and Dobropolskaya Coal Enrichment Plants (CEP), which initially belonged to Metinvest, were transferred to DTEK April 7 Vecherkom free newspaper entered the Kiev newspaper market April 11 Azovstal Steel Plant completed the reconstruction of blast furnace #3 April 14 Khartsyzk Pipe Plant quality management system was awarded the Russian certificate of compliance with GOST R ISO 9001-2001 standard April 16 Ukrainian Retail Company was recognized as the Best New Employer 2007 in Donetsk April 17 Pavlogradugol produced 400 mn tones of coal since the beginning of operations April 23 Yenakiyevo Steel Plant began the construction of a new blast furnace May 13 SCM exited from the shareholders of Kremenchug Steel Plant May 19 DTEK was granted a $150 mn syndicated loan May 22 SCM was rated A+ in the All-Ukrainian Rating of Socially Responsible Companies by Gvardiya Magazine May 28 Northern and Central Ore Mining and Enrichment Plants (SevGOK and CGOK) were granted the interna- tional Occupational Health and Safety Management Standard System certification, OHSAS 18001 June 9 First Ukrainian International Bank completed the procedure of the additional issue of shares worth $208 mn June 11 Azovstal Steel Plant tested its new steel slab continuous caster June 17 First Ukrainian International Bank increased the size of its net assets to $3,123 bn June 26 First Ukrainian International Bank was granted a $50 mn syndicated loan
  • 10. SCM Group Public Report 2008 10 July 1 SCM and Metinvest received Trade Finance Magazine’s ‘Best Transaction of the Year’ awards for the syndicated loan transactions of $545 mn and $1.5 bn, respectively July 2 Azovstal Steel Plant was awarded the Russian certificate of compliance with GOST R ISO 9001-2001 standard July 3 SCM joined the national Go Green environmental campaign, initiated by the United Nations Represent- ative Office in Ukraine July 7 SCM completed the sale of 99.85% of Sarmat Brewery to SABMiller plc July 14 DTEK was granted a $79 mn stand-by loan facility July 15 Dokuchaevsk Flux and Dolomite Plant (DFDK) and Novotroitskoye Mines Management installed the business management systems, based on the SAP for Mining industrial solution July 17 SCM increased its stake in ASKA Insurance Company to 88.70% July 17 SCM exited from the shareholders of SlavTyazhMash July 22 Ingulets Ore Mining and Enrichment Plant (InGOK) installed and launched the business management system, SAP’s Mining industry solution July 25 Dongorbank General Shareholders Assembly decided to increase the bank’s statutory capital by $72 mn July 28 DTEK issued domestic bonds worth $103 mn July 29 INKOR & Co was integrated into Metinvest Coal and Coke Division August 1 SCM exited from the shareholders of Krym Brewery August 8 SCM exited from the shareholders of Donbass Trade Fleet and Azov Shipyard Plant August 21 First Ukrainian International Bank was granted a $154 mn syndication loan August 22 Metinvest Eurasia opened the retail center in Krasnodar (Russia) August 29 Metinvest paid over $800 mn in taxes during the first seven months of 2008 August 29 Metinvest SMC began warehouse sales of rolled steel in Nikolayev and Krivoy Rog
  • 11. SCM Group events calendar 2008 11 September 11 SCM became a partner of the International Energy Forum in Brussels, dedicated to the matters of energy security September 24 SCM presented the results of Compass, the first rating of Ukrainian Higher Educational Institutions 2007-2008 September 25 DTEK signed an agreement for purchasing SAP business management solutions, in order to create a unified business management and resource planning system at the Group level September 26 Segodnya Multimedia launched a new product – Tvoe newspaper October 13 SCM Group was declared Donetsk Oblast’s best taxpayer October 15 Farlep-Optima Telecommunications Group began providing services under a unified brand - Vega October 28 DTEK paid off its first international loan of $100 mn November 11 ASKA Insurance Company General Shareholders Assembly decided to increase the company statutory capital by $6.9 mn November 11 Occupational Health and Safety Management Systems at DTEK enterprises were certified as being compliant with the international standard OHSAS 18001:2007 November 18 Football Television Channel began pilot broadcasting November 26 First Ukrainian Internatinoal Bank paid off a $90 mn syndicated loan December 9 Azovstal Steel Plant completely switched from the use of natural gas to coke in its blast furnace opera- tions December 10 DTEK was Ukraine’s first industrial company to publish the social report for 2007 December 26 SCM Company transferred the ownership to all petroleum retailing companies’ shares to Parallel Nafta (Cyprus), a daughter company
  • 12. SCM Group Public Report 2008 12 SCM Group corporate transformation program IN THE COURSE OF 2008, SCM GROUP CONTINUED THE TRANSFORMATION OF ITS ASSET MANAGEMENT SYSTEM, AIMED AT INCREASING THE EFFECTIVENESS OF GROUP ENTERPRISE MANAGEMENT. EARLIER, AT THE BEGINNING OF 2006, THE DECISION WAS MADE TO CONSOLIDATE GROUP ASSETS UNDER SECTORAL HOLDINGS: METINVEST, DTEK, ESTA HOLDING, SEGODNYA MULTIMEDIA, AND UKRAINE TELEVISION CHANNEL. THE DECISION WAS ALSO MADE TO TRANSFER THE CORPORATE RIGHTS OF A RANGE OF ASSETS TO SPECIALLY CREATED CORPORATE CENTERS: SCM FINANCE, UMG, PARALLEL NAFTA, UMBH, AND FARLEP INVEST. THIS MANAGEMENT SYSTEM COMPLIES WITH SCM GROUP VISION OF ITS FURTHER DEVELOPMENT AS A PROFESSIONAL MANAGING COMPANY, IN LINE WITH THE INTERNATIONAL CORPORATE STANDARDS. MINING AND METALS TELECOMMUNICATIONS Metinvest obtained the approval of the European Commis- CSS Telecommunications Company (Odessa) became part of sion to purchase the controling shareholding in Trametal Farlep-Optima Telecom Group. S.p.A. (Italy) and Spartan UK (United Kingdom) steel rolling plants. These enterprises will be integrated into Metinvest Farlep-Invest-CSS Telecommunications Group started pro- Holding Italy S.p.A., whose production capacity will exceed 1 viding its services under the unified Vega brand. The main mn tones of steel plate on the EU market. benefits of the unified operator under the Vega brand are: nationwide coverage, integrated services portfolio, higher in- INKOR & Co. Scientific and Production Company was in- ternet access speed, and high quality service. tegrated into Metinvest Group’s Coal and Coke Division. This enterprise will help provide deeper raw coke and coal The decision was also made to decrease the number of com- processing and produce a competitive product with higher panies in Vega’s legal structure, from 45 to 25. It is intended added value. The main raw coke and coal supplier for INKOR that operations based on fewer companies will help Vega to in- & Co is Avdeyevka Coke and Chemical Plant. crease the effectiveness of business processes and optimize the procedures for service provision throughout the country. ENERGY REAL ESTATE Within the framework of the corporate transformation pro- gram, SCM transferred stakes in Oktyabrskaya (16.25%) SCM Group launched ESTA Holding, which will manage the and Dobropolskaya (10.62%) CEPs, owned by Metinvest, company’s interests in the real estate sector. The decision to DTEK. Earlier, DTEK has already received 40.44% and to invest in a new business area follows SCM’s strategy of 27.45% stakes in these respective CEPs. As result, DTEK has deliberate diversification and increasing the share of non- a 60.85% stake in Oktyabrskaya CEP and 60.06% stake in industrial businesses in the Group’s portfolio. Dobropolskaya CEP. ESTA Holding business is present in the following real estate market segments: commercial property (class A office cent- FINANCIAL SERVICES ers and large retail centers), elite residential property and hotels (the company owns two premium-class hotels – Don- SCM increased its stake in ASKA Insurance Company to 88.70%. bass Palace in Donetsk and Opera in Kiev).
  • 13. SCM Group corporate transformation program 13 MEDIA OTHER BUSINESSES Television SCM obtained the Anti-Monopoly Committee of Ukraine’s approval to become the majority shareholder in Donetskgor- Within the framework of Ukraine Media Group development, mash. Digital Ventures was formed to manage a range of internet sites. In the long-term perspective, Digital Ventures intends SCM obtained the approval of the Anti-Monopoly Committee to become one of the leaders of Ukraine’s internet market. of Ukraine to become the majority shareholder in Kamensky Heavy Engineering Plant (Russia). Ukraine Television Channel obtained a satellite broadcasting license for News Channel. The channel is one of the niche SCM sold its 19.41% stake in Kremenchug Steel Plant. The television channels, planned for launch within the framework company was a minority shareholder in that enterprise and of the media group to be formed on the basis of Ukraine Tel- was not able to substantially influence neither strategic de- evision Channel. cision-making, nor financial and business activity. Therefore, having received an economically viable proposal to sell its stake, SCM made the decision to exit from the shareholders Publishing of Kremenchug Steel Plant. SCM formed Segodnya Multimedia publishing holding, to SCM sold its stake in SlavTyazhMash Plant. The company which it transferred corporate rights to a range of assets in was a minority shareholder with decision-making power di- the newspaper industry. Particularly, SCM transferred to Se- rectly related to the size of its stake. Having received a eco- godnya Multimedia a 88.69% stake in Priazovskiy Rabochiy nomically viable proposal, SCM made a decision to sell its newspaper, a 53.64% stake in Vecherniy Donetsk newspa- stake in the plant. per, and a 75% stake in Media-Press publishing company. SCM exited from the shareholders of Donbass Trade Fleet Vecherkom, a full-color free daily newspaper was launched and Azov Shipyard. SCM sold its minority stakes in these in Kiev. The newspaper is aimed at the readers between 16 companies as they did not comply with the Group’s invest- and 39. Vecherkom’s daily circulation is 80 000 copies. The ment strategy. The development of transportation busi- newspaper will feature daily news and information collected nesses is not a priority for SCM Group, and integrating the before noon and published the same day. businesses in the production chains of the existing sectoral holdings was not feasible. PETROLEUM PRODUCTS RETAILING The sale of SCM’s 99.85% stake in Sarmat Brewery to SAB- Miller plc was completed. Brewing is not a priority area for SCM transferred to Parallel Nafta, a ‘daughter’ company, its SCM Group and this was the reason for selling Sarmat Brew- stakes in its petroleum retailing businesses. Parallel Nafta ery to a large international brewer. received the stakes in Parallel-M Ltd (Parallel and PitStop gas station chains) and Gefest. As result, Parallel Nafta stake in SCM also completed the sale of its 93.98% stake in Krym statutory capital of Parallel-M and Gefest increased to 100%. Brewery in line with its strategy of exiting from the brewing business.
  • 14. ABOUT SCM GROUP
  • 15. About SCM Group > SCM Group history 15 SCM Group history SYSTEM CAPITAL MANAGEMENT (SCM) WAS FOUNDED IN 2000 IN DONETSK. ITS MAIN PURPOSE IS TO INVEST STRATEGICALLY IN KEY SEGMENTS OF THE UKRAINIAN ECONOMY. THESE ARE PRIMARILY MINING AND METALS, ENERGY, TELECOMMUNICATIONS, BANKING, INSURANCE, REAL ESTATE, MEDIA, CLAY MINING, RETAIL, AND PETROLEUM PRODUCT RETAILING. SINCE ITS FOUNDATION, SCM HAS BEEN BUILDING UP ITS BUSINESS, BASED ON THE INDUSTRIAL ASSETS IT OWNS AND MAKING LARGE-SCALE INVESTMENTS, BOTH IN UKRAINE AND ABROAD. TODAY, THE HISTORY OF SCM GROUP CAN BE PRESENTED IN THE FOLLOWING MAJOR STAGES. 2000–2002 GROWING THE PORTFOLIO The first stage of SCM’s development concentrated on expanding the Group’s investment portfolio. It was during this period that the company acquired most of its businesses and began to introduce a single standard of man- agement across the Group. 2002–2004 INVESTING During this period, the main focus was on establishing world standards of business management at all of the company’s key assets. Meanwhile, enterprises were modernized and production indicators were raised, where possible, using experience and know-how, accumulated by SCM professionals. The company began to implement its long-term growth strategy and to increase the effectiveness of its business. This meant building vertically-integrated industrial structures and forming a team of world-class managers capa- ble of running them. 2004–2006 EXPANDING During the same period, SCM began actively expanding its telecom business. Banking and insurance businesses also joined the list of key areas SCM was expanding into. The company instituted the preparation of consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and began the proc- ess of building a transparent business and management structure for the Group. 2007 – 2008 CREATING STABILITY SCM group developed a distinct business development strategy. Business expansion was based on organic growth, as well as on new acquisitions in strategically important segments of economy and industry (mining and metals, energy, financial sector, telecommunications, real estate, retailing, and others). It is during these years that the Group accumulated the necessary reserves to ensure business stability during volatile periods. The main goal for this period was to make SCM not only Ukraine’s leading financial and industrial group, but also a truly competitive and successful global business.
  • 16. SCM Group Public Report 2008 16 Corporate culture: mission, vision, values THE SCM MISSION: SUCCESS, TOGETHER We invest in the continuous growth and effectiveness of our business, and through this support the economic and social development of society as a whole. THE SCM VISION: CREATING THROUGH DEVELOPMENT We build effective businesses and manage them according to best world standards and practice, ensuring long-term returns on our investment and participating in the development of the regions in which we have a presence. OUR VALUES: EFFECTIVENESS, PROFESSIONALISM, ACCOUNTABILITY Effectiveness as a means to achieve the best results in everything we do. For us, effectiveness is: Ô reaching the goals we set; Ô applying contemporary technologies and approaches to doing business; Ô constantly improving the processes and methods of doing business; Ô rational allocation and use of resources; Ô seeking new opportunities; Ô being ready for change Professionalism in doing business, including investing in people and stimulating innovation and enthusiasm towards work. For us, there is particular importance in: Ô meeting the highest standards; Ô stimulating initiative and innovation; Ô investing in professional development and loyalty of employees; Ô attracting and retaining highly qualified personnel; Ô fair evaluation of achievements. Accountability to our employees, our partners, our communities, and society as a whole.
  • 17. About SCM Group > SCM Group management 17 SCM Group management Oleg Popov General Director CEO OF SCM SINCE DECEMBER 2005. 2001-2005 – EXECUTIVE DIRECTOR OF SCM. 2000 – HIRED BY SCM AS DEPUTY TO THE CEO. 1992-2000 – WORKED IN VARIOUS GOVERNMENT OFFICES AND PRIVATE COMPANIES. EDUCATION: Graduated from Donetsk State University in 1996 Graduated from Donetsk Polytechnical Institute in 1990 CAREER: Chairman of the Board for FC Shakhtar. Represents SCM interests on the Supervisory Boards of DTEK, First Ukrainian International Bank, Dongorbank, Ukrainian Retail, as well as on the Auditing Committee of Metinvest. Areas of responsibility include: taking and approval of the key financial, investment, and personnel decisions, both directly at SCM and in the Group assets, as well as evaluating the performance of top management of these assets. In 2008 we passed a serious endurance test, and, I believe, we did it suc- cessfully. The year that started with the swift economic growth, ended with the downturn of comparable scale, caused by the global economic reces- sion. However, it was the test by crisis that proved the accuracy of the development strategy we had chosen and reliability of the safety cushion we had created. Effective risk management system we built turned out to be truly invaluable during this challenging year, as well as the stability reserves accumulated during the pre-recession years. In 2008 we managed to precisely identify the external challenges and op- portunities, as well as to take efficient and effective anti-crisis decision. It was the clear focus on our priorities that allowed us to retain the trust of our clients, partners, and, what is especially important, the trust of our employees – the most valuable asset of SCM Group at all times.
  • 18. SCM Group Public Report 2008 18 Roman Vodolazkyy Financial Director CFO OF SCM SINCE JUNE 2005. FEBRUARY-JUNE 2005 – SENIOR FINANCIAL MANAGER (TITLE CHANGED TO CFO). 2002 – HIRED BY SCM AS MANAGER FOR THE GROUP’S METAL DIVISION. OCTOBER 2000-SEPTEMBER 2002 – AUDITOR FOR PRICEWATERHOUSECOOPERS IN KIEV. MARCH 1999- OCTOBER 2000 – WORKED AT THE FINANCIAL DEPARTMENT OF MCDONALD’S UKRAINE. 1994-1999 – BEGAN HIS CAREER AS ACCOUNTANT AND CHIEF ACCOUNTANT FOR VARIOUS UKRAINIAN COMPANIES. EDUCATION: MBA from INSEAD (France), a leading European business school, in 2007. Graduated from Kherson State Technical University as a Specialist in Ac- counting and Computer Software in 1998. CAREER: Member of the British Association of Certified Chartered Accountants (ACCA) since 2005. Represents SCM interests on the Supervisory Boards of DTEK, Farlep-Invest, ASKA Insurance Company, and FC Shakhtar. Areas of responsibility include managing the Group’s Financial Department: budget- ing, financial reporting preparation, treasury functions, and internal audit. Our main achievement in 2008 was the ability to timely and effectively re- act to the rapid changes in the external environment. In order to face the economic crisis prepared, we united, established rigorous control over our expenses, timely re-evaluated and re-allocated the resources, tightened the internal discipline. Due to the efficient and the pragmatic action on our part, not only were we able to maintain our business and our team, but we also strengthened the image of SCM as the reliable business partner. We also continued the integration of SCM and Smart Group assets in min- ing and metals. The purchase of the new steel rolling facilities in Europe and the beginning of purchasing a mine in the USA significantly strengthened SCM’s positions in mining and metals business. It is also worth noting that in 2008 we significantly decreased our debt burden. Even though the share of our debt was not critical before the crisis, its further decrease provided us with the flexibility we needed in the new economic reality. We became even more conservative in terms of soliciting external funding, while rigor- ous and timely fulfillment of our credit obligations has always been and re- mains one of our top priorities.
  • 19. About SCM Group > SCM Group management 19 Ilya Arkhipov Business Development Director BUSINESS DEVELOPMENT DIRECTOR AT SCM SINCE OCTOBER 2005. 2001-2005 CONSULTANT, MCKINSEY & CO, MOSCOW. 2000-2001 – OPERATIONS MANAGER FOR RUSSIA’S LARGEST ON-LINE AUCTION RESOURCE, MOLOTOK.RU FOR NETBRIDGE, AN INTERNET COMPANY. 1995-2000 – CONSULTANT, COOPERS & LYBRAND AND PRICEWATERHOUSECOOPERS, MOSCOW. EDUCATION: MBA from INSEAD (France), a leading European business school, in 2007. Graduated from the Plekhanov Academy of Economics in Russia as a Spe- cialist in Enterprise Management in 1999. CAREER: Represents SCM interests on the Supervisory Boards of Farlep-Invest, First Ukrainian International Bank, Dongorbank, ASKA Insurance Com- pany, Segodnya Multimedia, and Ukraine Television Channel. Areas of responsibility include: participating in determining the overall portfolio strategy of the Group, as well as in corporate restructuring. In particular, Mr. Arkhipov is involved in developing SCM’s business strategy regarding telecoms, banking and insurance, as well as media. 2008, by and large, became a ‘test’ year for the Group, which allowed us to re-evaluate our past achievements and demanded new ideas and new approaches. Our main achievement was that we entered the crisis strong and prepared to learn and change as we went along. All consolidation and business transformation efforts taken during the previous years in various industry sectors of our business paid off, and in 2008 we were certain that most of our strategies and decisions were correct.
  • 20. SCM Group Public Report 2008 20 Nikolai Nesterenko New Business Development Director NEW BUSINESS DEVELOPMENT DIRECTOR AT SCM SINCE SEPTEMBER 2007. 2002-2007 – SENIOR MANAGER FOR STRATEGY DEVELOPMENT IN A RANGE OF THE GROUP’S COMPANIES. WITH THE GROWTH OF SCM GROUP, THIS AREA BECAME MORE AND MORE SIGNIFICANT, AND THE DECISION WAS MADE TO INSTITUTE THE POSITION FOR NEW BUSINESS DEVELOMENT. 2001 – HIRED BY SCM AS MANAGER OF THE FINANCIAL CONTROL DEPARTMENT. 1997-2001 – WORKED AT KERAMET INVEST, HAVING GROWN FROM STOCK BROKER TO GENERAL MANAGER. EDUCATION: MBA from INSEAD (France), a leading European business school, In 2007. Graduated from the Financial Accounting Department of Donetsk State Universtity in 1998. CAREER: General Director of ESTA Holding, which manages SCM Group projects in real estate. Areas of responsibility: determining strategic business development in real estate, machine-building, and transport sectors at SCM, seeking new areas for investment. As for the real estate sector, the sphere I oversee, in 2008 we introduced ESTA Holding on the international arena for the first time. ESTA was pre- sented at one of the most prestigious real estate conferences – MIPIM that is traditionally held in France. Besides, it is during that year that we fi- nalized the formation of our organization structure. Now we can definitely say that ESTA Holding corporate structure fully complies with the world’s best practice. On SCM Group level, I think, our main achievement was divesting assets that didn’t belong to our key business areas. For instance, we sold our stakes in Ship Building Plant and Donbass Trade Fleet, as well as we ex- ited the beer brewing business. However, I believe the Group’s greatest achievement in 2008 was retain- ing our business and our team, in spite of all external complexities.
  • 21. About SCM Group > SCM Group management 21 Jock Mendoza-Wilson International and Investor Relations Director INTERNATIONAL AND INVESTOR RELATIONS DIRECTOR AT SCM SINCE 2006. 2005-2006 – DIRECTOR OF CORPORATE COMMUNICATIONS FOR SCM. 1989 – LAUNCHED HIS OWN PR CONSULTANCY IN LONDON AND ADVISED U.S. GOVERNMENT AGENCIES ON THEIR PUBLIC DIPLOMACY PROGRAMS IN THE MIDDLE EAST. 1984 – BEGAN HIS CAREER WITH FORD EUROPE COMPANY. EDUCATION: Graduated as an Economist from Heriott-Watt University (Edinburgh) in 1984. CAREER: Areas of responsibility: developing and implementing communications strategies and programs, aimed at establishing contacts with both gov- ernment offices and NGOs; developing relations with international gov- ernments, business, and media, as well as maintaining relations with the investment and finance community. There were several events in 2008 that facilitated SCM Group’s integra- tion into the global economy. The purchase of Trametal S.p.A. was the most important event of the year that secured SCM’s entrance to the new European markets. As a result of this purchase, Metinvest now possesses the production capacity of over 1 mn tonnes of rolled steel, a product with high added value, inside the European Union. This also helped Metinvest improve client service. Syndicated loans, successfully secured by SCM, Metinvest, and DTEK, were a serious achievement, ensuring those companies’ access to the international capital markets. SCM Group achieving an A+ grading and being the top rated Ukrain- ian company in terms of corporate responsibility was also a significant achievement for the company as it recognized the systematic approach taken and hard work done by our businesses in this area.
  • 22. SCM Group Public Report 2008 22 Natalia Yemchenko Public Relations and Communications Director PUBLIC RELATIONS AND COMMUNICATIONS DIRECTOR AT SCM SINCE DECEMBER 2006. 2005-2006 – PUBLIC RELATIONS MANAGER FOR SCM. 2003 – HIRED BY SCM GROUP AS A SECTOR GROUP MANGER. 2001-2003 – DIRECTOR, KERAMET INVEST, AN INVESTMENT COMPANY. 1998-2001 – FINANCIAL MANAGER AT KOLO, AN INVESTMENT COMPANY. EDUCATION: Graduated from Donetsk National University as a Specialist in Finance and Credit in 1998. CAREER: Chairs the Auditing Committee of Ukraine Television Channel. Areas of responsibility: communicating with stakeholders, including the media, employees, residents in regions of company presence, the govern- ment, community organizations, and the general publc, as well as com- pany reputation management. 2008 was quite an eventful year for SCM. During this year everyone, including us, was operating under increasingly uncertain conditions. In terms of communications, this meant a lot of complex and challenging goals for us, as well as some new opportunities. Not only was SCM Group able to quickly adjust its plans and priorities, but also managed to focus on the most important aspects of its activity in the rapidly changing environment, such as: liquidity, effective resources allocation, and business stability. SCM was also able to maintain transparent relations with its key stakeholders based on mutual trust. We clearly and timely informed the market of the anti-crisis measures we were taking and maintained constructive dialogue with practically all our publics. As for SCM’s achievements in communications, I would like to emphasize the annual reports prepared by the Group’s largest holdings, as well as a range of other projects. Among key events of the year, I would also like to mention the launch of Compass, National rating of higher education institutions that successfully started in 2008, in spite of the economic downturn.
  • 23. About SCM Group > SCM Group management 23 Roman Bugayov Corporate Rights and Foreign Asset Management Director CORPORATE RIGHTS AND FOREIGN ASSET MANAGEMENT DIRECTOR AT SCM SINCE SEPTEMBER 2007. 2005-2007 – MANAGER OF THE CORPORATE RIGHTS DEPARTMENT FOR SCM. 2003 – HIRED BY SCM AS ECONOMIST. 2002-2003 – ECONOMIST AT KERAMET INVEST. 1996-2002 – WORKED IN THE DONETSK OBLAST OFFICE OF THE ANTI-MONOPOLY COMMITTEE OF UKRAINE AS A SPECIALIST, SENIOR SPECIALIST, THEN DEPARTMENT MANAGER. EDUCATION: Graduated from the Donetsk Institute of Entrepreneurship as a Specialist in Organizational Management in 2000, with major in Economic and Legal Aspects of Commercial Activity. CAREER: Represents SCM interests on the Supervisory Board of DTEK. Sits on the Auditing Committee of Ukraine Television Channel and Bureau of Economic and Social Technologies (BEST) Analytical Center. Areas of responsibility: determining and implementing company policy re- garding the management of corporate rightrs; organizing and handling op- erations involving corporate rights belonging to the company and its subsid- iaries; and organizing the activities of foreign companies belonging to SCM. The main event of 2008 was the completion of SCM corporate transfor- mation. Particularly, we formed industrial holdings in telecommunications, publishing, and real estate, as well as consolidated our assets in oil prod- ucts retailing. Besides, it is in 2008 that we made a range of important purchases – practically in all spheres of our business, from mining and metals (INKOR and Co, steel plants in Italy and UK) to telecommunications (CSS). On the other hand, in 2008 we exited from businesses that did not comply with our strategy, for instance, from brewing business. In other words, we faced the ‘economic cooldown’ consolidated and well-structured, which allowed us not only to survive this year, but also to strengthen our market positions.
  • 24. SCM Group Public Report 2008 SCM Group target corporate governance system SCM Minority Company shareholders Sectoral Holding Supervisiory Board Appointment Health, Occupational Auditing Strategy and Investment and Compensation Safety, and Environment Comittee Comittee Comittee Comittee* * Applies only to Metinvest and DTEK
  • 25. About SCM Group > SCM Group target corporate governance system Sectoral Supervisiory Holding Boards Managing of Operational Company companies Holding Holding Operational General Board companies Director when decision is made to create a sectoral holding when decision is made not to create a sectoral holding
  • 26. SCM Group Public Report 2008 26 SCM Group target corporate governance system SCM’S SYSTEM OF CORPORATE GOVERNANCE IS IN LINE WITH THE HIGHEST INTERNATIONAL STANDARDS AND IS BASED ON WORLD BEST PRACTICE. IT ALLOWS THE COMPANY TO qUICKLY AND EFFECTIVELY MAKE THE DECISIONS, NECESSARY TO ENSURE THE DYNAMIC GROWTH OF ALL THE GROUP’S SECTORAL HOLDINGS AND BUSINESS AREAS. As the majority shareholder and the main inves- agement; the independence of internal and tor, SCM Group governs its sectoral holdings by external audits; and for ensuring compliance delegating its representatives to sit on the re- with the laws and norms governing business spective Supervisory Boards. The participation of ethics. minority shareholders in the governance of these holdings is also executed through their repre- Ô The Strategy and Investment Committee sentatives on the Supervisory Boards. prepares and submits for review to the Su- pervisory Board the necessary recommen- The Supervisory Boards govern the sectoral dations regarding the opportunities for the holdings. These Boards include representatives holdings to be involved in investment projects of SCM, minority shareholders, and external ex- and exit strategies for specific projects. The perts. The members of each Board vote to elect Committee also prepares recommendations a Chair from among their number. The Supervi- regarding the strategic goals and objectives sory Boards determine business development of the various holdings, as well as the imple- areas and the standards for engaging in specific mentation of agreements on mergers and ac- businesses; they approve strategies, budgets quisitions (M&A). and major transactions, as well as oversee their implementation; they track business indica- Ô The Appointment and Compensation tors, appoint top managers, establish incentives Committee recommends to the Supervisory for them, and evaluate their performance. The Boards candidates for management posi- members of the Supervisory Boards, along with tions in the sectoral holdings. With this pur- independent experts, may also participate in pose in mind, the Committee organizes inter- specialized comities including: The Audit Com- views with applicants for specific positions mittee, the Strategy and Investment Committee, and decides whom to recommend for those the Appointment and Compensation Committee, positions. The Committee also prepares rec- and the Health, Occupational Safety, and Envi- ommendations regarding the rotation of top ronment Committee. managers within the sectoral holdings, pro- poses ways to incentivize top managers, as Ô The Audit Committee prepares recommen- well as participates in shaping the corporate dations for the sectoral holdings’ Supervisory culture and staffing, and in determining the Boards regarding the approval of accounting prospects for personal development of man- policy and procedures for preparing financial agers, and so on. reports; the depth and accuracy of financial reporting provided by each holding; the reli- Ô The Health, Occupational Safety, and En- ability and effectiveness of the internal audit- vironment Committee was created to in- ing system, internal oversight and risk man- stitute the highest health and occupational
  • 27. About SCM Group > SCM Group target corporate governance system 27 safety standards across the Group, as well The Supervisory Boards of operating companies as to control the environmental impact of are responsible for their sustainable financial the Group’s industrial enterprises. The Com- and commercial growth, greater effectiveness, mittee develops SCM Group’s strategy for and increased competitiveness of their opera- the areas of its authority; prepares budgets tions. They keep track of the upholding of share- to finance modernization of and equipment holder rights, make decisions regarding the time purchase for the Group’s industrial assets; to hold General Shareholders’ Meetings, estab- ensures the compliance of all industrial en- lish the agenda for such meetings, draft corpo- terprises with the approved health and safety rate policy, and so on. standards; as well as annually submits the Group enterprises’ quarterly management The members of the Supervisory Boards of op- reports to the Supervisory Board for review. erating companies are appointed by the Execu- tive Council and are approved by the Supervisory The General Director of a sectoral holding is Board of the relevant sectoral holding. appointed by the Supervisory Board, in order to manage the holding’s operations. As a member For individual areas of business where there are of the Board, this person takes an active part in no sectoral holdings, the system of corporate the strategic planning of the holding’s activities. governance works through the immediate Super- visory Boards of the operating companies. The Executive Council is the highest body in the operational management of the holding. Each In the course of several years, this corporate holding’s Executive Council is established colle- governance structure has demonstrated its ef- gially. The Chair of the Executive Council is the fectiveness for achieving SCM Group’s goals and General Director of the holding. is being constantly improved.
  • 28. SCM Group Public Report 2008 28 SCM Group asset management system BY THE BEGINNING OF 2006, WHEN THE DECISION WAS MADE TO BEGIN THE CORPORATE TRANSFORMATION PROCESS, SCM GROUP SAW ITSELF AS THE CONGLOMERATION OF VARIOUS ASSETS THAT WERE DIRECTLY RUN BY SCM, THE MANAGING COMPANY. THE CORPORATE TRANSFORMATION PROGRAM IS AIMED AT INSTITUTING A MODERN, COMPREHENSIVE SYSTEM OF CORPORATE GOVERNANCE AND SWITCHING TO A NEW CORPORATE STRUCTURE. SCM Group’s target business model provides, The key features of SCM’s corporate governance first and foremost, for a change in SCM’s role in system are: the management system through a switch from operational management of individual enter- Ô simplicity and intelligence, clearly-defined ar- prises to strategic management of newly-formed eas of competence along all the links of the sectoral holdings and Group business areas. Ac- chain; cording to the Program approved in 2006, the process of combining the Group’s operational Ô effective managerial decision-making and con- companies within the framework of specific sec- trol; toral holdings began. Those holdings received the right to own and manage SCM assets in their Ô effective risk management; specific sectors. The sectoral holdings were also assigned to manage the assets that were handed Ô compliance with the target corporate rights over to them, including devising and implement- ownership structure; ing their business development strategies. Ô compliance with best world standards. This new business structure and the important change in the role of the SCM Company in the SCM Group’s corporate governance system is decision-making system, as well as SCM’s un- based on the principles of transparency and com- swerving determination to match international pliance with the law that lie at the heart of all its standards, drove the transition to what was, for activities. SCM, a fundamentally new system of corporate governance. In determining a target corporate governance structure, SCM studied best international prac- tice and clearly spelled out its key features and the basic principles on which it is built.
  • 29. About SCM Group > SCM Group approach to risk management 29 SCM Group approach to risk management WE CREATED AN EFFECTIVE AND RELIABLE RISK MANAGEMENT SYSTEM, COMBINING WORLD BEST PRACTICE AND OUR OWN EXPERTISE. WE MANAGE RISKS EFFECTIVELY, DUE TO THE DIVERSIFICATION OF OUR BUSINESS, CONSTANTLY STRIVING FOR THE FINANCIAL STABILITY OF ALL SCM GROUP ASSETS, AS WELL AS A CLEAR INVESTMENT STRATEGY, ALIGNED WITH THE OPERATIONAL DECISION-MAKING SYSTEM. Diversification. SCM Group strives towards We carefully monitor the liquidity of our assets deliberate business diversification, though it is and rigorously manage our working capital. a long-term process, requiring a balanced ap- proach to investment. Investment strategy. SCM is a strategic, long- term investor. We do not aim to receive ‘quick’ We carefully consider the opportunities to enter profits and regard investment in our business new markets. In order for SCM Group business development from the standpoint of long-term area to be declared strategic, it must comply with value creation. We are predominantly focused on the following set of criteria: the organic growth of the Group’s assets. Ô clear long-term perspectives; In the course of the last several years, we have regularly made significant investments in mod- Ô profitability; ernization of our enterprises and increasing the industrial production, as well as improving energy Ô return on investment; efficiency. As a result – we have accumulated the reserves, necessary to withstand any structural Ô competitive advantage; changes in the market. We have enough resourc- es at our disposal to ensure that SCM Group’s Ô significance for Ukraine. long-term strategy remains unchanged. We strive for our alternative business areas to be Decision-making system. One of our strategy’s more dynamic in their development than our core core components is preparedness to change. Our ones (mining and metals, energy, finance) only in corporate governance model is not bureaucratic, this case will diversification allow us to mitigate which allows us to efficiently make the neces- the industry risks. sary decisions in the rapidly changing external environment. We are also prepared to correct our Financial stability. The share of external funding short-term plans, as needed, to adapt to the new in the SCM Group portfolio is relatively low, the economic reality. main reason for this is our recent entrance into the debt capital markets. We have always been conservative in terms of selecting the sources of finance for our projects and and mainly prefer our own funding to external finance.
  • 30. SCM Group Public Report 2008 SCM business structure – 2008 Mining & Metals Energy Financial Telecom Media (Metinvest) (DTEK) Services Iron Ore Division Coal Mining Banking VEGA Telecom- Ô Ukraine Television Ô Northern Ore Mining Ô Pavlogradugol munications Channel Ô First Ukrainian and Enrichment Plant International Bank Group Ô Komsomolets (SevGOK) Donbassa Mine Ô Segodnya Multimedia Ô Dongorbank Ô Central Ore Mining and Ô Mospinskoye Coal Enrichment Plant (CGOK) Enrichment Plant Ô Digital Ventures Ô Inguletsky Ore Mining Ô Pavlogradskaya Coal and Enrichment Plant Enrichment Plant (CEP) Insurance (InGOK) Ô Kurakhovskaya Coal Ô Krivoy Rog Central Ore Enrichment Plant (CEP) Ô ASKA Mining Equipment Repair Plant (KCRZ-KZGO) Ô Dobropolskaya Coal Ô ASKA-Life Enrichment Plant (CEP) Ô Oktyabrskaya Coal Coke and Coal Enrichment Plant (CEP) Division Ô Avdeyevka Coke and Power Generation Chemical Plant (AKHZ) Ô Avlita Stevedoring Ô Vostokenergo Company Ô Krasnodonugol Ô INKOR & Co Power Distribution Ô PES Energougol Steel and Rolled Products Division Ô Service Invest Ô Azovstal Steel Plant Ô YeMZ Group (Yenakiyevo Steel Plant, Metalen) Ô Khartsyzsk Pipe Plant (KHTZ) Ô Trametal S.p.A. Ô Spartan UK Ltd. Ô Ferriera Valsider (Italy) Ô Prometei Ô Skif Shipping Sales Ô Metinvest International S.A. Ô Metinvest Eurasia Ô Metinvest Ukraine Ô Metinvest SMC
  • 31. About SCM Group > SCM business structure - 2008 Real Estate Clay Mining Retail Trade Petroleum Other assets (ESTA Holding) (United Minerals (Ukrainian Retail) Products Group) Retailing Hotels Ô Vesko Ô Brusnytsya Ô Parallel Heavy Engineering Retail Chain Ô Opera Ô Druzhkovskoe Mines Ô Gefest and PitStop Ô Donetskiy Energozavod Ô Donbass Palace Management brands Engineering Plant Ô Ogneupornerud Ô Druzhkovka Heavy Engineering Plant Multi-functional Ô Gorlovskiy Centers Mashinostroitel Ô Leonardo Engineering Plant Ô Pushkinsky Ô Sverdlovskiy Heavy Ô Oktyabrsky Engineering Plant Other properties under construction ASSOCIATED COMPANIES Mining & Metals: Ô Dokuchayevsk Flux and Dolomite Plant (DFDK) Ô Zaporozhkoks (Zaporozhye Coke and Chemical Plant) Ô Donetskkoks (Donetsk Coke and Chemical Plant) Ô Novotroitskoye Mines Management Ô Krivbassvzryvprom Explosives Company Ô Krivoy Rog Iron Ore Plant Energy: Ô Dneproenergo Ô Donetskoblenergo Telecommunications: Ô Astelit Ô Multichannel Multipoint Distribution System (MMDS)
  • 32. SCM GROUP’S BUSINESSES
  • 33. SCM Group’s businesses > Core business areas 33 Core business areas Mining and metals. Metinvest METINVEST GROUP INCLUDES ALL SCM GROUP’S ASSETS IN MINING AND METALS, AS WELL AS COMPANIES THAT SERVICE THEM. METINVEST IS THE BIGGEST VERTICALLY INTEGRATED MINING AND METALS COMPANY IN UKRAINE AND ONE OF THE LEADING PLAYERS IN THE WORLD’S METALLURGICAL INDUSTRY. THE MAIN SHAREHOLDERS OF METINVEST ARE SCM GROUP (75% SHARES) AND SMART GROUP (25% SHARES). In 2008 Metinvest Group enterprises produced Metinvest Group includes 25 enterprises which 10.8 mn tonnes of steel, over 11 mn tonnes of are among the leaders in the coke and chemi- rolled steel, over 5 mn tonnes of coke, and over cal, coal, mining, and metallurgy industries in 40 mn tonnes of raw iron ore. This production Ukraine. In Europe, Metinvest Group is repre- capacity allows to not only completely cover Met- sented by two rolled steel plants in Italy - Ferriera invest’s business needs for raw materials, but Valsider S.p.A. and Trametal S.p.A., as well as by also makes Metinvest one of the key suppliers to the Spartan UK Ltd., rolling mill in Great Britain. the steel producers in Ukraine, Europe, Mediter- ranean region, and Asia. Metinvest Group enter- The Group’s metallurgy enterprises produce a prises employ over 89 000 people. wide range of high quality products, used in prac- tically all metal intensive consuming industries. METINVEST GROUP ENTERPRISES IRON ORE DIVISION Northern Ore Mining and Enrichment Plant (SevGOK) is one of the largest mining companies in Europe with a closed production cycle for iron ore concentrate and pellets. Central Ore Mining and Enrichment Plant (CGOK) is a unique enterprise in Ukraine, combining opencast and shaft mining for the extraction of ores, as well as recycling enrichment wastes. The enterprise specializes in min- ing, processing, and production of raw iron ore for metallurgy, such as pellets and iron ore concentrate. Inguletsky Ore Mining and Enrichment Plant (InGOK) specializes in mining and processing ferrous quartzites from Ingulets deposit, located in the southern part of the Krivoy Rog iron ore basin. The enterprise produces two types of ferrous concentrate with iron content of 63.7% and 67.5%, respectively. InGOK uses a flotation concen- tration technology that is unique for Ukraine.
  • 34. SCM Group Public Report 2008 34 Krivoy Rog Central Ore Mining Equipment Repair Plant (KCRZ-KZGO) is one of the leading enterprises in Ukraine producing a wide selection of mining, enrichment and transportation equipment and spare parts for shaft mining and opencast mining, as well as for crushing and milling equipment. COKE AND COAL DIVISION Avdeyevka Coke and Chemical Plant (AKHZ) is the largest high-technology company in Europe’s coking coal industry. The plant’s product range includes over 30 items, with the main product being coke for metallurgy, with annual coke output of over 3 mn tonnes. Avlita Stevedoring Company controls two deep water berths in Sevastopol Bay in the South-Western Crimea that are open all year round. The company operates the necessary trans-shipment and reloading facilities for railway to road and to sea transport, from sea to road and rail transport, as well as from ship to ship. The company also provides a wide range of services, such as: customs brokerage, warehouse storage, cargo dispatch, and vessel servicing. The company processes metal and operates a grain terminal with storage capacity of 0.1 mn tonnes. The grain reloading station production capacity is 1.2 thousand tonnes per hour from railway transport, and 0.3 thousand tonnes per hour from road transport (two reloading points). The vessel loading capacity is 1.2 thosand tonnes per hour, and the equipment used at both berths consists of 23 berth cranes, 5 of which are the latest generation mobile berth cranes by Liebherr and Gottwald. Krasnodonugol is one of the biggest companies in Ukraine extracting and enriching high energy coal used for coke production. Krasnodonugol uses the coal deposits of Krasnodon geo-industrial region in Lugansk Oblast, with coal bed angles varying from 0 to 60 degrees, located 400-1,200 meters under ground. Krasnodonugol in- cludes seven mines and ore plants, two enrichment plants, and service divisions. INKOR and Co is one of the largest chemical producers in the CIS and Europe. The company specializes in processing phenol- and naphthalene-containing raw material, produced by coke and chemical plants. The largest raw material supplier for INKOR and Co is Avdeyevka Coke and Chemical Plant, which is also a part of Metinvest Group. The enterprise also buys raw material from other producers in Ukraine and Russia. INKOR and Co produces naphthalene, phenols, cresols, xylenols, boiler and furnace fuel, as well as other products at its Dzerzhinsk Phenol Plant (Donetsk Oblast), which was intergrated into the company in 2001. STEEL AND ROLLED PRODUCTS DIVISION Azovstal Steel Plant is a modern, high-technology company that is among the top three steelmakers in Ukraine in terms of product output volume, producing a wide assortment of metal products: slabs, rolled section steel, structural shapes, rails, rail fasteners, billets, steel plates, and steel slag products. Azovstal is among the top three leaders of the rating of metal and mining enterprises of Ukraine. YeMZ Group is one of the world leaders in steel billet production. The Group includes Yenakiyevo Steel Plant and Ukraine-Switzerland Joint Venture Limited Liability Company Metalen, operating on a unified production platform
  • 35. SCM Group’s businesses > Core business areas 35 with a consolidated production cycle. YeMZ Group produces various types of rolled steel (rods, cast billets, rolled bars, graded sections). Khartsyzsk Pipe Plant (KHTZ) is the largest producer of straight-seam electro-welded large diameter (478– 1,420 mm) piping in the CIS. The pipes are primarily used in the oil and gas industries. Trametal S.p.A. is a leader in Italian and European markets for structural carbon steel plates. Spartan UK Ltd. is the only producer of high-quality steel plates in Great Britain. The enterprise offers a wide vari- ety of steel plates used in construction, heavy engineering, and other industries. Ferriera Valsider (Italy) is a steel plant producing structural rolled steel (steel plates and hot-rolled coil). Its supply of raw materials is primarily (80–90%) sourced from Azovstal Steel Plant. Ferriera Valsider’s products are used in construction, ship-building, as well as in making boilers, pressure cylinders, pipies, and railing. Prometei Financial Industrial Company is one of the largest operators on the Ukrainian market of ferrous scrap metals. It supplies the holding’s companies with raw materials. Skif Shipping is a logistics company that provides the entire range of services for transporting, loading and docu- menting cargo. Metinvest International S.A. (formerly Leman Commodities) is the wholesale business responsible for the sale and export of Metinvest Group products. The company is represented in 11 countries, which allows the company to cover the world’s largest steel markets. Metinvest International has representative offices located in Istanbul (Turkey), Beirut (Lebanon), Beijing and Shanghai (China), Milan (Italy), Santo-Domingo (Dominican Republic), Bel- grade (Serbia), Tehran (Iran), Vilnius (Lithuania), Khartum (Sudan), Ashgabat (Turkmenistan), and Singapore. The company is headquartered in Geneva (Switzerland). Metinvest Ukraine is a wholesale business selling the products of Azovstal Steel Plant, Yenakiyevo Steel Plant, and Makeyevka Steel Plant in Ukraine and CIS countries, with the exception of Russia. The products are sold by railcar load quantities (from 65 tons), and the company has 165 products in its portfolio. Metinvest Eurasia is responsible for selling the products of Azovstal Steel Plant, Yenakiyevo Steel Plant, and Makeyevka Steel Plant in Russia. Metinvest SMC is a retail company selling the products of Metinvest Group enterprisees. Metinvest SMC’s net- work of companies includes 11 steel stock holding centers in Ukraine and 1 in Serbia which deliver a local service to customers.
  • 36. SCM Group Public Report 2008 36 Metinvest Group key indicators 2007 2008 Dynamics, % Sales volume, mn $ 7,425 13,223 +77.95 Asset value, mn $ 12,439 11,356 -8.7 EBITDA, mn $ 2,286 4,681 +104.77 Net profit, mn $ 1,321 2,803 +112.19 Raw iron ore output, mn tonnes 33,4 31,3 +6 Steel output, mn tonnes 9,115 8,241 -9.59 Rolled steel output, mn tonnes 9,468 9,223 -2.59 Metinvest is highly diversified in terms of its sales metal service centers increased by 288,000 markets. This helps the company to level out fluc- tonnes (55% growth compared to 2007). The tuations in demand from any of these markets. company is planning to further grow its presence in the CIS and international retail markets, grad- In 2008, Metinvest Group sales dynamics gen- ually increasing the sales of products with added erally reflected the world metal market trends. value and decreasing the sales of semi-finished Favorable economic conditions and rising metal products. prices in the first half of the year allowed the com- pany to effectively sell its products by expanding By the end of 2008, Metinvest Group ranked its share on the key markets. number four in terms of the world’s largest slab producers with over 8.2% share, and on the The sharp decline in global demand for metal world billets market the Group is the leader with products, starting from the 3rd quarter of 2008, a share of over 10%. The largest volumes of bil- triggered changes in regional and product sales lets were sold on Middle East and European mar- structure of Metinvest, and also led to some de- kets (37% and 26%, respectively). crease in sales volume. The acquisition of Trametal S.p.A. (Italy) and Finished product sales (excluding semi-finished Spartan UK Ltd. (Great Briatin) allowed Metinvest products – e.g. slabs and billets) amounted to to grow its presence in the EU market by 3.4%. At 4,487 mn tonnes or 46% of the total sales volume. the end of 2008, Metinvest increased its share of the steel plate market in the EU from 2.2% to In 2008 the volume of products, sold through 2.7%.
  • 37. SCM Group’s businesses > Core business areas 37 Overall, Metinvest Group’s share of the world’s ing completion. One of the main production steel plate and structural shapes market units of the new facilities, the ladle-furnance amounts to 2%. unit, reached its full capacity. The Azovstal ladle-furnance unit was engineered using the newest technologies, with Siemens VAI (Ger- Investment many) selected as supplier. The unit will have significant positive influence on Azovstal In 2008 the total volume of Metinvest Group in- economy, as well as on the environment of vestment amounted to $690 mn. the city of Mariupol, where the Steel Plant is located, by substantially decreasing the air Ô Azovstal Steel Plant completed its integrated pollution and reducing the water waste dis- program, aimed at increasing slab production charge. The new ladle-furnance unit annual and sales volume, as well as achieving the production capacity is 2 mn tonnes of steel, targeted quality parameters. This program and the installation costs, including the infra- has been implemented since 2003, with in- structure costs, amounted to $30 mn. vestment volume amounting to $600 mn. Reconstruction of blast furnace #3 was also Ô In the blast furnace iron making facilities, completed at Azvostal, thus, delivering in- the reconstruction of blast furnace #3 were creased productivity and reduced down time. completed, within the framework of Azvostal Steel Plant’s modernization and reconstruc- Ô The reconstruction of the oxygen-converter tion program. In the course of the blast fur- facilities at Azovstal Steel Plant is approach- nace repairs, a new fettling technology was Metinvest Group 6% sales structure Other 8%CIS 2008 Sales revenue, segmented by region. 35% Ukraine 10% 100% = $13,213 mn Near East and North Africa 14% South-East Asia 27% Europe
  • 38. SCM Group Public Report 2008 38 applied, leading to significant increase in the Ô Ingulets Ore Mining and Enrichment Plant term of equipment operation. The blast fur- (InGOK) began a large-scale program for nace is equipped with modern control equip- magnetic floatation beneficiation of iron ore ment, allowing automation of its operations concentrate worth $170 mn. The program is to the maximum extent. The new engineering intended to run untill 2011. solutions give the blast furnace an annual pro- duction capacity of 1 mn tonnes of pig iron, with Ô In order to ensure long-term, economically vi- reduced environmental impact. The total project able, and safe coal production at the Krasno- investment volume amounted to $30 mn. donugol mines, a 20-year mine development investment program was initiated in 2007, Ô Yenakiyevo Steel Plant began the construc- with total investment volume exceeding $600 tion of blast furnace #3 production facilities mn over 20 years and amounting to $64 mn which will increase the production of pig iron in 2008. and decrease the use of coking coal. The total project investment is $180 mn. Ô Novotroitskoye Mines Management and In- guletsk Ore Mining and Processing Plant Ô Khartsyzk Pipe Plant continued the construc- (InGOK) began implementing a business tion of the new production line for 711-1420 management system, based on the SAP for mm diameter pipes. It is anticipated that line Mining industry slolutions, designed spe- will increase the volume of annual pipe sales cifically for mining companies. The following by 200,000 tonnes. The total project invest- functional programs will be installed at these ment is $48 mn. enterprises: Financial Mangement, Manage- Metinvest Group Sales geography Sales Volume, mn Regional market % tonnes Europe 3,57 27 South-East Asia 1,85 14 Near East and North Africa 1,32 10 Ukraine 4,62 35 CIS 1,06 8 Other marketss 0,79 6 TOTAL: 13,21
  • 39. SCM Group’s businesses > Core business areas 39 rial Accounting and Controlling, Inventory Metinvest’s financial stability was positively in- Management, Sales Management, Produc- fluenced by vertical integration, a moderate debt tion Management, Budgeting, Investment burden, and a sufficient level of liquidity. Management, Repairs Management, quality Management, Material Needs Planning, and To mitigate the negative impact of the economic Personnel Administration. crisis on the economy, Ukranie’s leading min- ing and metal companies, including Metinvest, Considering the significant changes on the met- signed a memorandum with the Ukrainian gov- als market in the 4th quarter of 2008, Metinvest ernment. According to the terms of the memoran- reviewed its investment programs placing the fo- dum, the state monopolies were to temporarily cus on those which added value creation along freeze the cost of their services (transportation, the production chain. Increasing current opera- energy, etc.), which allowed Ukrainian mining and tional effectiveness and product quality were metal producers to remain competitive in global declared priorities for the year, while the plans to markets. increase steel rolling and raw materials capacity were postponed until the market situation stabilizes. In order to reduce costs, the least profitable production was stopped. All excess capacity or non-competitive production capacities under- Risk Management went short- and mid- term or complete stoppage: Yenakiyevo Steel Plant ceased operation of its The contraction of steel consumption in the sec- blooming mill and blast furnace #3; Azovstal ond half of 2008 was aggravated by significant Steel Plant stopped its blast furnace #1. Cur- product overstocking and a threefold decrease in rently, Metinvest Holding is applying centralized steel prices, compared to their peak levels in July supply chain management to all its enterprises. 2008, driving the prices down to the 2005 levels. Simultaneously, the integrated programs of per- sonnel number optimization, increasing labor In the light of the decreasing demand for steel, productivity, and outsourcing of ancillary func- competition between steel producers for the tions are being implemented. product markets tightened, leading to the large product volumes sold at prime cost or lower. To cut expenditure on natural gas, Azovstal and Yenakiyevo Steel Plants completely switched to The reduction in the demand for raw materials gas-free blast furnace operation by substituting caused the significant decrease in pig iron output natural gas use with the additional volumes of and falling prices. However, higher concentration coking coal. of the raw materials and coal producers helped maintain the profitability level of this industry Additional operational improvements and cost segment. minimization were implemented, particularly, regarding: administrative, logistical, energy, and The devaluation of the national currency in the repair costs. 4th quarter of 2008 did not have a negative im- pact on the Group’s operations, due to the fact To increase and maintain the overall solvency, that the majority of revenues are generated from Metinvest instituted centralized management of export. The devaluation also enabled Metinvest liquidity levels and working capital. to reduce the production costs costs in dollar equivalent. To maintain business competitiveness, Met- invest Group took specific anti-crisis measures in
  • 40. SCM Group Public Report 2008 40 Metinvest Group Sales structure Product Sales Volume, thousand tonnes % Sheet 1,918,2 27.1 Coil 161,4 1.7 Piping 407,0 8.4 Slab 1,893,0 15.3 Cast iron 313,4 2.0 Billet 3,082,0 24.3 Rolled section 2,000,0 21.3 TOTAL: 9,775,0 relation to all its key partners. For instance, ne- Ô improved product sales effectiveness, due to gotiations were held to reduce the prices for the the development of products and markets, as main production resources purchased outside well as due to enhanced client service. the Group (coal, ferrous alloys, etc.). To provide for the product sales with minimum profit margin, a contract was signed with the key large diameter pipes producer. Metinvest Group growth areas during the crisis period were as follows: Ô increased product competitiveness due to reduced costs at all production and service businesses; Ô increased sales volumes of raw materials to key export markets; Ô improved product quality, which was achieved without significant investment;
  • 41. SCM Group’s businesses > Core business areas 41 Energy. DTEK DTEK IS UKRAINE’S LARGEST VERTICALLY INTEGRATED ENERGY BUSINESS, WITH 22.6% SHARE OF THERMAL COAL PRODUCTION, A 25.4% SHARE OF THERMAL POWER GENERATION, AND 6.5% SHARE OF THERMAL POWER DISTRIBUTION. DTEK ENTERPRISES EMPLOY OVER 46 000 PEOPLE. DTEK enterprises form an effective production ness, key business process optimization, and chain from coal mining to thermal power genera- adoption of the new technologies. tion and distribution. The productive cooperation of coal mining and power generating enterprises, The main consumers of thermal power, generat- the institution of advanced technologies, profes- ed by DTEK enterprises, are the largest industrial sional management, and balanced social policy, enterprises of Eastern and Southern Ukraine, have allowed DTEK to take the leadership posi- particularly: Azovstal Steel Plant, Yenakiyevo tion in Ukraine’s energy market. DTEK personnel Steel Plant, Mariupol Steel Plant named after Il- on all levels of the Group are working in unified lyich, ISTIL Steel Plant, Northern Ore Mining and teams. DTEK’s development strategy provides Enrichment Plant (SevGOK), and Central Ore for increased corporate governance effective- Mining and Enrichment Plant (CGOK). DTEK key indicators 2007 2008 Dynamics, % Sales volume, mn $ 1,776 2,461 +38.56 Asset value, mn $ 2,654 2,346 -11.61 EBITDA, mn $ 477 655 +37.32 Net profit, mn $ 236 23 -90.25 Coal extracted, mn tonnes 15,8 17,6 +11.39 Energy generated, KWH 18,1 16,8 -7.18
  • 42. SCM Group Public Report 2008 42 DTEK GROUP ENTERPRISES COAL MINING Pavlogradugol is the largest coal mining enterprise in Ukraine. The company owns 10 mines, as well as a range of transport and production infrastructure businesses. In addition to thermal coal, the company also extracts coking coal. Komsomolets Donbassa Mine is one of the largest producers of thermal coal in Ukraine. The enterprise operates its own coal enrichment plant. Mospinskoye Coal Enrichment Plant is a producer of enriched coal and concentrate for thermal power plants (TPPs). Pavlogradskaya Coal Enrichment Plant (CEP) is one of the largest coal enrichment enterprises in Ukraine. Kurakhovskaya Coal Enrichment Plant (CEP) produces coal concentrate for thermal power plants (TPPs). Dobropolskaya Coal Enrichment Plant (CEP) is a producer of enriched metallurgical coal for coking. Oktyabrskaya Coal Enrichment Plant (CEP) is a producer of both coking coal and thermal coal for electric power generation. POWER GENERATION Vostokenergo is a private power-generating company. The company’s output is produced by three thermal power plants - TPPs): Zuevskaya, Kurakhovskaya, and Luganskaya. These plants have a total of 18 power generating units between them, whose combined power output is 4,060 MWt, of which 17 power generating units are used to generate electricity, for a total output capacity of 3,785 MWt. The company is the biggest producer of thermal electricity in Ukraine. POWER DISTRIBUTION PES Energougol manages 75 substations in Dnepropetrovsk and Donetsk Oblasts. Service Invest which manages 67 substations in Dnepropetrovsk and Donetsk Oblasts. Investment volume for 2007 by 78.6%. The investment took place at Pavlogradugol, where a range of DTEK’s total investment in 2008 amounted to large-scale mining infrastructure modernization $338 mn. projects continued. In 2008, the coal mining investment program In 2008, DTEK’s investment in its coal enrichment was $228 mn, exceeding the same program plants increased by 22%, amounting to $8 mn.
  • 43. SCM Group’s businesses > Core business areas 43 Distributed thermal 2.2% 4.8% power consumption Population and communal services Machine-building by industry, 2008 9.5% Others 14.7% Coal mining 68.1%Metallurgy Ô Within the framework of Pavlogradugol’s ing capital. Within the framework of the con- equipment modernization program, an tracts with DBT Europe and OSTROJ, DTEK agreement was signed with OSTROJ (Czech partnered with Swedbank (Ukraine) and Alfa- Republic), one of the leading mining equip- Bank (Ukraine), respectively. ment producers, to manufacture and supply mining equipment to Pavlogradskaya and Ô Vostokenergo is one of the few thermal pow- Zapadno-Donbasskaya Mines, worth over er generating companies in Ukraine, imple- $4 mn. The agreement was also signed with menting capital construction programs. In Bucyrus DBT Europe (Germany), one of the the course of the last 5 years, the volume of world leading coal plough systems produc- investment in Vostokenergo’s development ers, to manufacture and supply a modern has grown 4 times, and in 2008 $69 mn was coal plough system, worth over $42 mn. invested - more than double the 2007 figure. This significant increase in the 2008 capital The total of $52 mn was invested in purchas- investment program was due to Vostoken- ing the OSTROJ and T Machinery (Czech Re- ergo beginning its power generating unit re- public) mining equipment for Stepnaya and construction program. Particularly, the first Dneprovskaya mines. stage of the program has already been imple- mented at Zuyevskaya and Kurakhovskaya In this purchase of mining equipment, DTEK Thermal Power Plants (TPPs), where energy is using documentary credits with post-fi- generation units #2 and #5 were recontruct- nancing, which allows the company to make ed, respectively. large purchases with minimum use of work-
  • 44. SCM Group Public Report 2008 44 The capital repairs with partial reconstruction menting a range of investment programs, of Zuyevskaya TPP water cooling tower #2, aimed at increasing the production facilities’ required the total investment of $7.1 mn. The effectiveness. In 2008, DTEK’s power distri- modernization of the water cooling towers bution block investment program increased will reduce annual coal consumption by 26.4 by 59.2%, amounting to $21 mn. thousand tonnes, leading to the significant decreases in the TPP’s’ power generation In 2008, Service Invest completed the recon- costs. struction of the 110 KW Yenakiyevo substa- tion, with the 2008 investment of $2.2 mn Within the framework of the 2008 recon- (total investment, $5.74 mn). struction program, the first stage of DTEK power generating enterprises modernization Within the framework of the Konstantinovka program was completed. The second stage town industrial production facilities mainte- began which includes the reconstruction of nance and expansion program, Service Invest Zuyevskaya TPP power generating unit #1, began the reconstruction of the Konstanti- Kurakhosvkaya TPP power generating-unit novka substation, aimed at improving main- #7, and Luganskaya TPP power generating tenance and adding capacity to the Konstan- unit #10. tinovka town’s industrial zone. The first stage of project implementation involved $5.5 mn Ô DTEK’s energy distribution enterprises, Serv- of investment, while the overall planned ice-Invest and PES-Energougol, – are imple- project budget is $6 mn. Coal mining in Ukraine, 4.4% Komsomolets Donbassa 2008 3.4 mn tonnes 100% = 77.8 mn tonnes 18.2% Pavlogradugol 14.2 mn tonnes 77.4% Other coal mining enterprises 60.2 mn tonnes
  • 45. SCM Group’s businesses > Core business areas 45 Ô In 2008, at Dneproenergo, a DTEK associat- well as ensures the standardization of busi- ed company (DTEK owns a 47.5% stake), ex- ness applications for all DTEK enterprises. penditures on repairs and power generating The implementation of SAP solutions at DTEK unit reconstruction amounted to $77.1 mn. enterprises will be done simultaneously for all industrial sectors: coal mining, energy Ô DTEK signed an agreement for purchasing generation, and energy distribution. SAP industry solutions, in order to create a unified business management sytem across Ô DTEK plans to invest about $960 mn in the all its enterprises. The implementation of modernization of its energy generating en- the corporate SAP ERP system is planned for terprises before 2016. It is intended that 2008-2010, for all DTEK’s main enterprises. between two to three power generating units The business process automation project of Vostokenergo TPPs (Zuyevskaya, Kura- includes the implementation of the follow- khovskaya, and Luganskaya) will be recon- ing SAP solutions: SAP ERP – enterprises structed annualy. resource planning; SAP for Energy and SAP for Utilities – industry solutions, as well as Because of the worsening economic situation, SAP budgeting and consolidation solutions. DTEK’s internal ivestment program will be re- The implementation of SAP solutions delivers viewed to ensure the existing investment projects high information support levels for all areas are maintained, with implementation periods re- of DTEK activity, helps create an effective vised and partially extended. communication system within the Group, as Distribution of thermal power 9.8% Donbassenergo generated (by TPPs) in 2008 6.44 bn Kw•hour 100% = 65.66 bn Kw•hour 20.6% 25.4% Vostokenergo Zapadenergo 13.6 bn Kw•hour 16.79 bn Kw•hour 22.3% Dneproenergo 14.73 bn Kw•hour 21.9% Centrenergo 14.43 bn Kw•hour
  • 46. SCM Group Public Report 2008 46 COAL MINING POWER GENERATION POWER DISTRIBUTION Total in Ukraine, 2008 Total in Ukraine, 2008 Total in Ukraine, 2008 Coal mining – 17.6 mn tonnes Power Generation 31.5 Tw•hour Power Distribution 13.5 Tw•hour 20.9% DTEK 27.1% DTEK 5.4% DTEK Risk Management tions in the company, evaluating the internal control and risk management system effectiveness. DTEK’s approach to risk management implies an integrated internal control system, based on the According to DTEK’s latest risk evaluation re- strategic planning. sults, in 2008 the most significant business risks for the company are market, financial, regulatory, Since 2007, DTEK regularly identifies and evalu- and operational. ates risks, with mitigation measures further de- veloped. Risk management at DTEK is instituted Market Risks in all key decision-making processes, including, but not limited to: investment project risk analy- DTEK is prone to the changes in market prices for sis and an improved system of budget control. coal and thermal power, supplied to the whole- sale market. The minimization of the market Risk management and monitoring are primarily risks is achieved by changing the sales structure done by DTEK management. The risk manage- and expanding the markets for coal and thermal ment and internal control functions are repre- power sales. sented both, on the managing company level and on the enterprise level. The decisions regarding The market risks are lowered, due to DTEK verti- appropriate risk levels are made by DTEK’s Exec- cally-integrated business structure, allowing it to utive Council and the governing bodies of respec- minimize the threat of its power generating facili- tive enterprises. An Internal Audit Department func- ties lacking raw materials supply.
  • 47. SCM Group’s businesses > Core business areas 47 Financial Risks risk is achieved by supporting the target absolute liquidity ratio. The mechanism of monetary funds DTEK takes into account the following financial risks: planning and management allows DTEK to effi- credit, currency, liquidity, regulatory, and operational ciently react to changes in the internal and exter- nal environment. Credit risk is related to the way Energorynok State Enterprise sells electric energy to end us- Regulatory risk ers. Management of the credit risk is executed on the enterprise level, with DTEK’s general oversight. Because pricing in the coal and electric energy markets in Ukraine is regulated by the govern- When supplying electric energy to the industrial ment, DTEK could face regulatory risks. To miti- clients, DTEK enterprises are monitoring the gate these risks, the company actively partici- state of accounts receivable and are entitled pates in the law-making process, (strictly in line to switch off users for non payment. One of the with Ukrainian legislation), including the develop- most significant risk factors is the ‘ecology pro- ment of the new energy market model. tection energy supply’ status, applied to specific energy users (mainly state-owned coal mines). Operational risk Mines which have been given this status by gov- ernment cannot be disconnected if they fail to As a production company, DTEK pays special pay their energy bills. DTEK enterprises are cre- attention to monitoring and mitigation of the ating reserves to cover for the risk of outsanding operational risks. The programs are being imple- debt, in order to ensure financial stability during mented on all Group levels to lower the opera- the economic crisis. tional costs and increase production processes effectiveness. Emergency plans are also in place Currency risk for DTEK is limited as most of the to respond to and mitigate efficiently the conse- company’s sales revenue and expenses are re- quences of industrial accidents and outages. ceived and spent in the Ukrainian national cur- rency. Currency risks only emerge in relation to In terms of operational activity, priority risk man- DTEK’s debt obligations, partially denominated in agement areas for DTEK are labor safety, the en- foreign currency, and in relation to the purchases vironment, and production continuity. within the framework of investment projects. Management of currency risks mainly provides To effectively mange the operational risks, DTEK for the decreased open currency position by bal- actively uses insurance. The company has a spe- ancing the structure of assets and debts, nomi- cific insurance protection concept developed. nated in one currency. This is achieved by holding This concept is implemented on the central level, various currencies to avoid risk of over exposure by a designated company department, to provide to a single currency, as well as by targeted ef- a unified approach to cooperating with insurance forts, aimed at increasing the foreign currency companies and to optimize insurance premiums. share in DTEK’s overall revenue. The insurance system provides for the protection of DTEK’s interests and includes property insur- Liquidity risk is mitigated by DTEK diversifying ance, coverage of losses caused by production its range of counterparties, optimizing the terms outages, as well as payments under mandatory of agreements related to payment periods, and insurance policies. When arranging for the insur- implementing programs, aimed at decreasing ance coverage, DTEK considers the complete- operational expenses and increasing business ness of coverage, terms and conditions, as well process effectiveness. The minimization of this as the reliability of risk leveraging.
  • 48. SCM Group Public Report 2008 48 Financial services. Banking and insurance FINANCIAL SERVICES IS ONE OF SCM GROUP’S KEY BUSINESSES. SCM FINANCIAL SERVICES BUSINESS IS REPRESENTED BY TWO BANKS (FIRST UKRAINIAN INTERNATIONAL BANK AND DONGORBANK) AND TWO INSURANCE COMPANIES (ASKA INSURANCE COMPANY AND ASKA- LIFE). FINANCIAL SERVICES ENTERPRISES First Ukrainian International Bank is one of the largest banks in Ukraine. It is a diversified banking institution serving both, corporate and individual clients, as well as handling investment banking. The bank is national in scale and has a diverse country-wide network, covering 24 regions of Ukraine. The bank’s regional network con- sists of 130 branches. Dongorbank is a diversified banking institution and one of the largest banks in the country, according to the Na- tional Bank of Ukraine classification. Dongorbank is one of the market leaders in Donetsk region. The key regions of presence are the Eastern Oblasts of Ukraine and Kiev. The bank’s regional network consists of 54 branches. ASKA is one of the leading insurance companies in Ukraine and the country’s first non-government insurer. It is licensed to provide 16 types of optional insurance and 10 types of mandatory insurance. ASKA-Life is one of the Ukrainian market leaders in life insurance, providing a full range of relevant services. SCM Group financial services development strat- Investment egy is aimed, primarily, at the long-term value growth of banking and insurance businesses. We In 2008, First Ukrainian International Bank constantly strive to increase the effectiveness opened 24 new branches. As result, by the end of and the competitiveness of our financial institu- the year, the bank’s regional network consisted of tions. 141 branches. Dongorbank opened 16 new branches, thus, expand- Investment sources ing the regional network to a total of 54 branches. First Ukrainian International Bank organized a In order to implement ASKA strategic develop- private placement of an additional issue of its ment plan (maintaining leadership positions in shares, worth over $208 mn and this was fi- the insurance services market), as well as to in- nanced by the shareholders. Thus, the bank’s crease the company’s solvency and liquidity lev- statutory fund exceeded $325 mn. els during the recession, a private placement of an additional issue of company shares was organized, Dongorbank statutory capital was increased by worth $6.9 mn and funded by the shareholders. $72 mn, and as result amounted to $100.6 mn. Thus, ASKA statutory fund amounted to $18.8 mn.
  • 49. SCM Group’s businesses > Core business areas 49 Banking and Insurance key indicators 2007 2008 Dynamics, % Banking: First Ukrainian International Bank – top; Dongorbank - bottom 2,241,20 2,317,80 +3.42 Assets, mn $ 1,050,10 1,007 -4.1 482,70 451,16 -6.53 Capital, mn $ 106,50 140 +31.45 1,281,70 1,447,20 +12.91 Commercial loans, mn $ 493,80 466 -5.6 402,80 582,30 +44.56 Personal loans, mn $ 135,60 218 +60.8 Insurance: ASKA – top; ASKA-Life – bottom 66,30 52,90 -20.2 Assets, mn $ 23,90 19,40 -18.8 42,60 41 -3.8 Capital, mn $ 3,30 2,50 -24.2 66,20 77,10 +16.46 Insurance premiums, mn $ 6,10 5,40 -20.2 45,20 26,90 -18.8 Insurance payouts, mn $ 0,20 1,50 -3.8 Risk Management In the first half of the year, credit institutions re- tained their access to capital markets, though in Banking the second half of the year the situation radically changed. The main problem of Ukraine’s banking In 2008, the financial and economic crisis sig- system was sharply declining liquidity, caused by nificantly influenced the Ukrainian economy, par- the significant outflow of clients’ funds and inability ticularly, its financial services market. of the banks to attract new funds to replace them.
  • 50. SCM Group Public Report 2008 50 The 4th quarter of 2008 was the most difficult The approaches to granting new loans were re- period of the year for banks, when the rapid na- viewed, and new strict requirements covering tional currency devaluation and growing public borrowers’ financial state were instituted. distrust towards the banking sector led to the mass outflow of clients’ deposit funds. In its turn, Special attention was paid to offer debt restruc- this led to a severe banking system liquidity defi- turing programs to clients whose businesses suf- cit, decline in the quality of assets, and the threat fered from the economic crisis. of bankruptcy for a range of banks. In 2008, a system of collateral evaluation was re- As result of hryvnya devaluation in relation to the viewed, to ensure better quality handling of such US dollar and Euro, borrowers’ ability to service collateral and controlling credit risks. their obligations to banks declined, this prima- rily involved foreign currency loans. As result, the Efficient measures, aimed at improving the struc- number of non-performing loans increased. ture of loan agreements, as well as the mecha- nisms for detecting potentially non-performing In this regard, First Ukrainian International Bank loans, has allowed First Ukrainian International and Dongorbank’s top management focused Bank and Dongorbank to control the number and their efforts on supporting the banks’ liquid- dynamics of outstanding liabilitites. ity. The effective liquidity management policy al- lowed both banks to comply with all norms, in- Insurance stituted by the National Bank of Ukraine (NBU), as well as timely fulfill their obligations before The banking system crisis significantly influenced clients and to service the received loans. the operations of insurance companies. The most critical problem for the insurance sector in 2008 In order to manage the liquidity risks, both banks was caused by insurance companies holding are using the long-term evaluation with 9 months- their reserve funds mainly on deposit accounts long planning range. Scenario and stress-testing in banks. Consequently, any delay in the return of are also applied to assess the current liquidity state. those funds by the banks could significantly damage the financial state of insurance companies’ clients. In managing the operational risks, a reporting and key indicators diagnostics system is used to In the unstable economic situation and the re- target all types of risks, react to them, and pre- lated pessimistic consumer expectations, insur- vent their emergence in the future. ance companies could not afford to delay on set- tling claims. Otherwise, the unfounded decline For loan portfolio monitoring, a multi-level sys- and delays in paying claims could lead to rapidly tem is applied across all levels of the banks’ op- growing consumer distrust, not to a specific com- erations – from the point of sale, to the analytics pany, but towards insurance sector as a whole. produced by experts at the head office. To provide for the timely and complete fulfillment of Both banks conduct an integrated analysis of SCM Group’s insurance companies’ obligations to credit risks on a regular basis, constantly working their clients, the shareholders made a decision to on the improvement of risks control procedures. increase the statutory fund of ASKA and ASKA-Life. In 2008, the banking retail segment underwent Additionally, thorough cost optimization pro- significant changes in terms of the approach to grams were implemented at both companies. client and subcontractor data verification.
  • 51. SCM Group’s businesses > Opportunity businesses 51 Opportunity businesses Telecommunications. Vega VEGA TELECOMMUNICATIONS GROUP IS UKRAINE’S LARGEST PRIVATE FIXED-LINE OPERATOR AND PART OF SCM GROUP’S TELECOMMUNICATIONS BUSINESS. VEGA CURRENTLY OCCUPIES LEADERSHIP POSITIONS IN THE UKRAINIAN FIXED-LINE TELEPHONE CONNECTION, BROADBAND INTERNET ACCESS, AND DATA TRANSFER MARKETS. Vega entered Ukraine’s telecommunications Risk Management market on October 15, 2008, as result of Farlep- Optima-CSS Group rebranding. Vega Telecom- The economic crisis influenced the dynamics of munications Group possesses a full range of telecommunications services consumption, pri- licenses to provide fixed-line services across marily in the corporate segment. The budgets for Ukraine. Services include local, inter-city, and office telephone and internet connection were international telephone connection, as well as among the first ones to be optimized by Ukrain- transmission channel rental. Vega Telecommuni- ian companies. The decline in demand for corpo- cations Group provides services in 40 cities and 2 rate services stimulated Vega Group to review its population settlements, in 17 Oblasts of Ukraine. development plans and to start actively targeting The number of broadband subscribers in Ukraine the consumer market. Significant growth of the had grown 105,000 by the end of 2008. Vega US dollar exchange rate impacted on Vega Group broadband subscriber base has grown during expenses, especially in terms of equipment pur- the same time period by almost 50%, with almost chases from foreign suppliers. Vega managed 95% of the new connections made outside Kiev. to maintain its liquidity level by instituting the Vega Telecommunications Group has developed following measures: regular client funds inflow, its own powerful country-wide baseline network. current bank financing, loan and subcontractor debt restructuring, and outstanding debt control. Operations management of Vega Telecommuni- These measures allowed the company to support cations Group is undertaken by Farlep-Invest. sufficiently its liquidity level and to fulfill its obli- gations to its partners. The decision was made to decrease the number of the companies in Vega Investment Telecommunications Group legal structure – from 45 to 25. The Vega Group structure, based In 2008, the total investment by Vega Group on the fewer companies, will ensure greater amounted to $36.3 mn, with the main invest- business effectiveness and will optimize service ment priorities being: expanding the regions of provision for customers across the country. Vega presence and building up the company’s tech- Group long-term plans generally remained un- nology base. changed. These are the development of a FTTB (Fiber To The Building) connection service, IPTV The Group purchased Telecom-Ukraine (Donet- (Internet Protocol TV), and other content servic- sk) and Digital Connection Systems (Odessa), es, as well as client servicing improvements. Rig- two local telecommunications operators, thus, orous operational costs optimization programs expanding its geographical reach. are being implemented across Vega Group.
  • 52. SCM Group Public Report 2008 52 Real estate. ESTA holding ESTA HOLDING (KNOWN AS SCM ESTATE PRIOR TO 2008) IS THE SECTORAL HOLDING, MANAGING SCM GROUP’S ASSETS IN REAL ESTATE AND THE HOTELS. THE COMPANY WAS ESTABLISHED IN MAY 2006, IN ORDER TO CONSOLIDATE ALL SCM ASSETS IN REAL ESTATE UNDER A SINGLE MANAGING ENTITY. ESTA Holding manages a number of ongoing ESTA Holding land bank: projects1 in the real estate sector: Ô Multi-functional complex on Moskovskaya Ô Pushkinskiy multi-functional complex in the Street in Kyiv. Class A project, conveniently center of Donetsk. A class A project with the located, with a good traffic interchange, and total area of 52,600 square meters. Total in- with a total area of about 200,000 square vestment of $130 mn. meters. Total investment volume: $500 mn. Ô Multi-functional complex on Frolovska Street Ô Suburban residential complex, South of Kiev. in Kiev, with the total area of over 70,000 A unique complex, with the total area of 43 square meters. Total investment $200 mn. hectares, located by a lake. Total investment of: $200 mn. ESTA Holding investment projects: ESTA Holding also owns large land plots in Donet- Ô Donbass Palace Hotel – a five-star hotel sk, Dnepropetrovsk, Poltava, and Crimea. in the center of Donetsk. The World Travel Awards Association declared it the best ho- tel in Ukraine in 2005, 2006 and 2007. Total Risk Management rooms: 129. The financial and economic crisis resulted in Ô Opera Hotel – a five-star hotel in the center of negative dynamics for all real estate market seg- Kiev. In 2007, it was recognized as the best ments. Following this market trend, SCM Group new business hotel in Europe (by The World reviewed its strategic plans for real estate, lim- Travel Awards Association). Total rooms: 138. iting the number of development projects, and concentrating on the key, non capital-intensive Ô Leonardo Business Center – a multi-func- segments. tional complex in the center of Kiev. Total area: 38,000 square meters. To implement the selected projects, experienced partners will be selected who are interested in, Ô Office buildings in Kiev and Donetsk. and capable of investing in the Ukrainian real es- tate market. Ô Logistics complex in Dnepropetrovsk. ESTA Group’s development is supported primari- ly from its own funds, thus, significantly minimiz- ing currency and financial risks. 1 The ongoing projects are the projects being implemented during the reporting period
  • 53. SCM Group’s businesses > Opportunity businesses 53 Media MEDIA ASSETS UNDER SCM GROUP MANAGEMENT ARE CONCENTRATED IN THE THREE SEGMENTS: TELEVISION, PUBLISHING, AND INTERNET. Ukraine Media Group Kharkov, Donetsk, Dnepropetrovsk, and na- tional editions is about 130,000 copies. Ô Ukraine Television Channel is one of Ukraine’s leading nationwide television channels. Ac- Ô Vecherniy Donetsk newspaper – a regional cording to Gfk Ukraine’s latest people meter edition, aimed at a wide readership of all panel data, Ukraine Television Channel is ages and social groups. Distributed in Donet- number 6 in the Ukrainian national TV chan- sk and Donetsk Oblast. nels rating. The average audience share of the Channel in 2008 was 5.86%, with a rat- Ô Donetskie Novosti – a weekly newspaper ing of 0.85% amongst 18+ audience in cities and Donetskie Novosti Kurier, a free advertis- with population exceeding 50,000 people. ing weekly. Distributed in Donetsk. Ô Football Television Channel is Ukraine’s first Ô Salon Dona i Basa – socio-political newspa- specialized channel, dedicated exclusively to per featuring classifieds and advertising. Dis- football. The channel is broadcast through tributed in Donetsk and Donetsk Oblast. cable television networks. Ô RIO newspaper – positioned in the segment Ô News Television Channel is a specialized of inexpensive TV-guides; promoted as an at- news channel that will be broadcast exclu- tractive advertising medium. Distributed in sively through cable television networks. The Donetsk and Donetsk Oblast. channel launch is planned for 2010. Ô Priazovskiy Rabochiy – large socio-political Ô Digital Ventures is managing a range of on- newspaper, targeting the South of Donetsk line entertainment resources: Glamurchik. Oblast. Distributed in Mariupol and Donetsk com, Nightlife.ua, Yashik.tv, E-motion, Tut- Oblast. atama.com, Astrogid.com, E-movie. Ô Mariupolskaya Nedelya – weekly family Publishing newspaper. Distributed in Mariupol and adja- cent rural areas. SCM Group’s publishing business is consolidat- ed under the Segodnya Multimedia holding that Ô Dom Sovetov newspaper – entertainment executes strategic management of the following edition featuring practical advice regarding: printed editions: housekeeping, gardening, growing vegeta- bles, cuisine, fashion, treatment, flowers. Dis- Ô Segodnya newspaper – ranks number 1 by tributed in Mariupol and the adjacent areas. popularity in Kyiv, Odessa, and Donetsk and ranks number 2 among Ukraine’s daily news- Ô Privet, Rebyata! newspaper – youth-oriented papers (source: TNS Global). The average cu- edition. Distributed in Mariupol and Donetsk mulative daily circulation of the Kyiv, Odessa, Oblast.
  • 54. SCM Group Public Report 2008 54 Ô Tvoe newspaper – all-Ukrainian edition fea- Segodnya newspaper, with editorial content suit- turing a variety of consumer information and ed to the interest of these cities’ population. This practical advice. initiative helped draw Segodnya closer to its au- dience and strengthen its market position. Ô Vecherkom newspaper – free evening infor- mation and entertainment newspaper. Dis- Priazovskiy Rabochiy newspaper increased its tributed in Kiev. statutory fund by $1.6 mn. The funding will be used for business development and printing In addition to printed editions, Segodnya Multi- plant modernization. media manages the following online-resources: www.segodnya.ua, www.dnews.donetsk.ua, www. In April 2008, Vecherkom free newspaper en- pr.ua, www.salon.donetsk.ua, www.vecher.com.ua. tered the Kyiv newspaper market – in convenient and innovative evening format. The holding also manages its own production fa- cilities: the modern Segodnya Multimedia print- Segodnya Multimedia launched a new printed ing house in Vyshgorod which offers a range of product – Tvoe newspaper. Tvoe offers its read- full-color printing services. ers a variety of consumer information and practi- cal advice. Most of the editorial is supported by journalists’ investigations on consumer issues or Investment by the industry expert opinion. The new 32-page edition will be published biweekly on Fridays, in Ukraine media-group an A3 format. The overall newspaper circulation will be around 30,000 copies. Football Television Channel began broadcasting in November 2008. It is the first television chan- nel in Ukraine, dedicated exclusively to football. Risk Management The channel will be broadcasting exclusively through cable television networks. Economic and financial crisis significantly influ- enced the Ukrainian advertising market. Follow- In the course of 2008, Ukraine Television Chan- ing this market trend, SCM Group reviewed and nel continued to develop its own programming, adapted its media business strategy at the end allowing it to expand the channel’s audience of 2008. base. Necessary measures were taken to provide for In June 2008, Ukraine media group created Dig- SCM Group media assets stability, in order to en- ital Ventures, a company which will manage a sure the long-term objective of them taking lead- range of SCM Group’s internet resources. In the ership positions in their respective segments. long-term Digital Ventures is expected to occupy a leadership position in Ukraine’s digital media market. Segodnya Multimedia publishing holding In 2008, Segodnya Multimedia holding began the implementation of new projects. These were the localized editions of Kharkov and Donetsk
  • 55. SCM Group’s businesses > Opportunity businesses 55 Clay mining. United minerals group UNITED MINERALS GROUP (UMG) MANAGES SCM GROUP’S ASSETS IN CLAY MINING. THE COMPANY IS ONE OF THE WORLD LARGEST SUPPLIERS OF CLAY FOR CERAMICS, PORCELAIN, AND FIREPROOFING INDUSTRIES. THE PRODUCTS MADE BY UMG COMPANIES ARE SOLD IN 20 DIFFERENT COUNTRIES, INCLUDING UKRAINE, RUSSIA, ITALY, SPAIN, TURKEY, INDIA, AND POLAND WITH 87% OF SALES ARE GENERATED ABROAD. THE COMPANY PRODUCES CLAY UNDER SUCH BRANDS AS VESKO KERAMIK, VESKO GRANITIK, VESKO PRIMA, DN-1, DN-2, AND OTHERS. Currently, UMG owns three major clay mining Ô Druzhkovskoye Mines Management special- companies: izes in mining and processing clay for the ceramics, china, and fireproofing industries. Ô Vesko specializes in mining and processing It is the biggest supplier of clay to Belarus, as clay for the ceramics, china, and fireproof- well as one of the biggest suppliers of clay to ing industries. It is the biggest supplier of Italy, Spain, and Turkey. Annual volume of clay clay in Ukraine and Russia, as well as one of extraction is 0.8 mn tonnes. the biggest in Italy, Spain, Turkey, India, and the United Arab Emirates (UAE). The annual Ô Ogneupornerud specializes in clay mining for volume of extracted clay is 1.7 mn tonnes. the ceramics, china, and fireproofing indus- tries. Annual volume of clay extraction is 0.5 mn tonnes. United Minerals Group key indicators 2007 2008 Dynamics, % Sales volume, mn $ 77,4 94,9 +22.61 Asset value, mn $ 131,3 99,6 -24.14 EBITDA, mn $ 31,7 31,0 -2.21 Net profit, mn $ 23,4 22,2 -5.13 Clay mining, mn tonnes 3,0 3,0 0
  • 56. SCM Group Public Report 2008 56 Investment The necessary inventory volumes in warehouses, as well as the availability of the financial resourc- The total volume of UMG capital investment in es to support production and sales, allowed the 2008 amounted to $7.5 mn: company to maintain partner relations with cli- ents and subcontractors. UMG was able to fulfill Ô $0.5 mn – purchasing land plots for future its obligations to customers to provide stable clay development and clay products supply as well as to maintain product quality. Ô $5.1 mn – purchasing equipment, vehicles, and gear; UMG implemented operational costs optimiza- tion programs for all of its enterprises, to ensure Ô $1.4 mn – construction costs; a high level of production effectiveness and func- tional cost structure. Ô $0.4 mn – project documentation costs; Ô $0.1 mn – software installation. Risk Management In the first half of 2008, the demand for clay in the market significantly exceeded supply, creat- ing a deficit. There were also logistical complexi- ties related to clay transportation, due to the lack of railway cars available, limited port infrastruc- ture, and sea transportation difficulties. By the end of 2008, the consumption of ceramic clays declined sharply due to shrinking sales of tiles and bricks, caused by recession. Due to the correct and timely information received from the markets, UMG managed to foresee the impact of the financial crisis on the clay mining sector. The company froze its capital investment program, cut costs, and decreased production volumes, starting in the autumn of 2008. UMG also reorganized its business, having optimized approximately 50% of personnel.
  • 57. SCM Group’s businesses > Opportunity businesses 57 Retail trade. Ukrainian retail THE MAIN TASK OF UKRAINIAN RETAIL IS MANAGING AND DEVELOPING THE RETAIL TRADE BUSINESS UNDER THE BRUSNYTSYA BRAND. THE MAIN GOAL OF THE COMPANY IS TO CREATE AND OPERATE ONE OF THE LARGEST RETAIL CONVENIENCE STORE CHAINS IN UKRAINE. THE BRUSNYTSYA CHAIN OPERATES THE CONVENIENCE (OR 'NEIGHBORHOOD') STORE FORMAT, WITH FLOOR SPACE OF 300–400 SqUARE METERS AND PRODUCT RANGE OF 4,500 ITEMS. The main competitive advantages of the Brus- 4th quarter of 2008, the turnover in all Ukraine’s nytsya chain include: compact space, carefully retail chains significantly decreased. As result, selected product range, optimal numbers of Ukrainian Retail reviewed its business develop- staff, and a high level of customer service. One ment strategy, as well as devised and started of Brusnytsya’s main competitive advantages, implementing a plan to deal with the recession. compared to the large stores, is targeted and ef- ficient response to the consumer preferences in To provide for the financial stability of Brusnytsya each geographic location. retail chain, the following measures were taken: Brusnytsya retail chain geography includes Ô rigorous financial planning; Donetsk, Lugansk, Kharkov, Dnepropetrovsk, and Zaporozhye Oblasts. Ô optimization and decrease in operational costs; Investment Ô increasing stock turnover and marginal rev- enue; In 2008, the total investment volume in Brus- nytsya retail chain development amounted to Ô increasing the additional revenue from the $51.5 mn. Most of this funding was used to ac- non-operating activities; quire property and equipment, necessary for the chain’s operational activity. During 2008, Brus- Ô increasing the effectiveness of marketing ef- nytsya opened 24 new stores, taking the overall forts. number of Brusnytsya stores to 39. Ukrainian Retail managed to maintain its busi- During the year First Ukrainian International ness liquidity level, due to the strict implemen- Bank also opened a $8.9 mn line of credit for tation of budgets; rigorous financial control; Ukrainian Retail. reviewed payment terms under all agreements; inventory surplus control; reviewed product mix and efficient accounts payable / receivable anal- Risk Management ysis. The economic crisis and the national currency devaluation significantly lowered the purchas- ing capacity of the Ukrainian population and led rising prices for imported food products. In the
  • 58. SCM Group Public Report 2008 58 Petroleum products retailing SCM GROUP HAS BEEN SUCCESSFULLY OPERATING IN THE PETROLEUM PRODUCTS WHOLESALE AND RETAIL TRADE SINCE 1995. IN SCM’S PORTFOLIO, THIS BUSINESS IS REPRESENTED BY THE CHAINS OF PETROL STATIONS, OPERATING UNDER THE PARALLEL, GEFEST, AND PITSTOP BRANDS. FOLLOWING THE ONGOING CORPORATE TRANSFORMATION PROGRAM, THE MANAGEMENT RIGHTS TO 69 PETROL STATIONS IN THE 9 OBLASTS OF UKRAINE (DONETSK, KIROVOGRAD, LUGANSK, ZAPOROZHYE, DNEPROPETROVSK, SUMY, KHARKOV, ZAKARPATYE, AND CRIMEA) WERE TRANSFERRED TO PARALLEL NAFTA (CYPRUS), AN SCM ‘DAUGHTER’ COMPANY. The chain of petrol stations operating under the The Group’s main petroleum suppliers are: Maz- Parallel brand is positioned in the premium mar- eikiu Nafta (Lithuania), Rompetrol Ukraine, Be- ket segment, serving both wholesale and retail larus Oil Company, Ukrtatnafta, TNK BP, Logrus- customers. AMT, Vikoil, and Slavyanskiye Nefteprodukty (Belarus). The chain of petrol stations operating under the Gefest brand is positioned in the mid-market In 2008, Parallel Nafta sold 252.2 mn liters of segment, offering a wide selection of fuel brands. petroleum products. The chain of gas stations operating under the PitStop brand is targeted at younger drivers serv- Investment ing individual customers who are ‘young in spirit’ and love fast driving. PitStop gas stations offer In 2008, the total volume of investment in Paral- their clients high quality regular and branded lel Nafta’s development amounted to $4 mn. fuel, as well a wide range of additional services. In the course of the year, 7 gas stations were re- The mini-market chain operating at the petrol constructed, following the change of brand from stations under ZZZIP!! brand (33 mini-markets) Gefest to Parallel. Additionally 10 mini markets offers a variety of associated goods and food and 7 car washes were opened, 6 petrol tanker products, as well as operateing 13 car washes. trucks and 1 gas tanker truck were purchased. Parallel Nafta serves as an exclusive light oil Gefest, Donbassnefteprodukt, and PitStop supplier to Gefest, PitStop, and Donbassnefte- chains joined the Card Blanche loyalty program produkt chains of gas stations, as well as pro- for individual clients, previously launched at the vides fuel storage and transportation services. Parallel chain. The company operates its own fuel testing and quality control facilities (an accredited labora- A new automated light oil discharge system was tory). The company also owns the largest petro- installed at the Donetskgornefteprodukt petro- leum storage depot in Donetsk, as well as a fleet leum storage depot, helping to decrease the of modern petrol and gas tankers. number of fuel measurement inaccuracies by more than five times.
  • 59. SCM Group’s businesses > Opportunity businesses 59 A satellite distance tracking system was in- stalled, for remote monitoring of the movement of company’s tanker truck fleet. Risk Management Due to the low debt ratio, Parallel Nafta is finan- cially stable. The company supports its develop- ment using its own funds. The company 2012 development strategy did not undergo significant changes. The reconstruction of several Gefest gas stations will be continued to prepare them for operation under the Parallel brand. Purchasing of land plots for further con- struction of new gas stations is planned. The development of the ZZZIP!! mini-market and car wash chain will be continued within the frame- work of rebranding. Additionally Parallel Nafta is planning to invest in loyalty programs for individ- ual and corporate clients, as well as in strength- ening the market positions of its brands.
  • 60. SCM Group Public Report 2008 60 SCM sport Shakhtar Football Club first row of seats is located close to the football pitch and then the seating rises in three tiers FC Shakhtar (Donetsk) has a 70-year history of from pitch side , ensuring an excellent view for achievement and has the skills and profession- all spectators. To ensure the comfort of spectators alism of its football players and trainers, as well with special needs and their companions, 170 spe- as their teamwork and fighting spirit to thank for cial seats were also included in the stadium design. its sporting successes. SCM and FC Shakhtar are leaders whose cooperation is aimed at develop- Donbass Arena will also feature three restau- ing Ukrainian football as a whole. Shakhtar has a rants, four bars for season tickets holders, a track record of success having won the Ukrainian lounge bar, as well as dozens of fast-food restau- Championship (2002, 2005, 2006), the Ukraine rants, shops, and a fitness center. FC Shakhtar’s Cup (1995, 1997, 2001, 2002, 2004), and the fan-cafe, museum, and brand shop will be lo- Ukraine Super Cup (2005). The club’s budget cated at Donbass Arena. In the interim between for the 2007/08 season was $80 mn. Both in football seasons, Donbass Arena will host corpo- Ukraine and abroad, there are more than 90 ac- rate events – meetings, presentations, press-con- tive FC Shakhtar fan clubs officially registered. ferences and business receptions. The stadium will The football club has a well-developed sporting also host international conferences and exhibitions. infrastructure that includes, among others, a modern training base (originally opened in 1990) Guided tours will become a special attraction and a football academy. for the stadium. The concept for the future tours includes exploring Donbass Arena’s unique characteristics, visiting the dressing rooms and Donbass Arena Stadium behind the scenes facilties used by the football players, visiting FC Shakhtar’s museum, and fi- A new 50,000-seat home stadium, named the nally, gift-shopping at the FC Shakhtar store. Be- Donbass Arena, is the first in Eastern Europe to sides football matches, concerts and entertain- be designed and built, in compliance with UEFA’s ment shows will also take place at the stadium. 5-star standard. The overall investment in the Donbass Arena’s excellent equipment and sound stadium and the surrounding park amounted system will allow it to host not only local perform- to $400 mn. The construction works began in ers, but also international superstars. All events 2006, with ENKA as general subcontractor. The taking place in the football field can be simul- construction completion and the stadium launch taneously broadcast on two giant LED-screens, are planned for 2009. Donbass Arena design each of 100 square meters. The field’s perimeter was developed by ArupSport, which was also will be equipped with the latest electronic adver- responsible for several of Europe’s well-known tising boards, with a total length of 200 meters. stadiums, such as Manchester City’s City of Man- chester Stadium (England), Bayern Munich’s Al- Donbass Arena is FC Shakhtar’s home stadium lianz Arena (Germany), Espanyol’s new stadium and the cultural center of Donbass’ capital, (Barcelona), and the ANZ Stadium, Sydney (Aus- Donetsk. In addition, the stadium is being con- tralia).The arena was designed as single sweep- sidered as a possible arena to host the Cham- ing bowl giving excellent views of the pitch and pions League final, the Europa League Final, as generating a good asmosphere in the stadium well as international games including the Euro rather than as for individual grandstands. The 2012 championship.
  • 61. SCM Group’s businesses > Associated companies 61 Associated companies THE ASSOCIATED COMPANIES ARE COMPANIES, WHERE SCM GROUP IN ITS ROLE AS AN INVESTOR IS CAPABLE OF SIGNIFICANT INFLUENCE, PARTICULARLY, WITH REGARD TO DEFINING THEIR FINANCIAL AND OPERATIONAL POLICY, BUT WITHOUT EXERCISING FULL CONTROL. SCM IS INVOLVEMED IN DEFINING FINANCIAL AND OPERATIONAL POLICY OF THE ASSOCIATED COMPANIES THROUGH ITS REPRESENTATION ON THE BOARD OF DIRECTORS. SCM’S SHARE IN SUCH COMPANIES IS NO LESS THAN 20% OF THE VOTING RIGHTS. Mining and metals Krivoy Rog Iron Ore Plant – Ukraine’s largest producer of iron ore – 49.94% shares. Zaporozhkoks (Zaporozhye Coke and Chemical Plant) – Ukraine’s leading coke and chemical enterprise with a full technology cycle for chem- Energy ical-recovery and product processing – 24.99% shares. Dneproenergo – Ukraine’s second largest elec- tric power producer, with 22.1% share of the Donetskkoks (Donetsk Coke and Chemical thermal power generation market. Dneproen- Plant) – one of Ukraine’s largest coke and chem- ergo production facitlities include three thermal ical enterprises, producing over 20 products – power plants (TPP) – Zaporozhskaya, Krivorozh- 24.5% shares. skaya, and Pridneprovskaya – with cumulative installed capacity of 8.2 GW/hour, amounting Dokuchayevsk Flux and Dolomite Plant (DFDK) to 30% of the cumulative installed capacity of all – one of Ukraine’s largest mining enterprises, TES’s in Ukraine – 47.5% shares. specializing in fluxing limestone and dolomite extraction and processing, and the largest pro- Donetskoblenergo – specializes in electric ducer of fired dolomite for metallurgy. It is also power distribution at regulated tariffs and its the only plant in Ukraine to produce powders for supply using local electric networks – 30.59%. refractory materials – 49.98%. Novotroitskoye Mines Management – a large Telecommunications mining enterprise, specializing in limestone and dolomite extraction and processing for metal- Astelit – a national operator, providing mobile lurgy, refractory, glasswork, and the sugar indus- communication services in GMS 900 and GSM tries – 49.975% shares. 1800 standards, operating under the life:) brand – 44.96% shares. Krivbasszvryvprom Explosives Company – in- dustrial production enterprise, specializing in ex- MMDS Ukraine – a telecommunications com- plosion works in open casts Ukrainian mines. It is pany providing digital television services and also a large producer of emulsion and hydrolabile internet access, based on MMDS (Multichannel explosives – 46.58% shares. Multipoint Distribution System) – 25% shares.
  • 62. SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT
  • 63. Social responsibility and sustainable development 63 SCM GROUP HAS A MAJOR IMPACT ON THE SOCIAL AND ECONOMIC DEVELOPMENT OF UKRAINE AND FULLY RECOGNIZES ITS OBLIGATIONS TO UKRAINIAN SOCIETY. IN THE COURSE OF ITS ACTIVITY, THE GROUP IMPLEMENTS THE PROGRESSIVE CORPORATE SOCIAL RESPONSIBILITY (CSR) PRINCIPLES THAT WERE EMBEDDED IN ITS CORPORATE POLICIES IN 2007. ONLY A SUCCESSFUL COMPANY, CONFIDENT IN ITS LONG-TERM SUSTAINABILITY, CAN TRULY PURSUE EFFECTIVE CSR ACTIVITY THAT EXPANDS BEYOND SIMPLE LEGAL REqUIREMENTS. SCM follows the highest standards and applies line with Global Reporting Initiative (GRI) require- best world practice in corporate social responsibil- ments, with the GRI standard adapted to match ity, adapted to meet Ukrainian market conditions. Ukraine’s economic and social reality. SCM also The CSR principles we follow allow us to harmo- developed a methodology of social reporting and nize increasing business efficiency with the inter- launched the implementation of sustainable de- ests of local communities and society as a whole. velopment reporting system at the Group level. The Group’s activity in CSR area has also received The company’s corporate social responsibility public recognition. The company ranked number is reflected in six key areas of activity: corporate one in the Rating of Socially Responsible Compa- governance and business ethics; working condi- nies by Gvardia Magazine. The rated companies tions; the environment; local communities; so- were evaluated, based on their transparency and cial investment; sponsorship and charity. Every CSR activity in 2008. In addition, SCM was the company and organization that is part of SCM first among Ukraine’s largest holdings to publish contributes to addressing the social issues in its a Sustainable Development Report, prepared in region of presence. SCM Group six CSR Policies WORKING CONDITIONS THE ENVIRONMENT CORPORATE GOVERNANCE 6 CSR SPONSORSHIPS AND BUSINESS ETHICS policies AND CHARITY LOCAL SOCIAL COMMUNITIES INVESTMENT
  • 64. SCM Group Public Report 2008 64 In April 2008, SCM presented two updated CSR ment of Ukraine. Since its launch until March 1, policies – social investment, as well as sponsor- 2008 Foundation for the Development of Ukraine ship and charity. was SCM Group’s corporate foundation. In March 2008, the Foundation became the personal char- The key areas for project implementation will be itable foundation of Mr. Rinat Akhmetov, SCM culture, education, sport, and health. By focusing Group’s main shareholder. Simultaneously, the on these key areas, SCM strives to provide great- Foundation continues to work wih SCM Group as er effectiveness of the Group’s investment in the partner on charitable projects. development of Ukrainian society. In sponsorship and charity, preference will be given to national- Consequently, SCM’s charity programs, as well scale projects, as well as to projects, aimed at as social investment projects, will be implement- strengthening Ukraine’s position on the interna- ed on behalf of SCM, rather than on behalf of the tional arena. In social investment, SCM plans to corporate Foundation, as it was done before. implement both, regional and national projects. The other SCM Group partner within the frame- One of the most significant transformations in work of CSR policies implementation is the think- SCM Group’s charitable activity was the change tank, Bureau of Economic and Social Technolo- to the status of the Foundation for the Develop- gies (BEST) BUREAU OF ECONOMIC AND SOCIAL TECHNOLOGIES (BEST) BEST is a thinktank, specializing in research and consulting on social and economic policy issues. The center’s objective is to foster the development of a market economy in Ukraine and to encourage stable economic growth. BEST also serves as an expert platform for public debate on socio-economic policy issues and for arranging dialog between government and business and civil society. BEST’s key research areas include macroeconomic policy, structural reforms, social policy, and the development of democratic institutions. Main areas of activity: Ô Devising monitoring products, analyzing Ukraine’s socio-economic development dynamic on macro- and mi- croeconomic levels, including regional and sectoral aspects. Ô Undertaking both theoretical and empirical studies on a variety of socio-economic policy issues. Ô Providing consulting services (developing consultancy products in the areas of socio-economic policy, corpo- rate governance, and corporate social responsibility).
  • 65. Social responsibility and sustainable development 65 Corporate Governance and Business Ethics SCM respects the right of its employees to estab- lish professional unions and other associations SCM Group runs its businesses in an open and to represent their interests. SCM provides equal transparent manner, upholding all legal and opportunities for all employees and creates con- normative standards. The company recognizes ditions for each individual to realize his or her full its responsibility before employees, business potential. SCM invests in professional develop- partners, investors, Ukrainian society, and local ment and continuous learning for its employees, communities for actions related to its business thus, developing its own corporate culture. activities. SCM Group communicates openly with all stakeholders about its business activities and operations, while respecting their rights and The Environment points of view. SCM sees environmental sustainability as an es- SCM runs its businesses professionally, uphold- sential element of its business processes. The ing the highest international standards, invest- Group meets all legal requirements in terms ing in human resources, as well as stimulating of protecting the environment and constantly both, innovation and an enthusiastic approach strives to deliver performance on environmental towards work. One of the key elements of SCM indicators, which exceed the established norms. business and corporate ethics standards raising We support the introduction of international en- concept is introducing a transparent and objec- vironmental standards in Ukraine. The Group is tive system of incentives. SCM implements a pol- actively working on evaluating, monitoring, and icy of transparent and fair compensation, based managing possible risks to the environment and on individual contribution to the overall business the impact on local communities, caused by pro- result. duction processes. Environmental issues are of primary importance Working conditions to the Group’s industrial enterprises. Environ- mental issues management is based on world SCM looks to hire the best expertise and talent at best practice and meeting the ISO 14000 envi- all levels of its business. SCM Group businesses ronmental standards. In accordance with ISO employ a total of nearly 150,000 people. SCM 14001 requirements, Metinvest has instituted maintains the salary levels of its employees in and certified environmental management sys- accordance with current legislation and meets tems at all six of its Ore Mining Division compa- the legal requirements for employer’s social nies and at Khartsyzsk Pipe Plant (KHTZ). Other guarantees. Salaries at the Group’s enterprises Metinvest companies are currently undergoing are generally higher than the market average in preparations to implement these standards. At the business sectors where SCM is present. DTEK, elements of the ISO 14001 system have also been instituted, and all enterprises are ex- The Group rigorously strives to improve the health pected to receive ISO certification by the end of and safety conditions for its employees, decreas- 2010. ing the occupational accident and illness levels, as well as improving the working environment. SCM is introducing new technologies and proc- Labor safety management across the Group is a esses that have a positive impact on the environ- priority and is based on the world best practice – ment and is working to reduce energy consump- the international OHSAS 18001 standard. tion and to use energy-efficient technologies in all areas of its activity. Group companies continu-
  • 66. SCM Group Public Report 2008 66 ally analyze their CO2 emissions and those of a cohesive set of measures, aimed at delivering spe- other greenhouse gases, in order to effectively cific sustainable results and bringing about tangible manage and reduce them. When implementing change. At the same time, SCM enterprises welcome new investment projects, SCM applies efficient and support the desire of their employees to partici- and environmentally friendly technologies. pate in the work of the local government bodies. The Group is sympathetic with the international One of 2008’s key achievements was SCM en- community in recognizing the importance of fight- terprises adopting the mechanism of strategic ing climate change. To minimize its environmen- partnership with local authorities, within the tal footprint and reduce green house gas emis- framework of social partnership agreements. sions, SCM uses Kyoto Protocol based projects Earlier, the enterprises were receiving ad hoc to help it tackle emissions reductions and energy requests for assistance from local governments efficiency. For example DTEK and Metinvest are as the specific problems emerged. Today, socio- implementing coal bed methane capture and re- economic partnership agreements are signed be- cycling projects. These projects help reduce the tween the enterprises and the local authorities, volume of green house gas emissions entering addressing the long-term development goals of the atmosphere, while at the same recycle the specific regions and particularly defining each methane to use it to power boilers to provide hot party’s role and responsibilities in this process water for mines and to generate electricity. creating a transparent system of cooperation. SCM actively cooperates with community organi- zations, government, and local communities, in Social Investment order to address their environmental concerns, as well as takes stakeholder opinions into ac- SCM is involved in facilitating the implementa- count in its decision-making process. SCM Group tion of social programs on the national level, to management actively encourages employees to support the sustainable growth and development protect the environment and biodiversity. of the Ukrainian society. The main purpose of the company’s social investment is to improve the quality of life for Ukrainians. For instance, in 2008 Local Communities the main direction of SCM social investment in- cluded education development projects. For ex- Many companies at SCM Group are the lead- ample, in September 2008, SCM presented the ing employers in the city or town where they are Compass project, which is a rating of Ukrainian based, therefore play a major role in the lives of Higher Educational Institutions for 2007-2008. local communities. Naturally, the Group is con- Compass has become Ukraine’s first nation-wide cerned about the environment in which its em- rating, based on the opinion of employers and ployees live and work. The SCM companies play young specialists regarding the compliance of an active part in tackling the socio-economic is- the local higher educational institutions gradu- sues in their regions of presence. They do this by ates’ skills and knowledge with the labor market investing in local infrastructure development and requirements. The leading positions in the rating in local territory improvements. were occupied by the higher education institu- tions, providing the most valuable education To help improve the local residents’ quality of life, from the standpoint of practicality, compliance SCM works in partnership with all stakeholder with real economy sector requirements, and groups, including the local governments, to imple- guaranteeing reliable employment (salary and ment projects. Through joint efforts, they put together career growth) perspectives to the graduates.
  • 67. Social responsibility and sustainable development 67 Sponsorship and Charity Plant allocated $1.1 mn to help renovate resi- dential buildings local territory improvement as SCM invests in sponsorship and charity pro- well as road and street lighting repairs. Azovstal grams, addressing the social problems in educa- also took a number of measures, aimed at im- tion, health, sport, and culture. proving the quality of medical services available to Mariupol citizens: City Hospital #4’s intensive SCM does not sponsor or provide funds for po- care unit was upgraded and the clinical depart- litical parties, individual politicians, or political ment underwent major refurbishment. At City events. SCM Group does not provide sponsorship Maternity Hospital #2 the surgery department funding for institutions, events, or campaigns was also refurbished. Additionally, these hospi- that support a particular religion or to organiza- tals were provided with new medical equipment tions whose goals are purely commercial in na- and supplies. The total project investment vol- ture and who expect to gain benefit from SCM’s ume amounted to $650,000. support as a sponsor. In 2008, Yenakiyevo Steel Plant (YeMZ) contin- Metinvest CSR Projects ued the joint project with FC Shakhtar Youth Foot- ball Academy by building three football pitches Metinvest main CSR direction for 2008 was with artificial surfacing on YeMZ stadium, worth social development in its regions of presence, about $1 mn. aimed, primarily, at supporting and developing city infrastructure and social facilities including DTEK Group CSR Projects health care, education, and sport. In 2008, DTEK ratified its CSR policies and Cor- SevGOK allocated $1.5 mn for large-scale re- porate Ethics Code. The company also published construction of the Damanskiy District of Krivoy a CSR Report, the first of its kind to be produced Rog. Under the project, the following works were by a Ukrainian industrial company. The report completed: major road repairs; construction and was prepared to international social reporting reconstruction of public transportation stops; standards (Global Reporting Initiative (GRI)) and construction of two playgrounds and two sports AA1000 series. grounds for children; renovation of street light- ing; restoration of parks and public gardens; and In 2008, in terms of cooperation with the local reconstruction of the local civic centre. The ren- government authorities, DTEK enterprises made novation of an entire residential community was a transition from signing the memoranda of un- the first, and so far the only initiative of its kind, derstanding to formulating a long-term social not only in Krivoy Rog, but in Dnepropetrovsk Ob- and economic cooperation strategy, based on last. the partnership and transparency principles. In March 2008, a long-term multilateral DTEK So- Avlita Stevedoring allocated $560,000 to imple- cial Partnership Declaration was signed. To en- ment the construction of a new sewerage station sure the transparency of this partnership and ef- in Sevastopol. The company also began the re- fectivene funding allocation, a Social Partnership construction of the Gornyak Stadium in Simfer- Coordination Committee was created. opol. The first stage of stadium reconstruction will require an investment of $230,000. Within this framework, DTEK and its mining business Pavlogradugol have allocated over Within the framework of Orjonikidze District im- $550,000 for the implementation of social pro- provement project in Mariupol, Azovstal Steel grams in Western Donbass in the towns of Pav-
  • 68. SCM Group Public Report 2008 68 lograd, Ternovka, Pershotravensk, as well as UN Assembly ratification of the Universal Decla- Pavlograd and Petropavlovsk districts. The social ration of Human Rights. investment made under the project is more than double the sum spent for this purpose in 2007. As a Global Compact General Partner, DTEK sup- ported the second edition of the book ‘CSR. Ex- In Pavlograd, the Chidlren’s Department of the pert Evaluation and Practice In Ukraine’, within City Hospital #1 was refurbished. In addition the framework of the Expert Magazine and East- computers and multimedia equipment were ern Europe Foundation joint project, supported by purchased for the public schools in the town. In the Media Development Fund of the US Embassy Ternovka, the Children’s Recreation Center build- in Ukraine. The edition is intended for CEOs, top ing underwent major repair and remodeling. In managers, government officials, and NGO man- Pershotravensk, the domestic waste collection, agers, as well as journalists and other experts, transportation, processing, and utilization pro- working and interested in CSR. gram was continued by purchase of containers for waste separation. Pavlograd district used its Detailed information on social and environ- allocated funding to purchase digital color X-Ray mental aspects of SCM Group activity can be equipment. Petropavlovsk district used the allo- found in SCM Sustainable Development Report: cated funding to provide 12 public schools with www.scm.com.ua/en/publish/category/22774 electric stoves and purchase a digital color X-Ray equipment and an electric stove for the district’s Central Hospital. In total, about $1.1 mn was allo- cated by DTEK within the framework of the social partnership programs in 2008. In October 2008, the preliminary results of DTEK and USAID (United States Agency for Interna- tional Development) partnership project were presented at a joint conference in Kyiv. The LED (Local Economic Development) Project included expert advice and practical assistance to the lo- cal governments in the regions where DTEK oper- ates (7 City Councils and 2 District Councils) and has as its objective the improvement of the stra- tegic planning processes to assist in increasing the competitiveness and the investment attrac- tiveness of those regions. DTEK actively participates in a range of CSR initiatives and programs in Ukraine and abroad. In 2007, DTEK joined the UN Global Compact (UNGC) and entered the Ukrainian network of UNGC members that currently unites over 141 companies and organizations. In 2008, DTEK chaired the GC working group on business and human rights. This fact had special meaning in the light of the 60th anniversary of the General
  • 69. Social responsibility and sustainable development 69
  • 70. KEY POST-REPORTING PERIOD EVENTS – 2009
  • 71. Key post-reporting period events – 2009 71 JANUARY The capacity of Zuyevskaya TPP power generating unit #2 (part of Vostokenergo, DTEK Group) was increased from 300 to 315 MW, as result of the six months-long gradual reconstruction of the unit. On January 8, 2009, the unit was reconnected to the network. The total modernization cost amounted to $15.2 mn. Ukrainian Machine Building Holding Limited (Cyprus), a part of SCM Group, obtained approval from the Anti-Mo- nopoly Committee of Ukraine (AMC) to acquire a majority stake in Donetskgormash’s statutory capital. Currently, SCM Group owns 24.99% stake in Donetskgormash statutory capital. After the acquisition transaction is formal- ized, the enterprise will be integrated into SCM Group. Within the framework of Krasnodonugol’s long-term development program at Molodogvardeyskayа mine the re- activated air-feed pipe was connected to the underground excavation facilities. Putting the the air-feed pipe into operations will significantly improve the excavations aeration, as well as will enhance the safety of coal miners, by providing better air circulation. The total project investment volume amounted to about $2.5 mn. Metinvest Group enterprises completed the preliminary registration procedure, in compliance with the EU’s REACH requirements. The aim of REACH is to improve the protection of human health and the environment through the better and earlier identification of the intrinsic properties of chemical substances. REACH is primarily aimed at managing the risks from chemicals and providing safety information on the substances. It requires manufactur- ers and importers to gather information on the properties of their chemical substances, which will allow their safe handling in terms of human health and the environment. Vega Telecommunications group expanded its presence in Ukraine to 40 cities. The unified operator began to provide broadband internet access services in Chernigov, Vinnitsa, and Poltava. In Chernigov, Vega also launched a fixed-line service, with assigned number resource of 5,000 subscribtion numbers. The total Vega Telecommu- nications Group investment in developing the telecommunications infrastructure in the stated cities amounted to $500,000. The sale of Lugansk Brewery was completed, with a 90.6% stake in the enterprise transferred from Emporium (part of SCM Group) to the new owner – Keg-Service. DTEK continued its mine modernization program. The company signed an agreement with OSTROJ, one of the world’s leading mining equipment producers, for purchasing powered roof supports for Komsomolets Donbassa mine, worth $20.42 mn. UniCreditBank Czech Republic a.s. served as DTEK’s financial partner for this project, by granting DTEK a 5 year loan at EURIBOR +1.9%.
  • 72. SCM Group Public Report 2008 72 FEBRUARY Yenakiyevo Steel Plant (YeMZ) will be producing five new grades of steel, using the advanced technology. The YeMZ-engineered integrated steel smelting program allows the plant to expand its range of products for the con- struction industry by producing reinforcing bars and steel rounds 5.5-12 mm in diameter, thus, enhancing YeMZ product assortment and sales potential. These innovation-oriented measures are being taken within the framework of Metinvest Group enterprises devel- opment program. SCM initiated the Discussion Club project, intended as a platform for constructive dialogue between the labor market and the educationalists. The main goal of the dialogue is seeking ways to raise the effectiveness and the practical value of graduates’ knowledge and skills provided by Ukrainian higher education institutions, for the la- bor market. The Discussion Club operates within the framework of ‘SCM to Higher Educational Institutions’ social investment program. Within the framework of its mining equipment modernization program, DTEK purchased two power-operated OS- TROJ-70/125 equipment units for Pavlogradskaya and Ternovskaya Mines, both part of Pavlogradugol. The mod- ern equipment significantly expedites the coal extraction process, thus, increasing the mines’ output capacity. The total contract value amounted to $25.6 mn. Within the framework of the Corporate Transformation Program, Parallel, the largest regional petroleum products retailer, began the merger with Germes which manages the Gefest and PitStop gas station chains. MARCH Segodnya Multimedia opened a corporate university for its personnel, based on a system of internal training provided by its senior managers, serving as in-house trainers. The system has a number of advantages. Primarily, these are the opportunity to enhance employee professionalism in the business and improve perfromance. The opportunity to work on practical case studies, supported by real life situations and products, provides for the ef- ficiency and the practical application training. Azovstal Steel Plant implemented an advanced railway transportation dispatch control system, that allowed it to completely automate the registration of railway cars on the Plant’s territory. With the total investment of $30,000 the economic effect from the pilot system launch amounted to $400,000.
  • 73. Key post-reporting period events – 2009 73 SCM presented the SCM Group Sustainable Development Report 2007. The report structure fully complies with SCM CSR priorities, and meets the leading international standards of the GRI sustainable development and re- porting guidelines, UN Global Compact principles, and Ukrainian legislation requirements. The independent veri- fication of the report was carried out by Ernst & Young. DTEK invested about $7 mn in purchasing the T Machinery (Czech Republic) mining equipment within the frame- work of Pavlogradskaya and Ternovskaya Mines modernization. The purchased equipment will significantly lower the prime cost of extracted coal and simultaneously increasing coal mining productivity. UniCreditBank Czech Republic a.s. served as DTEK’s financial partner within the framework of this project by granting DTEK a 5-year loan at EURIBOR +1.7%. APRIL Metinvest Eurasia opened a new warehouse in Sochi (Russia), to ensure efficient client service by providing a wide product range. The warehouse will be specializing in metal products for the construction industry, maintaining a constant inventory of 500 tonnes of rolled steel products supplied by Azovstal, Yenakiyevo, and Makeyevka Steel Plants. DTEK coal mining and energy generating enterprises completed the certification of their occupational health man- agement system to comply with the OHSAS 18001:2007 international standard. Moody’s International registrar issued the compliance certificates to Pavlogradugol, Komsomolets Donbassa, and Vostokenergo. DTEK’s invest- ment in the project amounted to $15.5 mn. Yenakiyevo Steel Plant reached a new stage of blast furnace #3 facilities construction, by lining of a vital blast furnace unit – stove block designed by the Kalugin (Russia). Construction of these facilities is implemented, ac- cording to Metivnest Group Steel and Rolled Products Division development and modernization program. The total project investment volume amounted to about $180 mn. SCM Group ranked number 1 in the ‘Rating of Socially Responsible Companies 2008’, evaluating the transpar- ency and the activity of Ukrainian companies in corporate responsibility. The rating was administered by Gvardiya, all-Ukrainian rating magazine. Metinvest Group completed the acquisition of 100% stake in United Coal Company (UCC). The key rationale for the acquisition of UCC was its significant reserves of high quality metallurgical coal, which will help Metinvest’s coke and chemical facilities produce a better quality feedstock. As a consequence, the Group’s steel works will be provided with a higher quality coke, reducing iron production costs and improving quality characteristics. The Group will thereafter be more competitive in current and prospective sales markets.
  • 74. SCM Group Public Report 2008 74 At the end of the 1st quarter of 2009, First Ukrainian International Bank received net profit of $31.1 mn, which is $9.3 mn (or 42%) higher than the net profit for the same period of 2008. In the 1st quarter of 2009, Azovstal Steel Plant invested about $200,000 in environmental improvement activi- ties, within the framework of industrial modernization and reconstruction program. MAY DTEK paid off the first part of its $21.8 mn international syndicated loan. The payment was executed in full compli- ance with terms of the loan agreement. The sum was used to pay off the body of the loan and the interest. A $150 mn loan facility was agreed, repayable in 2 years, with a possible 1 year extension, at LIBOR +3%. The loan was arranged by Barclays Capital plc and Standard Bank plc. Azovstal Steel Plant completed the planned capital repairs of its ‘3600’ plate mill. The total cost of repairs amount- ed to $2.6 mn. DTEK signed an 18 months, $15 mn loan agreement with Sberbank (Russia). DTEK was among the first Ukrainian companies to cooperate with Sberbank. For DTEK, given the vast experience of cooperation with international and Ukrainian banks, a loan from Sberbank signified its first step into the Russian financial market. SCM, jointly with Korrespondent magazine and Segodnya newspaper, presented the results of Compass, the Ukrainian Higher Educational Institutions Rating 2009, jointly initiated by SCM and Rinat Akhmetov’s Foundation for the Development of Ukraine. The project investment volume amounted to $150,000. Ukraine Television Channel reached second place in the national television channels rating by reaching a 9.7% audience share. At the end of May 2009, the channel demonstrated an unprecedented audience share growth of 90%, compared to May 2008. Thus, Ukraine Television Channel confirmed its position of the most dynamic of Ukraine’s six leading television channels. The Channel’s January-May 2009 audience share was 8.22%, which is 54.8% higher than during the same period of 2008.
  • 75. Key post-reporting period events – 2009 75 JUNE Nine SCM Group senior managers were declared the best top managers in Ukraine by ‘TOP-100 Best Ukraine’s Top Managers’ report. Igor Syry, Metinvest Group General Director, and Maksim Timchenko, DTEK General Direc- tor, were both ranked number one. Besides, Mr. Syry and Mr. Timchenko were declared the best CEOs in the met- allurgy and energy sectors, respectively. Oleg Popov, SCM CEO, won two special nominations – Best Change and Transformation Manager and Best Strategist. Aleksandr Vilkul, SevGOK and CGOK (Metinvest Group) Honorary President, was another winner in the Best Strategist Nomination. Aleksandr Vilkul also ranked number one in the rating of ore mining and enrichment enterprises CEOs and ranked amongst Ukraine’s Top 10 Managers. Based on the industry ratings, the representatives of three Metinvet Group enterprises were declared the leading managers in metallurgy and by-product coking industry: Gennadiy Vlasov (Avdeyevka Coke and Chemical Plant), Aleksandr Podkorytov (Yenakiyevo Steel Plant), and Dmitriy Livshyts (Azovstal Steel Plant). SCM Group banking business rep- resentatives entered the industry rating of the banking sector’s leading managers: Rafal Yushchak (First Ukrainian International Bank) and Vladimir Popovich (Dongorbank). DTEK completed the rebranding of its corporate center and industrial enterprises. The rebranding was part of con- solidation to deal with the impact of the recession and DTEK’s entrance to international markets. The rebranding was based on creating an ‘umbrella’ brand, resulting in all DTEK enterprises uniting under the DTEK corporate brand.