SYSTEM CAPITAL MANAGEMENT. SCM Group public report Stability. Partnership. Growth

Transcription

1 08 SYSTEM CAPITAL MANAGEMENT SCM Group public report Stability. Partnership. Growth

2 SCM Group Public Report 2008 CONTENTS KEY FINANCIAL INDICATORS CEO STATEMENT 6 SCM GROUP EVENTS CALENDAR 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 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 SUSTAINABLE DEVELOPMENT KEY POST-REPORTING PERIOD EVENTS

4 SCM Group Public Report 2008 Key financial indicators 2008 ASSETS, US $ MILLION 19,944 18, EQUITY, US $ MILLION 9,709 7, EBITDA, US $ MILLION 5,441 2,

5 Key financial indicators 2008 REVENUE, US $ MILLION 15,985 9, PROFIT FOR THE YEAR, US $ MILLION 2,195 1,

6 SCM Group Public Report CEO statement I am proud to present to you SCM Group s Public Report for The year was one which I am sure all of us will remember for a long time. The swift economic growth of the first six months gave way rapidly to a downturn of comparable scale. However, SCM Group maintained its strong position, in spite of the unfavorable economic conditions, due to the stability given by reserves it accumulated during the earlier, successful years. Regardless of the changes in the global economy, our fundamental approach to doing business remains unchanged: deliberate diversification and long-term investment in assets that have strong profitability and value growth potential, primarily in businesses we understand well. We are interested in assets that are capable of creating value at every stage of the production cycle. The new economic reality did not alter our business philosophy, but did lead to adjustment in our priorities. As a result, the short-term development plans for all the Group s assets were adapted to respond to volatile market conditions. We believe it was the rigorous following of this simple recipe for success that not only enabled SCM to survive 2008, but also will also provide us with the necessary competitive advantage for our future growth, when the national and the global economies begin recovery. SCM Group s stability during this challenging year was secured through our balanced approach to market analysis; efficiency in making effective, though sometimes unpopular, decisions; our conservative approach to soliciting external funding; a clear set of priorities; and the main factor - our team of talented professionals. In the second half of 2008 we focused on controlling liquidity and maximizing the effectiveness of resource allocation, setting priorities for investment projects and implementing the most important of these, and exiting from projects and assets which did not meet SCM s investment strategy. All these measures allowed us to make a range of critical tactical decisions, with the Group s long-term development strategy remaining unchanged. In 2008, SCM exited a number of businesses within the framework of its long-term investment strategy. In line with its strategy of exiting from the brewing business, Sarmat and Krym breweries were sold, and the sale of Dnipro and Poltavpivo breweries was begun. SCM sold its stakes in Kremenchug Steel Plant and Slavtyazhmash Plant because, as a minority shareholder in those enterprises, it was not able to substantially influence either the strategic decision-making, or their financial and business activity. We also exited from the shareholders of Donbass Trade Fleet and Azov Shipyard, following the strategy of setting out investment priorities. At the same time, we continued working on the integration of SCM Group and Smart Group assets in metallurgy within the framework of Metinvest. We also continued the Group s geographical expansion, following a strategy of deliberate diversification and building vertically integrated holdings. In 2008 we started negotiations to purchase United Coal Company (USA). On completion of this transaction in 2009, SCM Group will be capable of providing its enterprises with metallurgical coal required for high quality coke production. This will provide us with an additional competitive advantage in international markets. Simultaneously with our M&A activity, we continued to invest in the Group s organic growth. The largest investments were made in our mining and metals and energy businesses, particularly in equipment modernization and increasing productivity. The total investments in Metinvest and DTEK s organic growth in 2008 amounted to $679 mn and $338 mn, respectively. In order to provide stability for SCM assets in financial services, as well as to fulfill our obligations to clients, and to maintain market share, the statutory capitals of banks and insurance companies in SCM s portfolio were increased by soliciting funding from shareholders. As result, First Ukrainian International Bank s statutory capital was raised to $350 mn, and Dongorbank s statutory capital rose to $100.6 mn. The statutory capital of ASKA Insurance Company was increased to $18.8 mn. The total investments in Brusnytsya, the Group s conven-

7 CEO statement 7 ience store chain development, amounted to $51.5 mn, while the total investments in ESTA Group s development (our real estate holding company) in 2008 exceeded $30 mn. In 2008 we completed the process of corporate transformation and continued to improve the Group s corporate governance structure. The clear and simple decision-making system allows SCM Group to make effective and timely decisions, which is especially important under increasingly uncertain market conditions. achievements. We realize that some losses were inevitable, but in spite of that our team was able to minimize the negative impact of the recession on our enterprises and to maintain trust in our relations with clients, financial markets, and local communities. I would like to thank everyone at SCM Group for the outstanding performance and the tremendous effort they have shown in 2008, a year of extraordinary decisions and global challenges, as well as for their dedication and contribution to maintaining business stability. Working towards long-term sustainable growth remains at the core of our strategy. Our largest businesses require constant and substantial capital investments. Clear and effective 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 enterprises. 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 potential. 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 SCM Group events calendar 2008 January 4 January 6 January 14 Metinvest and Indistrial Union of Donbass Corporation signed a long-term agreement for supply of iron ore, flux, and dolomite products Metinvest and Zaporozhstal signed a long-term contract for supplying iron ore, flux, and dolomite products 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 January 28 January 29 February 8 February 20 February 29 March 14 March 14 Metinvest obtained the European Commission s approval to acquire Trametal S.p.A. (Itay) and Spartan UK Ltd (Great Briatin) Steel Mills Azovstal Steel Plant s reconstruction of converter industry facilities reached its final stage SCM formed a publishing holding under the management of Segodnya Multimedia Azovstal Steel Plant produced 2 mn tonnes of slabs during its 15 years of cooperation with South Korean Dongkuk Steel Mill Co, Ltd. News Television Channel obtained a satellite broadcasting license Khartsyzk Pipe Plant received the international ISO 3834 compliance certification for its pipe welding quality SCM presented its real estate sectoral holding ESTA Holding DTEK was rated A+ in the All-Ukrainian Rating of Socially Responsible Companies by Gvardiya Magazine 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 March 26 April 4 April 7 April 7 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 SCM presented its revised CSR policies Shares in Oktyabrskaya and Dobropolskaya Coal Enrichment Plants (CEP), which initially belonged to Metinvest, were transferred to DTEK Vecherkom free newspaper entered the Kiev newspaper market April 11 Azovstal Steel Plant completed the reconstruction of blast furnace #3 April 14 April 16 April 17 April 23 May 13 May 19 May 22 May 28 June 9 June 11 June 17 June 26 Khartsyzk Pipe Plant quality management system was awarded the Russian certificate of compliance with GOST R ISO standard Ukrainian Retail Company was recognized as the Best New Employer 2007 in Donetsk Pavlogradugol produced 400 mn tones of coal since the beginning of operations Yenakiyevo Steel Plant began the construction of a new blast furnace SCM exited from the shareholders of Kremenchug Steel Plant DTEK was granted a $150 mn syndicated loan SCM was rated A+ in the All-Ukrainian Rating of Socially Responsible Companies by Gvardiya Magazine Northern and Central Ore Mining and Enrichment Plants (SevGOK and CGOK) were granted the international Occupational Health and Safety Management Standard System certification, OHSAS First Ukrainian International Bank completed the procedure of the additional issue of shares worth $208 mn Azovstal Steel Plant tested its new steel slab continuous caster First Ukrainian International Bank increased the size of its net assets to $3,123 bn First Ukrainian International Bank was granted a $50 mn syndicated loan

10 SCM Group Public Report 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 standard July 3 July 7 July 14 July 15 SCM joined the national Go Green environmental campaign, initiated by the United Nations Representative Office in Ukraine SCM completed the sale of 99.85% of Sarmat Brewery to SABMiller plc DTEK was granted a $79 mn stand-by loan facility 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 July 22 SCM exited from the shareholders of SlavTyazhMash 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 July 29 August 1 August 8 August 21 August 22 DTEK issued domestic bonds worth $103 mn INKOR & Co was integrated into Metinvest Coal and Coke Division SCM exited from the shareholders of Krym Brewery SCM exited from the shareholders of Donbass Trade Fleet and Azov Shipyard Plant First Ukrainian International Bank was granted a $154 mn syndication loan 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 September 11 September 24 September 25 September 26 October 13 October 15 October 28 November 11 November 11 November 18 November 26 December 9 SCM became a partner of the International Energy Forum in Brussels, dedicated to the matters of energy security SCM presented the results of Compass, the first rating of Ukrainian Higher Educational Institutions 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 Segodnya Multimedia launched a new product Tvoe newspaper SCM Group was declared Donetsk Oblast s best taxpayer Farlep-Optima Telecommunications Group began providing services under a unified brand - Vega DTEK paid off its first international loan of $100 mn ASKA Insurance Company General Shareholders Assembly decided to increase the company statutory capital by $6.9 mn Occupational Health and Safety Management Systems at DTEK enterprises were certified as being compliant with the international standard OHSAS 18001:2007 Football Television Channel began pilot broadcasting First Ukrainian Internatinoal Bank paid off a $90 mn syndicated loan Azovstal Steel Plant completely switched from the use of natural gas to coke in its blast furnace operations 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 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 Metinvest obtained the approval of the European Commission to purchase the controling shareholding in Trametal S.p.A. (Italy) and Spartan UK (United Kingdom) steel rolling plants. These enterprises will be integrated into Metinvest Holding Italy S.p.A., whose production capacity will exceed 1 mn tones of steel plate on the EU market. INKOR & Co. Scientific and Production Company was integrated into Metinvest Group s Coal and Coke Division. This enterprise will help provide deeper raw coke and coal processing and produce a competitive product with higher added value. The main raw coke and coal supplier for INKOR & Co is Avdeyevka Coke and Chemical Plant. ENERGY Within the framework of the corporate transformation program, SCM transferred stakes in Oktyabrskaya (16.25%) and Dobropolskaya (10.62%) CEPs, owned by Metinvest, to DTEK. Earlier, DTEK has already received 40.44% and 27.45% stakes in these respective CEPs. As result, DTEK has a 60.85% stake in Oktyabrskaya CEP and 60.06% stake in Dobropolskaya CEP. FINANCIAL SERVICES SCM increased its stake in ASKA Insurance Company to 88.70%. TELECOMMUNICATIONS CSS Telecommunications Company (Odessa) became part of Farlep-Optima Telecom Group. Farlep-Invest-CSS Telecommunications Group started providing its services under the unified Vega brand. The main benefits of the unified operator under the Vega brand are: nationwide coverage, integrated services portfolio, higher internet access speed, and high quality service. The decision was also made to decrease the number of companies in Vega s legal structure, from 45 to 25. It is intended that operations based on fewer companies will help Vega to increase the effectiveness of business processes and optimize the procedures for service provision throughout the country. REAL ESTATE SCM Group launched ESTA Holding, which will manage the company s interests in the real estate sector. The decision to invest in a new business area follows SCM s strategy of deliberate diversification and increasing the share of nonindustrial businesses in the Group s portfolio. ESTA Holding business is present in the following real estate market segments: commercial property (class A office centers and large retail centers), elite residential property and hotels (the company owns two premium-class hotels Donbass Palace in Donetsk and Opera in Kiev).

13 SCM Group corporate transformation program 13 MEDIA Television Within the framework of Ukraine Media Group development, Digital Ventures was formed to manage a range of internet sites. In the long-term perspective, Digital Ventures intends to become one of the leaders of Ukraine s internet market. Ukraine Television Channel obtained a satellite broadcasting license for News Channel. The channel is one of the niche television channels, planned for launch within the framework of the media group to be formed on the basis of Ukraine Television Channel. Publishing SCM formed Segodnya Multimedia publishing holding, to which it transferred corporate rights to a range of assets in the newspaper industry. Particularly, SCM transferred to Segodnya Multimedia a 88.69% stake in Priazovskiy Rabochiy newspaper, a 53.64% stake in Vecherniy Donetsk newspaper, and a 75% stake in Media-Press publishing company. Vecherkom, a full-color free daily newspaper was launched in Kiev. The newspaper is aimed at the readers between 16 and 39. Vecherkom s daily circulation is copies. The newspaper will feature daily news and information collected before noon and published the same day. PETROLEUM PRODUCTS RETAILING SCM transferred to Parallel Nafta, a daughter company, its stakes in its petroleum retailing businesses. Parallel Nafta received the stakes in Parallel-M Ltd (Parallel and PitStop gas station chains) and Gefest. As result, Parallel Nafta stake in statutory capital of Parallel-M and Gefest increased to 100%. OTHER BUSINESSES SCM obtained the Anti-Monopoly Committee of Ukraine s approval to become the majority shareholder in Donetskgormash. SCM obtained the approval of the Anti-Monopoly Committee of Ukraine to become the majority shareholder in Kamensky Heavy Engineering Plant (Russia). SCM sold its 19.41% stake in Kremenchug Steel Plant. The company was a minority shareholder in that enterprise and was not able to substantially influence neither strategic decision-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 of Kremenchug Steel Plant. SCM sold its stake in SlavTyazhMash Plant. The company was a minority shareholder with decision-making power directly related to the size of its stake. Having received a economically viable proposal, SCM made a decision to sell its stake in the plant. SCM exited from the shareholders of Donbass Trade Fleet and Azov Shipyard. SCM sold its minority stakes in these companies as they did not comply with the Group s investment strategy. The development of transportation businesses is not a priority for SCM Group, and integrating the businesses in the production chains of the existing sectoral holdings was not feasible. 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 Group and this was the reason for selling Sarmat Brewery to a large international brewer. SCM also completed the sale of its 93.98% stake in Krym 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 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 management across the Group 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 capable of running them 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 process of building a transparent business and management structure for the Group 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 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: reaching the goals we set; applying contemporary technologies and approaches to doing business; constantly improving the processes and methods of doing business; rational allocation and use of resources; seeking new opportunities; 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: meeting the highest standards; stimulating initiative and innovation; investing in professional development and loyalty of employees; attracting and retaining highly qualified personnel; 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 EXECUTIVE DIRECTOR OF SCM HIRED BY SCM AS DEPUTY TO THE CEO 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 successfully. The year that started with the swift economic growth, ended with the downturn of comparable scale, caused by the global economic recession. 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 opportunities, 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 Roman Vodolazkyy Financial Director CFO OF SCM SINCE JUNE FEBRUARY-JUNE 2005 SENIOR FINANCIAL MANAGER (TITLE CHANGED TO CFO) HIRED BY SCM AS MANAGER FOR THE GROUP S METAL DIVISION. OCTOBER 2000-SEPTEMBER 2002 AUDITOR FOR PRICEWATERHOUSECOOPERS IN KIEV. MARCH OCTOBER 2000 WORKED AT THE FINANCIAL DEPARTMENT OF MCDONALD S UKRAINE BEGAN HIS CAREER AS ACCOUNTANT AND CHIEF ACCOUNTANT FOR VARIOUS UKRAINIAN COMPANIES. EDUCATION: MBA from INSEAD (France), a leading European business school, in Graduated from Kherson State Technical University as a Specialist in Accounting and Computer Software in CAREER: Member of the British Association of Certified Chartered Accountants (ACCA) since 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: budgeting, financial reporting preparation, treasury functions, and internal audit. Our main achievement in 2008 was the ability to timely and effectively react 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 mining 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 rigorous and timely fulfillment of our credit obligations has always been and remains 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 CONSULTANT, MCKINSEY & CO, MOSCOW OPERATIONS MANAGER FOR RUSSIA S LARGEST ON-LINE AUCTION RESOURCE, MOLOTOK.RU FOR NETBRIDGE, AN INTERNET COMPANY CONSULTANT, COOPERS & LYBRAND AND PRICEWATERHOUSECOOPERS, MOSCOW. EDUCATION: MBA from INSEAD (France), a leading European business school, in Graduated from the Plekhanov Academy of Economics in Russia as a Specialist in Enterprise Management in CAREER: Represents SCM interests on the Supervisory Boards of Farlep-Invest, First Ukrainian International Bank, Dongorbank, ASKA Insurance Company, 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 Nikolai Nesterenko New Business Development Director NEW BUSINESS DEVELOPMENT DIRECTOR AT SCM SINCE SEPTEMBER 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 HIRED BY SCM AS MANAGER OF THE FINANCIAL CONTROL DEPARTMENT WORKED AT KERAMET INVEST, HAVING GROWN FROM STOCK BROKER TO GENERAL MANAGER. EDUCATION: MBA from INSEAD (France), a leading European business school, In Graduated from the Financial Accounting Department of Donetsk State Universtity in 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 presented at one of the most prestigious real estate conferences MIPIM that is traditionally held in France. Besides, it is during that year that we finalized 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 exited the beer brewing business. However, I believe the Group s greatest achievement in 2008 was retaining 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 DIRECTOR OF CORPORATE COMMUNICATIONS FOR SCM LAUNCHED HIS OWN PR CONSULTANCY IN LONDON AND ADVISED U.S. GOVERNMENT AGENCIES ON THEIR PUBLIC DIPLOMACY PROGRAMS IN THE MIDDLE EAST BEGAN HIS CAREER WITH FORD EUROPE COMPANY. EDUCATION: Graduated as an Economist from Heriott-Watt University (Edinburgh) in CAREER: Areas of responsibility: developing and implementing communications strategies and programs, aimed at establishing contacts with both government offices and NGOs; developing relations with international governments, 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 integration 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 Ukrainian 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 Natalia Yemchenko Public Relations and Communications Director PUBLIC RELATIONS AND COMMUNICATIONS DIRECTOR AT SCM SINCE DECEMBER PUBLIC RELATIONS MANAGER FOR SCM HIRED BY SCM GROUP AS A SECTOR GROUP MANGER DIRECTOR, KERAMET INVEST, AN INVESTMENT COMPANY FINANCIAL MANAGER AT KOLO, AN INVESTMENT COMPANY. EDUCATION: Graduated from Donetsk National University as a Specialist in Finance and Credit in 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 government, community organizations, and the general publc, as well as company reputation management 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 MANAGER OF THE CORPORATE RIGHTS DEPARTMENT FOR SCM HIRED BY SCM AS ECONOMIST ECONOMIST AT KERAMET INVEST 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 regarding the management of corporate rightrs; organizing and handling operations involving corporate rights belonging to the company and its subsidiaries; and organizing the activities of foreign companies belonging to SCM. The main event of 2008 was the completion of SCM corporate transformation. Particularly, we formed industrial holdings in telecommunications, publishing, and real estate, as well as consolidated our assets in oil products 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 Company Minority shareholders Sectoral Holding Supervisiory Board Auditing Comittee Strategy and Investment Comittee Appointment and Compensation Comittee Health, Occupational Safety, and Environment Comittee* * Applies only to Metinvest and DTEK

25 About SCM Group > SCM Group target corporate governance system Sectoral Holding Managing Company Supervisiory Boards of Operational companies Holding General Director Holding Board Operational companies when decision is made to create a sectoral holding when decision is made not to create a sectoral holding

26 SCM Group Public Report 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 investor, SCM Group governs its sectoral holdings by delegating its representatives to sit on the respective Supervisory Boards. The participation of minority shareholders in the governance of these holdings is also executed through their representatives on the Supervisory Boards. The Supervisory Boards govern the sectoral holdings. These Boards include representatives of SCM, minority shareholders, and external experts. The members of each Board vote to elect a Chair from among their number. The Supervisory Boards determine business development areas and the standards for engaging in specific businesses; they approve strategies, budgets and major transactions, as well as oversee their implementation; they track business indicators, appoint top managers, establish incentives for them, and evaluate their performance. The members of the Supervisory Boards, along with independent experts, may also participate in specialized comities including: The Audit Committee, the Strategy and Investment Committee, the Appointment and Compensation Committee, and the Health, Occupational Safety, and Environment Committee. The Audit Committee prepares recommendations for the sectoral holdings Supervisory Boards regarding the approval of accounting policy and procedures for preparing financial reports; the depth and accuracy of financial reporting provided by each holding; the reliability and effectiveness of the internal auditing system, internal oversight and risk management; the independence of internal and external audits; and for ensuring compliance with the laws and norms governing business ethics. The Strategy and Investment Committee prepares and submits for review to the Supervisory Board the necessary recommendations regarding the opportunities for the holdings to be involved in investment projects and exit strategies for specific projects. The Committee also prepares recommendations regarding the strategic goals and objectives of the various holdings, as well as the implementation of agreements on mergers and acquisitions (M&A). The Appointment and Compensation Committee recommends to the Supervisory Boards candidates for management positions in the sectoral holdings. With this purpose in mind, the Committee organizes interviews with applicants for specific positions and decides whom to recommend for those positions. The Committee also prepares recommendations regarding the rotation of top managers within the sectoral holdings, proposes ways to incentivize top managers, as well as participates in shaping the corporate culture and staffing, and in determining the prospects for personal development of managers, and so on. The Health, Occupational Safety, and Environment Committee was created to institute the highest health and occupational

27 About SCM Group > SCM Group target corporate governance system 27 safety standards across the Group, as well as to control the environmental impact of the Group s industrial enterprises. The Committee develops SCM Group s strategy for the areas of its authority; prepares budgets to finance modernization of and equipment purchase for the Group s industrial assets; ensures the compliance of all industrial enterprises with the approved health and safety standards; as well as annually submits the Group enterprises quarterly management reports to the Supervisory Board for review. The General Director of a sectoral holding is appointed by the Supervisory Board, in order to manage the holding s operations. As a member of the Board, this person takes an active part in the strategic planning of the holding s activities. The Executive Council is the highest body in the operational management of the holding. Each holding s Executive Council is established collegially. The Chair of the Executive Council is the General Director of the holding. The Supervisory Boards of operating companies are responsible for their sustainable financial and commercial growth, greater effectiveness, and increased competitiveness of their operations. They keep track of the upholding of shareholder rights, make decisions regarding the time to hold General Shareholders Meetings, establish the agenda for such meetings, draft corporate policy, and so on. The members of the Supervisory Boards of operating companies are appointed by the Executive Council and are approved by the Supervisory Board of the relevant sectoral holding. For individual areas of business where there are no sectoral holdings, the system of corporate governance works through the immediate Supervisory Boards of the operating companies. In the course of several years, this corporate governance structure has demonstrated its effectiveness for achieving SCM Group s goals and is being constantly improved.

28 SCM Group Public Report 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, first and foremost, for a change in SCM s role in the management system through a switch from operational management of individual enterprises to strategic management of newly-formed sectoral holdings and Group business areas. According to the Program approved in 2006, the process of combining the Group s operational companies within the framework of specific sectoral holdings began. Those holdings received the right to own and manage SCM assets in their specific sectors. The sectoral holdings were also assigned to manage the assets that were handed over to them, including devising and implementing their business development strategies. This new business structure and the important change in the role of the SCM Company in the decision-making system, as well as SCM s unswerving determination to match international standards, drove the transition to what was, for SCM, a fundamentally new system of corporate governance. The key features of SCM s corporate governance system are: simplicity and intelligence, clearly-defined areas of competence along all the links of the chain; effective managerial decision-making and control; effective risk management; compliance with the target corporate rights ownership structure; compliance with best world standards. SCM Group s corporate governance system is based on the principles of transparency and compliance with the law that lie at the heart of all its activities. In determining a target corporate governance structure, SCM studied best international practice 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 deliberate business diversification, though it is a long-term process, requiring a balanced approach to investment. We carefully consider the opportunities to enter new markets. In order for SCM Group business area to be declared strategic, it must comply with the following set of criteria: clear long-term perspectives; profitability; return on investment; competitive advantage; significance for Ukraine. We strive for our alternative business areas to be more dynamic in their development than our core ones (mining and metals, energy, finance) only in this case will diversification allow us to mitigate the industry risks. Financial stability. The share of external funding in the SCM Group portfolio is relatively low, the 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. We carefully monitor the liquidity of our assets and rigorously manage our working capital. Investment strategy. SCM is a strategic, longterm investor. We do not aim to receive quick profits and regard investment in our business development from the standpoint of long-term value creation. We are predominantly focused on the organic growth of the Group s assets. In the course of the last several years, we have regularly made significant investments in modernization of our enterprises and increasing the industrial production, as well as improving energy efficiency. As a result we have accumulated the reserves, necessary to withstand any structural changes in the market. We have enough resources at our disposal to ensure that SCM Group s long-term strategy remains unchanged. Decision-making system. One of our strategy s core components is preparedness to change. Our corporate governance model is not bureaucratic, which allows us to efficiently make the necessary decisions in the rapidly changing external environment. We are also prepared to correct our short-term plans, as needed, to adapt to the new economic reality.

30 SCM Group Public Report 2008 SCM business structure 2008 Mining & Metals (Metinvest) Energy (DTEK) Financial Services Telecom Media Iron Ore Division Northern Ore Mining and Enrichment Plant (SevGOK) Central Ore Mining and Enrichment Plant (CGOK) Inguletsky Ore Mining and Enrichment Plant (InGOK) Krivoy Rog Central Ore Mining Equipment Repair Plant (KCRZ-KZGO) Coal Mining Pavlogradugol Komsomolets Donbassa Mine Mospinskoye Coal Enrichment Plant Pavlogradskaya Coal Enrichment Plant (CEP) Kurakhovskaya Coal Enrichment Plant (CEP) Dobropolskaya Coal Enrichment Plant (CEP) Banking First Ukrainian International Bank Dongorbank Insurance ASKA ASKA-Life VEGA Telecommunications Group Ukraine Television Channel Segodnya Multimedia Digital Ventures Coke and Coal Division Oktyabrskaya Coal Enrichment Plant (CEP) Avdeyevka Coke and Chemical Plant (AKHZ) Power Generation Avlita Stevedoring Company Vostokenergo Krasnodonugol INKOR & Co Power Distribution Steel and Rolled Products Division PES Energougol Service Invest Azovstal Steel Plant YeMZ Group (Yenakiyevo Steel Plant, Metalen) Khartsyzsk Pipe Plant (KHTZ) Trametal S.p.A. Spartan UK Ltd. Ferriera Valsider (Italy) Prometei Skif Shipping Sales Metinvest International S.A. Metinvest Eurasia Metinvest Ukraine Metinvest SMC

31 About SCM Group > SCM business structure Real Estate (ESTA Holding) Clay Mining (United Minerals Group) Retail Trade (Ukrainian Retail) Petroleum Products Retailing Other assets Hotels Opera Donbass Palace Vesko Druzhkovskoe Mines Management Brusnytsya Retail Chain Parallel Gefest and PitStop brands Heavy Engineering Donetskiy Energozavod Engineering Plant Ogneupornerud Druzhkovka Heavy Engineering Plant Multi-functional Centers Leonardo Gorlovskiy Mashinostroitel Engineering Plant Pushkinsky Oktyabrsky Sverdlovskiy Heavy Engineering Plant Other properties under construction ASSOCIATED COMPANIES Mining & Metals: Dokuchayevsk Flux and Dolomite Plant (DFDK) Zaporozhkoks (Zaporozhye Coke and Chemical Plant) Donetskkoks (Donetsk Coke and Chemical Plant) Novotroitskoye Mines Management Krivbassvzryvprom Explosives Company Krivoy Rog Iron Ore Plant Energy: Dneproenergo Donetskoblenergo Telecommunications: Astelit 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 10.8 mn tonnes of steel, over 11 mn tonnes of rolled steel, over 5 mn tonnes of coke, and over 40 mn tonnes of raw iron ore. This production capacity allows to not only completely cover Metinvest s business needs for raw materials, but also makes Metinvest one of the key suppliers to the steel producers in Ukraine, Europe, Mediterranean region, and Asia. Metinvest Group enterprises employ over people. Metinvest Group includes 25 enterprises which are among the leaders in the coke and chemical, coal, mining, and metallurgy industries in Ukraine. In Europe, Metinvest Group is represented by two rolled steel plants in Italy - Ferriera Valsider S.p.A. and Trametal S.p.A., as well as by the Spartan UK Ltd., rolling mill in Great Britain. The Group s metallurgy enterprises produce a wide range of high quality products, used in practically 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 mining, 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 concentration technology that is unique for Ukraine.

34 SCM Group Public Report 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 includes 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 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 variety 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 documenting 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), Belgrade (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 network 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 Metinvest Group key indicators Dynamics, % Sales volume, mn $ 7,425 13, Asset value, mn $ 12,439 11, EBITDA, mn $ 2,286 4, Net profit, mn $ 1,321 2, Raw iron ore output, mn tonnes 33,4 31,3 +6 Steel output, mn tonnes 9,115 8, Rolled steel output, mn tonnes 9,468 9, Metinvest is highly diversified in terms of its sales markets. This helps the company to level out fluctuations in demand from any of these markets. In 2008, Metinvest Group sales dynamics generally reflected the world metal market trends. Favorable economic conditions and rising metal prices in the first half of the year allowed the company to effectively sell its products by expanding its share on the key markets. The sharp decline in global demand for metal products, starting from the 3rd quarter of 2008, triggered changes in regional and product sales structure of Metinvest, and also led to some decrease in sales volume. Finished product sales (excluding semi-finished products e.g. slabs and billets) amounted to 4,487 mn tonnes or 46% of the total sales volume. In 2008 the volume of products, sold through metal service centers increased by 288,000 tonnes (55% growth compared to 2007). The company is planning to further grow its presence in the CIS and international retail markets, gradually increasing the sales of products with added value and decreasing the sales of semi-finished products. By the end of 2008, Metinvest Group ranked number four in terms of the world s largest slab producers with over 8.2% share, and on the world billets market the Group is the leader with a share of over 10%. The largest volumes of billets were sold on Middle East and European markets (37% and 26%, respectively). The acquisition of Trametal S.p.A. (Italy) and Spartan UK Ltd. (Great Briatin) allowed Metinvest to grow its presence in the EU market by 3.4%. At the end of 2008, Metinvest increased its share of the steel plate market in the EU from 2.2% to 2.7%.

37 SCM Group s businesses > Core business areas 37 Overall, Metinvest Group s share of the world s steel plate and structural shapes market amounts to 2%. Investment In 2008 the total volume of Metinvest Group investment amounted to $690 mn. Azovstal Steel Plant completed its integrated program, aimed at increasing slab production and sales volume, as well as achieving the targeted quality parameters. This program has been implemented since 2003, with investment volume amounting to $600 mn. Reconstruction of blast furnace #3 was also completed at Azvostal, thus, delivering increased productivity and reduced down time. The reconstruction of the oxygen-converter facilities at Azovstal Steel Plant is approaching completion. One of the main production units of the new facilities, the ladle-furnance unit, reached its full capacity. The Azovstal ladle-furnance unit was engineered using the newest technologies, with Siemens VAI (Germany) selected as supplier. The unit will have significant positive influence on Azovstal economy, as well as on the environment of the city of Mariupol, where the Steel Plant is located, by substantially decreasing the air pollution and reducing the water waste discharge. The new ladle-furnance unit annual production capacity is 2 mn tonnes of steel, and the installation costs, including the infrastructure costs, amounted to $30 mn. In the blast furnace iron making facilities, the reconstruction of blast furnace #3 were completed, within the framework of Azvostal Steel Plant s modernization and reconstruction program. In the course of the blast furnace repairs, a new fettling technology was Metinvest Group sales structure 2008 Sales revenue, segmented by region. 100% = $13,213 mn 6% Other 8% CIS 35% Ukraine 10% Near East and North Africa 14% South-East Asia 27% Europe

38 SCM Group Public Report applied, leading to significant increase in the term of equipment operation. The blast furnace is equipped with modern control equipment, allowing automation of its operations to the maximum extent. The new engineering solutions give the blast furnace an annual production capacity of 1 mn tonnes of pig iron, with reduced environmental impact. The total project investment volume amounted to $30 mn. Yenakiyevo Steel Plant began the construction of blast furnace #3 production facilities which will increase the production of pig iron and decrease the use of coking coal. The total project investment is $180 mn. Khartsyzk Pipe Plant continued the construction of the new production line for mm diameter pipes. It is anticipated that line will increase the volume of annual pipe sales by 200,000 tonnes. The total project investment is $48 mn. Ingulets Ore Mining and Enrichment Plant (InGOK) began a large-scale program for magnetic floatation beneficiation of iron ore concentrate worth $170 mn. The program is intended to run untill In order to ensure long-term, economically viable, and safe coal production at the Krasnodonugol mines, a 20-year mine development investment program was initiated in 2007, with total investment volume exceeding $600 mn over 20 years and amounting to $64 mn in Novotroitskoye Mines Management and Inguletsk Ore Mining and Processing Plant (InGOK) began implementing a business management system, based on the SAP for Mining industry slolutions, designed specifically for mining companies. The following functional programs will be installed at these enterprises: Financial Mangement, Manage- Metinvest Group Sales geography Regional market Sales Volume, mn 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 Management, Sales Management, Production Management, Budgeting, Investment Management, Repairs Management, Quality Management, Material Needs Planning, and Personnel Administration. Considering the significant changes on the metals market in the 4th quarter of 2008, Metinvest reviewed its investment programs placing the focus on those which added value creation along the production chain. Increasing current operational effectiveness and product quality were declared priorities for the year, while the plans to increase steel rolling and raw materials capacity were postponed until the market situation stabilizes. Risk Management The contraction of steel consumption in the second half of 2008 was aggravated by significant product overstocking and a threefold decrease in steel prices, compared to their peak levels in July 2008, driving the prices down to the 2005 levels. In the light of the decreasing demand for steel, competition between steel producers for the product markets tightened, leading to the large product volumes sold at prime cost or lower. The reduction in the demand for raw materials caused the significant decrease in pig iron output and falling prices. However, higher concentration of the raw materials and coal producers helped maintain the profitability level of this industry segment. The devaluation of the national currency in the 4th quarter of 2008 did not have a negative impact on the Group s operations, due to the fact that the majority of revenues are generated from export. The devaluation also enabled Metinvest to reduce the production costs costs in dollar equivalent. Metinvest s financial stability was positively influenced by vertical integration, a moderate debt burden, and a sufficient level of liquidity. To mitigate the negative impact of the economic crisis on the economy, Ukranie s leading mining and metal companies, including Metinvest, signed a memorandum with the Ukrainian government. According to the terms of the memorandum, the state monopolies were to temporarily freeze the cost of their services (transportation, energy, etc.), which allowed Ukrainian mining and metal producers to remain competitive in global markets. In order to reduce costs, the least profitable production was stopped. All excess capacity or non-competitive production capacities underwent short- and mid- term or complete stoppage: Yenakiyevo Steel Plant ceased operation of its blooming mill and blast furnace #3; Azovstal Steel Plant stopped its blast furnace #1. Currently, Metinvest Holding is applying centralized supply chain management to all its enterprises. Simultaneously, the integrated programs of personnel number optimization, increasing labor productivity, and outsourcing of ancillary functions are being implemented. To cut expenditure on natural gas, Azovstal and Yenakiyevo Steel Plants completely switched to gas-free blast furnace operation by substituting natural gas use with the additional volumes of coking coal. Additional operational improvements and cost minimization were implemented, particularly, regarding: administrative, logistical, energy, and repair costs. To increase and maintain the overall solvency, Metinvest instituted centralized management of liquidity levels and working capital. To maintain business competitiveness, Metinvest Group took specific anti-crisis measures in

40 SCM Group Public Report Metinvest Group Sales structure Product Sales Volume, thousand tonnes % Sheet 1,918, Coil 161,4 1.7 Piping 407,0 8.4 Slab 1,893, Cast iron 313,4 2.0 Billet 3,082, Rolled section 2,000, TOTAL: 9,775,0 relation to all its key partners. For instance, negotiations were held to reduce the prices for the main production resources purchased outside the Group (coal, ferrous alloys, etc.). improved product sales effectiveness, due to the development of products and markets, as well as due to enhanced client service. 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: increased product competitiveness due to reduced costs at all production and service businesses; increased sales volumes of raw materials to key export markets; 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 people. DTEK enterprises form an effective production chain from coal mining to thermal power generation and distribution. The productive cooperation of coal mining and power generating enterprises, the institution of advanced technologies, professional management, and balanced social policy, have allowed DTEK to take the leadership position in Ukraine s energy market. DTEK personnel on all levels of the Group are working in unified teams. DTEK s development strategy provides for increased corporate governance effectiveness, key business process optimization, and adoption of the new technologies. The main consumers of thermal power, generated by DTEK enterprises, are the largest industrial enterprises of Eastern and Southern Ukraine, particularly: Azovstal Steel Plant, Yenakiyevo Steel Plant, Mariupol Steel Plant named after Illyich, ISTIL Steel Plant, Northern Ore Mining and Enrichment Plant (SevGOK), and Central Ore Mining and Enrichment Plant (CGOK). DTEK key indicators Dynamics, % Sales volume, mn $ 1,776 2, Asset value, mn $ 2,654 2, EBITDA, mn $ Net profit, mn $ Coal extracted, mn tonnes 15,8 17, Energy generated, KWH 18,1 16,8-7.18

42 SCM Group Public Report 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 DTEK s total investment in 2008 amounted to $338 mn. In 2008, the coal mining investment program was $228 mn, exceeding the same program volume for 2007 by 78.6%. The investment took place at Pavlogradugol, where a range of large-scale mining infrastructure modernization projects continued. In 2008, DTEK s investment in its coal enrichment plants increased by 22%, amounting to $8 mn.

43 SCM Group s businesses > Core business areas 43 Distributed thermal power consumption by industry, % Population and communal services 4.8% Machine-building 9.5% Others 68.1% Metallurgy 14.7% Coal mining Within the framework of Pavlogradugol s equipment modernization program, an agreement was signed with OSTROJ (Czech Republic), one of the leading mining equipment producers, to manufacture and supply mining equipment to Pavlogradskaya and Zapadno-Donbasskaya Mines, worth over $4 mn. The agreement was also signed with Bucyrus DBT Europe (Germany), one of the world leading coal plough systems producers, to manufacture and supply a modern coal plough system, worth over $42 mn. The total of $52 mn was invested in purchasing the OSTROJ and T Machinery (Czech Republic) mining equipment for Stepnaya and Dneprovskaya mines. In this purchase of mining equipment, DTEK is using documentary credits with post-financing, which allows the company to make large purchases with minimum use of working capital. Within the framework of the contracts with DBT Europe and OSTROJ, DTEK partnered with Swedbank (Ukraine) and Alfa- Bank (Ukraine), respectively. Vostokenergo is one of the few thermal power generating companies in Ukraine, implementing capital construction programs. In the course of the last 5 years, the volume of investment in Vostokenergo s development has grown 4 times, and in 2008 $69 mn was invested - more than double the 2007 figure. This significant increase in the 2008 capital investment program was due to Vostokenergo beginning its power generating unit reconstruction program. Particularly, the first stage of the program has already been implemented at Zuyevskaya and Kurakhovskaya Thermal Power Plants (TPPs), where energy generation units #2 and #5 were recontructed, respectively.

44 SCM Group Public Report The capital repairs with partial reconstruction of Zuyevskaya TPP water cooling tower #2, required the total investment of $7.1 mn. The modernization of the water cooling towers will reduce annual coal consumption by 26.4 thousand tonnes, leading to the significant decreases in the TPP s power generation costs. Within the framework of the 2008 reconstruction program, the first stage of DTEK power generating enterprises modernization program was completed. The second stage began which includes the reconstruction of Zuyevskaya TPP power generating unit #1, Kurakhosvkaya TPP power generating-unit #7, and Luganskaya TPP power generating unit #10. DTEK s energy distribution enterprises, Service-Invest and PES-Energougol, are implementing a range of investment programs, aimed at increasing the production facilities effectiveness. In 2008, DTEK s power distribution block investment program increased by 59.2%, amounting to $21 mn. In 2008, Service Invest completed the reconstruction of the 110 KW Yenakiyevo substation, with the 2008 investment of $2.2 mn (total investment, $5.74 mn). Within the framework of the Konstantinovka town industrial production facilities maintenance and expansion program, Service Invest began the reconstruction of the Konstantinovka substation, aimed at improving maintenance and adding capacity to the Konstantinovka town s industrial zone. The first stage of project implementation involved $5.5 mn of investment, while the overall planned project budget is $6 mn. Coal mining in Ukraine, % = 77.8 mn tonnes 4.4% Komsomolets Donbassa 3.4 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 In 2008, at Dneproenergo, a DTEK associated company (DTEK owns a 47.5% stake), expenditures on repairs and power generating unit reconstruction amounted to $77.1 mn. DTEK signed an agreement for purchasing SAP industry solutions, in order to create a unified business management sytem across all its enterprises. The implementation of the corporate SAP ERP system is planned for , for all DTEK s main enterprises. The business process automation project includes the implementation of the following SAP solutions: SAP ERP enterprises resource planning; SAP for Energy and SAP for Utilities industry solutions, as well as SAP budgeting and consolidation solutions. The implementation of SAP solutions delivers high information support levels for all areas of DTEK activity, helps create an effective communication system within the Group, as well as ensures the standardization of business applications for all DTEK enterprises. The implementation of SAP solutions at DTEK enterprises will be done simultaneously for all industrial sectors: coal mining, energy generation, and energy distribution. DTEK plans to invest about $960 mn in the modernization of its energy generating enterprises before It is intended that between two to three power generating units of Vostokenergo TPPs (Zuyevskaya, Kurakhovskaya, and Luganskaya) will be reconstructed annualy. Because of the worsening economic situation, DTEK s internal ivestment program will be reviewed to ensure the existing investment projects are maintained, with implementation periods revised and partially extended. Distribution of thermal power generated (by TPPs) in % = bn Kw hour 25.4% Vostokenergo bn Kw hour 9.8% Donbassenergo 6.44 bn Kw hour 20.6% Zapadenergo 13.6 bn Kw hour 22.3% Dneproenergo bn Kw hour 21.9% Centrenergo bn Kw hour

46 SCM Group Public Report 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 DTEK s approach to risk management implies an integrated internal control system, based on the strategic planning. Since 2007, DTEK regularly identifies and evaluates risks, with mitigation measures further developed. Risk management at DTEK is instituted in all key decision-making processes, including, but not limited to: investment project risk analysis and an improved system of budget control. Risk management and monitoring are primarily done by DTEK management. The risk management and internal control functions are represented both, on the managing company level and on the enterprise level. The decisions regarding appropriate risk levels are made by DTEK s Executive Council and the governing bodies of respective enterprises. An Internal Audit Department functions in the company, evaluating the internal control and risk management system effectiveness. According to DTEK s latest risk evaluation results, in 2008 the most significant business risks for the company are market, financial, regulatory, and operational. Market Risks DTEK is prone to the changes in market prices for coal and thermal power, supplied to the wholesale market. The minimization of the market risks is achieved by changing the sales structure and expanding the markets for coal and thermal power sales. The market risks are lowered, due to DTEK vertically-integrated business structure, allowing it to minimize the threat of its power generating facilities lacking raw materials supply.

47 SCM Group s businesses > Core business areas 47 Financial Risks DTEK takes into account the following financial risks: credit, currency, liquidity, regulatory, and operational Credit risk is related to the way Energorynok State Enterprise sells electric energy to end users. Management of the credit risk is executed on the enterprise level, with DTEK s general oversight. When supplying electric energy to the industrial clients, DTEK enterprises are monitoring the state of accounts receivable and are entitled to switch off users for non payment. One of the most significant risk factors is the ecology protection energy supply status, applied to specific energy users (mainly state-owned coal mines). Mines which have been given this status by government cannot be disconnected if they fail to pay their energy bills. DTEK enterprises are creating reserves to cover for the risk of outsanding debt, in order to ensure financial stability during the economic crisis. Currency risk for DTEK is limited as most of the company s sales revenue and expenses are received and spent in the Ukrainian national currency. Currency risks only emerge in relation to DTEK s debt obligations, partially denominated in foreign currency, and in relation to the purchases within the framework of investment projects. Management of currency risks mainly provides for the decreased open currency position by balancing the structure of assets and debts, nominated in one currency. This is achieved by holding various currencies to avoid risk of over exposure to a single currency, as well as by targeted efforts, aimed at increasing the foreign currency share in DTEK s overall revenue. Liquidity risk is mitigated by DTEK diversifying its range of counterparties, optimizing the terms of agreements related to payment periods, and implementing programs, aimed at decreasing operational expenses and increasing business process effectiveness. The minimization of this risk is achieved by supporting the target absolute liquidity ratio. The mechanism of monetary funds planning and management allows DTEK to efficiently react to changes in the internal and external environment. Regulatory risk Because pricing in the coal and electric energy markets in Ukraine is regulated by the government, DTEK could face regulatory risks. To mitigate these risks, the company actively participates in the law-making process, (strictly in line with Ukrainian legislation), including the development of the new energy market model. Operational risk As a production company, DTEK pays special attention to monitoring and mitigation of the operational risks. The programs are being implemented on all Group levels to lower the operational costs and increase production processes effectiveness. Emergency plans are also in place to respond to and mitigate efficiently the consequences of industrial accidents and outages. In terms of operational activity, priority risk management areas for DTEK are labor safety, the environment, and production continuity. To effectively mange the operational risks, DTEK actively uses insurance. The company has a specific insurance protection concept developed. This concept is implemented on the central level, by a designated company department, to provide a unified approach to cooperating with insurance companies and to optimize insurance premiums. The insurance system provides for the protection of DTEK s interests and includes property insurance, coverage of losses caused by production outages, as well as payments under mandatory insurance policies. When arranging for the insurance coverage, DTEK considers the completeness of coverage, terms and conditions, as well as the reliability of risk leveraging.

48 SCM Group Public Report 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 consists of 130 branches. Dongorbank is a diversified banking institution and one of the largest banks in the country, according to the National 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 strategy is aimed, primarily, at the long-term value growth of banking and insurance businesses. We constantly strive to increase the effectiveness and the competitiveness of our financial institutions. Investment sources First Ukrainian International Bank organized a private placement of an additional issue of its shares, worth over $208 mn and this was financed by the shareholders. Thus, the bank s statutory fund exceeded $325 mn. Dongorbank statutory capital was increased by $72 mn, and as result amounted to $100.6 mn. Investment In 2008, First Ukrainian International Bank opened 24 new branches. As result, by the end of the year, the bank s regional network consisted of 141 branches. Dongorbank opened 16 new branches, thus, expanding the regional network to a total of 54 branches. In order to implement ASKA strategic development plan (maintaining leadership positions in the insurance services market), as well as to increase the company s solvency and liquidity levels during the recession, a private placement of an additional issue of company shares was organized, worth $6.9 mn and funded by the shareholders. Thus, ASKA statutory fund amounted to $18.8 mn.

49 SCM Group s businesses > Core business areas 49 Banking and Insurance key indicators Banking: First Ukrainian International Bank top; Dongorbank - bottom Dynamics, % Assets, mn $ Capital, mn $ Commercial loans, mn $ Personal loans, mn $ Insurance: ASKA top; ASKA-Life bottom Assets, mn $ Capital, mn $ Insurance premiums, mn $ Insurance payouts, mn $ 2,241,20 2,317, ,050,10 1, ,70 451, , ,281,70 1,447, , ,80 582, , ,30 52, ,90 19, , ,30 2, ,20 77, ,10 5, ,20 26, ,20 1, Risk Management Banking In 2008, the financial and economic crisis significantly influenced the Ukrainian economy, particularly, its financial services market. In the first half of the year, credit institutions retained their access to capital markets, though in the second half of the year the situation radically changed. The main problem of Ukraine s banking system was sharply declining liquidity, caused by the significant outflow of clients funds and inability of the banks to attract new funds to replace them.

50 SCM Group Public Report The 4th quarter of 2008 was the most difficult period of the year for banks, when the rapid national currency devaluation and growing public distrust towards the banking sector led to the mass outflow of clients deposit funds. In its turn, this led to a severe banking system liquidity deficit, decline in the quality of assets, and the threat of bankruptcy for a range of banks. As result of hryvnya devaluation in relation to the US dollar and Euro, borrowers ability to service their obligations to banks declined, this primarily involved foreign currency loans. As result, the number of non-performing loans increased. In this regard, First Ukrainian International Bank and Dongorbank s top management focused their efforts on supporting the banks liquidity. The effective liquidity management policy allowed both banks to comply with all norms, instituted by the National Bank of Ukraine (NBU), as well as timely fulfill their obligations before clients and to service the received loans. In order to manage the liquidity risks, both banks are using the long-term evaluation with 9 monthslong planning range. Scenario and stress-testing are also applied to assess the current liquidity state. In managing the operational risks, a reporting and key indicators diagnostics system is used to target all types of risks, react to them, and prevent their emergence in the future. For loan portfolio monitoring, a multi-level system is applied across all levels of the banks operations from the point of sale, to the analytics produced by experts at the head office. Both banks conduct an integrated analysis of credit risks on a regular basis, constantly working on the improvement of risks control procedures. In 2008, the banking retail segment underwent significant changes in terms of the approach to client and subcontractor data verification. The approaches to granting new loans were reviewed, and new strict requirements covering borrowers financial state were instituted. Special attention was paid to offer debt restructuring programs to clients whose businesses suffered from the economic crisis. In 2008, a system of collateral evaluation was reviewed, to ensure better quality handling of such collateral and controlling credit risks. Efficient measures, aimed at improving the structure of loan agreements, as well as the mechanisms for detecting potentially non-performing loans, has allowed First Ukrainian International Bank and Dongorbank to control the number and dynamics of outstanding liabilitites. Insurance The banking system crisis significantly influenced the operations of insurance companies. The most critical problem for the insurance sector in 2008 was caused by insurance companies holding their reserve funds mainly on deposit accounts in banks. Consequently, any delay in the return of those funds by the banks could significantly damage the financial state of insurance companies clients. In the unstable economic situation and the related pessimistic consumer expectations, insurance companies could not afford to delay on settling claims. Otherwise, the unfounded decline and delays in paying claims could lead to rapidly growing consumer distrust, not to a specific company, but towards insurance sector as a whole. To provide for the timely and complete fulfillment of SCM Group s insurance companies obligations to their clients, the shareholders made a decision to increase the statutory fund of ASKA and ASKA-Life. Additionally, thorough cost optimization programs were implemented at both companies.

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 market on October 15, 2008, as result of Farlep- Optima-CSS Group rebranding. Vega Telecommunications Group possesses a full range of licenses to provide fixed-line services across Ukraine. Services include local, inter-city, and international telephone connection, as well as transmission channel rental. Vega Telecommunications Group provides services in 40 cities and 2 population settlements, in 17 Oblasts of Ukraine. The number of broadband subscribers in Ukraine had grown 105,000 by the end of Vega broadband subscriber base has grown during the same time period by almost 50%, with almost 95% of the new connections made outside Kiev. Vega Telecommunications Group has developed its own powerful country-wide baseline network. Operations management of Vega Telecommunications Group is undertaken by Farlep-Invest. Investment In 2008, the total investment by Vega Group amounted to $36.3 mn, with the main investment priorities being: expanding the regions of presence and building up the company s technology base. The Group purchased Telecom-Ukraine (Donetsk) and Digital Connection Systems (Odessa), two local telecommunications operators, thus, expanding its geographical reach. Risk Management The economic crisis influenced the dynamics of telecommunications services consumption, primarily in the corporate segment. The budgets for office telephone and internet connection were among the first ones to be optimized by Ukrainian companies. The decline in demand for corporate services stimulated Vega Group to review its development plans and to start actively targeting the consumer market. Significant growth of the US dollar exchange rate impacted on Vega Group expenses, especially in terms of equipment purchases from foreign suppliers. Vega managed to maintain its liquidity level by instituting the following measures: regular client funds inflow, current bank financing, loan and subcontractor debt restructuring, and outstanding debt control. These measures allowed the company to support sufficiently its liquidity level and to fulfill its obligations to its partners. The decision was made to decrease the number of the companies in Vega Telecommunications Group legal structure from 45 to 25. The Vega Group structure, based on the fewer companies, will ensure greater business effectiveness and will optimize service provision for customers across the country. Vega Group long-term plans generally remained unchanged. These are the development of a FTTB (Fiber To The Building) connection service, IPTV (Internet Protocol TV), and other content services, as well as client servicing improvements. Rigorous operational costs optimization programs are being implemented across Vega Group.

52 SCM Group Public Report 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 projects 1 in the real estate sector: Pushkinskiy multi-functional complex in the center of Donetsk. A class A project with the total area of 52,600 square meters. Total investment of $130 mn. Multi-functional complex on Frolovska Street in Kiev, with the total area of over 70,000 square meters. Total investment $200 mn. ESTA Holding investment projects: Donbass Palace Hotel a five-star hotel in the center of Donetsk. The World Travel Awards Association declared it the best hotel in Ukraine in 2005, 2006 and Total rooms: 129. Opera Hotel a five-star hotel in the center of Kiev. In 2007, it was recognized as the best new business hotel in Europe (by The World Travel Awards Association). Total rooms: 138. Leonardo Business Center a multi-functional complex in the center of Kiev. Total area: 38,000 square meters. Office buildings in Kiev and Donetsk. Logistics complex in Dnepropetrovsk. ESTA Holding land bank: Multi-functional complex on Moskovskaya Street in Kyiv. Class A project, conveniently located, with a good traffic interchange, and with a total area of about 200,000 square meters. Total investment volume: $500 mn. Suburban residential complex, South of Kiev. A unique complex, with the total area of 43 hectares, located by a lake. Total investment of: $200 mn. ESTA Holding also owns large land plots in Donetsk, Dnepropetrovsk, Poltava, and Crimea. Risk Management The financial and economic crisis resulted in negative dynamics for all real estate market segments. Following this market trend, SCM Group reviewed its strategic plans for real estate, limiting the number of development projects, and concentrating on the key, non capital-intensive segments. To implement the selected projects, experienced partners will be selected who are interested in, and capable of investing in the Ukrainian real estate market. ESTA Group s development is supported primarily from its own funds, thus, significantly minimizing 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 Ukraine Television Channel is one of Ukraine s leading nationwide television channels. According to Gfk Ukraine s latest people meter panel data, Ukraine Television Channel is number 6 in the Ukrainian national TV channels rating. The average audience share of the Channel in 2008 was 5.86%, with a rating of 0.85% amongst 18+ audience in cities with population exceeding 50,000 people. Football Television Channel is Ukraine s first specialized channel, dedicated exclusively to football. The channel is broadcast through cable television networks. News Television Channel is a specialized news channel that will be broadcast exclusively through cable television networks. The channel launch is planned for Digital Ventures is managing a range of online entertainment resources: Glamurchik. com, Nightlife.ua, Yashik.tv, E-motion, Tutatama.com, Astrogid.com, E-movie. Publishing SCM Group s publishing business is consolidated under the Segodnya Multimedia holding that executes strategic management of the following printed editions: Segodnya newspaper ranks number 1 by popularity in Kyiv, Odessa, and Donetsk and ranks number 2 among Ukraine s daily newspapers (source: TNS Global). The average cumulative daily circulation of the Kyiv, Odessa, Kharkov, Donetsk, Dnepropetrovsk, and national editions is about 130,000 copies. Vecherniy Donetsk newspaper a regional edition, aimed at a wide readership of all ages and social groups. Distributed in Donetsk and Donetsk Oblast. Donetskie Novosti a weekly newspaper and Donetskie Novosti Kurier, a free advertising weekly. Distributed in Donetsk. Salon Dona i Basa socio-political newspaper featuring classifieds and advertising. Distributed in Donetsk and Donetsk Oblast. RIO newspaper positioned in the segment of inexpensive TV-guides; promoted as an attractive advertising medium. Distributed in Donetsk and Donetsk Oblast. Priazovskiy Rabochiy large socio-political newspaper, targeting the South of Donetsk Oblast. Distributed in Mariupol and Donetsk Oblast. Mariupolskaya Nedelya weekly family newspaper. Distributed in Mariupol and adjacent rural areas. Dom Sovetov newspaper entertainment edition featuring practical advice regarding: housekeeping, gardening, growing vegetables, cuisine, fashion, treatment, flowers. Distributed in Mariupol and the adjacent areas. Privet, Rebyata! newspaper youth-oriented edition. Distributed in Mariupol and Donetsk Oblast.

54 SCM Group Public Report Tvoe newspaper all-ukrainian edition featuring a variety of consumer information and practical advice. Vecherkom newspaper free evening information and entertainment newspaper. Distributed in Kiev. In addition to printed editions, Segodnya Multimedia manages the following online-resources: www. pr.ua, The holding also manages its own production facilities: the modern Segodnya Multimedia printing house in Vyshgorod which offers a range of full-color printing services. Investment Ukraine media-group Football Television Channel began broadcasting in November It is the first television channel in Ukraine, dedicated exclusively to football. The channel will be broadcasting exclusively through cable television networks. In the course of 2008, Ukraine Television Channel continued to develop its own programming, allowing it to expand the channel s audience base. In June 2008, Ukraine media group created Digital Ventures, a company which will manage a range of SCM Group s internet resources. In the long-term Digital Ventures is expected to occupy a leadership position in Ukraine s digital media market. Segodnya newspaper, with editorial content suited to the interest of these cities population. This initiative helped draw Segodnya closer to its audience and strengthen its market position. Priazovskiy Rabochiy newspaper increased its statutory fund by $1.6 mn. The funding will be used for business development and printing plant modernization. In April 2008, Vecherkom free newspaper entered the Kyiv newspaper market in convenient and innovative evening format. Segodnya Multimedia launched a new printed product Tvoe newspaper. Tvoe offers its readers a variety of consumer information and practical advice. Most of the editorial is supported by journalists investigations on consumer issues or by the industry expert opinion. The new 32-page edition will be published biweekly on Fridays, in an A3 format. The overall newspaper circulation will be around 30,000 copies. Risk Management Economic and financial crisis significantly influenced the Ukrainian advertising market. Following this market trend, SCM Group reviewed and adapted its media business strategy at the end of Necessary measures were taken to provide for SCM Group media assets stability, in order to ensure the long-term objective of them taking leadership positions in their respective segments. 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 companies: Vesko specializes in mining and processing clay for the ceramics, china, and fireproofing industries. It is the biggest supplier of clay in Ukraine and Russia, as well as one of the biggest in Italy, Spain, Turkey, India, and the United Arab Emirates (UAE). The annual volume of extracted clay is 1.7 mn tonnes. Druzhkovskoye Mines Management specializes in mining and processing clay for the ceramics, china, and fireproofing industries. It is the biggest supplier of clay to Belarus, as well as one of the biggest suppliers of clay to Italy, Spain, and Turkey. Annual volume of clay extraction is 0.8 mn tonnes. Ogneupornerud specializes in clay mining for the ceramics, china, and fireproofing industries. Annual volume of clay extraction is 0.5 mn tonnes. United Minerals Group key indicators Dynamics, % Sales volume, mn $ 77,4 94, Asset value, mn $ 131,3 99, EBITDA, mn $ 31,7 31, Net profit, mn $ 23,4 22, Clay mining, mn tonnes 3,0 3,0 0

56 SCM Group Public Report Investment The total volume of UMG capital investment in 2008 amounted to $7.5 mn: Ô Ô $0.5 mn purchasing land plots for future development Ô Ô $5.1 mn purchasing equipment, vehicles, and gear; Ô Ô $1.4 mn construction costs; Ô Ô $0.4 mn project documentation costs; The necessary inventory volumes in warehouses, as well as the availability of the financial resources to support production and sales, allowed the company to maintain partner relations with clients and subcontractors. UMG was able to fulfill its obligations to customers to provide stable clay and clay products supply as well as to maintain product quality. UMG implemented operational costs optimization programs for all of its enterprises, to ensure a high level of production effectiveness and functional cost structure. Ô Ô $0.1 mn software installation. Risk Management In the first half of 2008, the demand for clay in the market significantly exceeded supply, creating a deficit. There were also logistical complexities related to clay transportation, due to the lack of railway cars available, limited port infrastructure, 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 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 square METERS AND PRODUCT RANGE of 4,500 ITEMS. The main competitive advantages of the Brusnytsya chain include: compact space, carefully selected product range, optimal numbers of staff, and a high level of customer service. One of Brusnytsya s main competitive advantages, compared to the large stores, is targeted and efficient response to the consumer preferences in each geographic location. Brusnytsya retail chain geography includes Donetsk, Lugansk, Kharkov, Dnepropetrovsk, and Zaporozhye Oblasts. Investment In 2008, the total investment volume in Brusnytsya retail chain development amounted to $51.5 mn. Most of this funding was used to acquire property and equipment, necessary for the chain s operational activity. During 2008, Brusnytsya opened 24 new stores, taking the overall number of Brusnytsya stores to 39. During the year First Ukrainian International Bank also opened a $8.9 mn line of credit for Ukrainian Retail. Risk Management 4th quarter of 2008, the turnover in all Ukraine s retail chains significantly decreased. As result, Ukrainian Retail reviewed its business development strategy, as well as devised and started implementing a plan to deal with the recession. To provide for the financial stability of Brusnytsya retail chain, the following measures were taken: rigorous financial planning; optimization and decrease in operational costs; increasing stock turnover and marginal revenue; increasing the additional revenue from the non-operating activities; increasing the effectiveness of marketing efforts. Ukrainian Retail managed to maintain its business liquidity level, due to the strict implementation of budgets; rigorous financial control; reviewed payment terms under all agreements; inventory surplus control; reviewed product mix and efficient accounts payable / receivable analysis. The economic crisis and the national currency devaluation significantly lowered the purchasing capacity of the Ukrainian population and led rising prices for imported food products. In the

58 SCM Group Public Report Petroleum products retailing SCM Group has been successfully operating in the petroleum products wholesale and retail trade since 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 Parallel brand is positioned in the premium market segment, serving both wholesale and retail customers. The chain of petrol stations operating under the Gefest brand is positioned in the mid-market segment, offering a wide selection of fuel brands. The chain of gas stations operating under the PitStop brand is targeted at younger drivers serving individual customers who are young in spirit and love fast driving. PitStop gas stations offer their clients high quality regular and branded fuel, as well a wide range of additional services. The mini-market chain operating at the petrol stations under ZZZIP!! brand (33 mini-markets) offers a variety of associated goods and food products, as well as operateing 13 car washes. Parallel Nafta serves as an exclusive light oil supplier to Gefest, PitStop, and Donbassnefteprodukt chains of gas stations, as well as provides fuel storage and transportation services. The company operates its own fuel testing and quality control facilities (an accredited laboratory). The company also owns the largest petroleum storage depot in Donetsk, as well as a fleet of modern petrol and gas tankers. The Group s main petroleum suppliers are: Mazeikiu Nafta (Lithuania), Rompetrol Ukraine, Belarus Oil Company, Ukrtatnafta, TNK BP, Logrus- AMT, Vikoil, and Slavyanskiye Nefteprodukty (Belarus). In 2008, Parallel Nafta sold mn liters of petroleum products. Investment In 2008, the total volume of investment in Parallel Nafta s development amounted to $4 mn. In the course of the year, 7 gas stations were reconstructed, following the change of brand from Gefest to Parallel. Additionally 10 mini markets and 7 car washes were opened, 6 petrol tanker trucks and 1 gas tanker truck were purchased. Gefest, Donbassnefteprodukt, and PitStop chains joined the Card Blanche loyalty program for individual clients, previously launched at the Parallel chain. A new automated light oil discharge system was installed at the Donetskgornefteprodukt petroleum storage depot, helping to decrease the number of fuel measurement inaccuracies by more than five times.

59 SCM Group s businesses > Opportunity businesses 59 A satellite distance tracking system was installed, for remote monitoring of the movement of company s tanker truck fleet. Risk Management Due to the low debt ratio, Parallel Nafta is financially stable. The company supports its development 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 construction of new gas stations is planned. The development of the ZZZIP!! mini-market and car wash chain will be continued within the framework of rebranding. Additionally Parallel Nafta is planning to invest in loyalty programs for individual and corporate clients, as well as in strengthening the market positions of its brands.

60 SCM Group Public Report SCM sport Shakhtar Football Club FC Shakhtar (Donetsk) has a 70-year history of achievement and has the skills and professionalism of its football players and trainers, as well as their teamwork and fighting spirit to thank for its sporting successes. SCM and FC Shakhtar are leaders whose cooperation is aimed at developing Ukrainian football as a whole. Shakhtar has a track record of success having won the Ukrainian Championship (2002, 2005, 2006), the Ukraine Cup (1995, 1997, 2001, 2002, 2004), and the Ukraine Super Cup (2005). The club s budget for the 2007/08 season was $80 mn. Both in Ukraine and abroad, there are more than 90 active FC Shakhtar fan clubs officially registered. The football club has a well-developed sporting infrastructure that includes, among others, a modern training base (originally opened in 1990) and a football academy. Donbass Arena Stadium A new 50,000-seat home stadium, named the Donbass Arena, is the first in Eastern Europe to be designed and built, in compliance with UEFA s 5-star standard. The overall investment in the stadium and the surrounding park amounted to $400 mn. The construction works began in 2006, with ENKA as general subcontractor. The construction completion and the stadium launch are planned for Donbass Arena design was developed by ArupSport, which was also responsible for several of Europe s well-known stadiums, such as Manchester City s City of Manchester Stadium (England), Bayern Munich s Allianz Arena (Germany), Espanyol s new stadium (Barcelona), and the ANZ Stadium, Sydney (Australia).The arena was designed as single sweeping bowl giving excellent views of the pitch and generating a good asmosphere in the stadium rather than as for individual grandstands. The first row of seats is located close to the football pitch and then the seating rises in three tiers from pitch side, ensuring an excellent view for all spectators. To ensure the comfort of spectators with special needs and their companions, 170 special seats were also included in the stadium design. Donbass Arena will also feature three restaurants, four bars for season tickets holders, a lounge bar, as well as dozens of fast-food restaurants, shops, and a fitness center. FC Shakhtar s fan-cafe, museum, and brand shop will be located at Donbass Arena. In the interim between football seasons, Donbass Arena will host corporate events meetings, presentations, press-conferences and business receptions. The stadium will also host international conferences and exhibitions. Guided tours will become a special attraction for the stadium. The concept for the future tours includes exploring Donbass Arena s unique characteristics, visiting the dressing rooms and behind the scenes facilties used by the football players, visiting FC Shakhtar s museum, and finally, gift-shopping at the FC Shakhtar store. Besides football matches, concerts and entertainment shows will also take place at the stadium. Donbass Arena s excellent equipment and sound system will allow it to host not only local performers, but also international superstars. All events taking place in the football field can be simultaneously broadcast on two giant LED-screens, each of 100 square meters. The field s perimeter will be equipped with the latest electronic advertising boards, with a total length of 200 meters. Donbass Arena is FC Shakhtar s home stadium and the cultural center of Donbass capital, Donetsk. In addition, the stadium is being considered as a possible arena to host the Champions League final, the Europa League Final, as well as international games including the Euro 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 Zaporozhkoks (Zaporozhye Coke and Chemical Plant) Ukraine s leading coke and chemical enterprise with a full technology cycle for chemical-recovery and product processing 24.99% shares. Donetskkoks (Donetsk Coke and Chemical Plant) one of Ukraine s largest coke and chemical enterprises, producing over 20 products 24.5% shares. Dokuchayevsk Flux and Dolomite Plant (DFDK) one of Ukraine s largest mining enterprises, specializing in fluxing limestone and dolomite extraction and processing, and the largest producer of fired dolomite for metallurgy. It is also the only plant in Ukraine to produce powders for refractory materials 49.98%. Novotroitskoye Mines Management a large mining enterprise, specializing in limestone and dolomite extraction and processing for metallurgy, refractory, glasswork, and the sugar industries % shares. Krivbasszvryvprom Explosives Company industrial production enterprise, specializing in explosion works in open casts Ukrainian mines. It is also a large producer of emulsion and hydrolabile explosives 46.58% shares. Krivoy Rog Iron Ore Plant Ukraine s largest producer of iron ore 49.94% shares. Energy Dneproenergo Ukraine s second largest electric power producer, with 22.1% share of the thermal power generation market. Dneproenergo production facitlities include three thermal power plants (TPP) Zaporozhskaya, Krivorozhskaya, and Pridneprovskaya with cumulative installed capacity of 8.2 GW/hour, amounting to 30% of the cumulative installed capacity of all TES s in Ukraine 47.5% shares. Donetskoblenergo specializes in electric power distribution at regulated tariffs and its supply using local electric networks 30.59%. Telecommunications Astelit a national operator, providing mobile communication services in GMS 900 and GSM 1800 standards, operating under the life:) brand 44.96% shares. MMDS Ukraine a telecommunications company providing digital television services and internet access, based on MMDS (Multichannel 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 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 best world practice in corporate social responsibility, adapted to meet Ukrainian market conditions. The CSR principles we follow allow us to harmonize increasing business efficiency with the interests of local communities and society as a whole. The Group s activity in CSR area has also received public recognition. The company ranked number one in the Rating of Socially Responsible Companies by Gvardia Magazine. The rated companies were evaluated, based on their transparency and CSR activity in In addition, SCM was the first among Ukraine s largest holdings to publish a Sustainable Development Report, prepared in line with Global Reporting Initiative (GRI) requirements, with the GRI standard adapted to match Ukraine s economic and social reality. SCM also developed a methodology of social reporting and launched the implementation of sustainable development reporting system at the Group level. The company s corporate social responsibility is reflected in six key areas of activity: corporate governance and business ethics; working conditions; the environment; local communities; social investment; sponsorship and charity. Every company and organization that is part of SCM contributes to addressing the social issues in its region of presence. SCM Group six CSR Policies WORKING CONDITIONS THE ENVIRONMENT CORPORATE GOVERNANCE AND BUSINESS ETHICS 6 CSR policies SPONSORSHIPS AND CHARITY LOCAL COMMUNITIES SOCIAL INVESTMENT

64 SCM Group Public Report In April 2008, SCM presented two updated CSR policies social investment, as well as sponsorship and charity. The key areas for project implementation will be culture, education, sport, and health. By focusing on these key areas, SCM strives to provide greater effectiveness of the Group s investment in the development of Ukrainian society. In sponsorship and charity, preference will be given to nationalscale projects, as well as to projects, aimed at strengthening Ukraine s position on the international arena. In social investment, SCM plans to implement both, regional and national projects. One of the most significant transformations in SCM Group s charitable activity was the change to the status of the Foundation for the Development of Ukraine. Since its launch until March 1, 2008 Foundation for the Development of Ukraine was SCM Group s corporate foundation. In March 2008, the Foundation became the personal charitable foundation of Mr. Rinat Akhmetov, SCM Group s main shareholder. Simultaneously, the Foundation continues to work wih SCM Group as partner on charitable projects. Consequently, SCM s charity programs, as well as social investment projects, will be implemented on behalf of SCM, rather than on behalf of the corporate Foundation, as it was done before. The other SCM Group partner within the framework of CSR policies implementation is the thinktank, Bureau of Economic and Social Technologies (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: Devising monitoring products, analyzing Ukraine s socio-economic development dynamic on macro- and microeconomic levels, including regional and sectoral aspects. Undertaking both theoretical and empirical studies on a variety of socio-economic policy issues. Providing consulting services (developing consultancy products in the areas of socio-economic policy, corporate governance, and corporate social responsibility).

65 Social responsibility and sustainable development 65 Corporate Governance and Business Ethics SCM Group runs its businesses in an open and transparent manner, upholding all legal and normative standards. The company recognizes its responsibility before employees, business partners, investors, Ukrainian society, and local communities for actions related to its business activities. SCM Group communicates openly with all stakeholders about its business activities and operations, while respecting their rights and points of view. SCM runs its businesses professionally, upholding the highest international standards, investing in human resources, as well as stimulating both, innovation and an enthusiastic approach towards work. One of the key elements of SCM business and corporate ethics standards raising concept is introducing a transparent and objective system of incentives. SCM implements a policy of transparent and fair compensation, based on individual contribution to the overall business result. Working conditions SCM looks to hire the best expertise and talent at all levels of its business. SCM Group businesses employ a total of nearly 150,000 people. SCM maintains the salary levels of its employees in accordance with current legislation and meets the legal requirements for employer s social guarantees. Salaries at the Group s enterprises are generally higher than the market average in the business sectors where SCM is present. The Group rigorously strives to improve the health and safety conditions for its employees, decreasing the occupational accident and illness levels, as well as improving the working environment. Labor safety management across the Group is a priority and is based on the world best practice the international OHSAS standard. SCM respects the right of its employees to establish professional unions and other associations to represent their interests. SCM provides equal opportunities for all employees and creates conditions for each individual to realize his or her full potential. SCM invests in professional development and continuous learning for its employees, thus, developing its own corporate culture. The Environment SCM sees environmental sustainability as an essential element of its business processes. The Group meets all legal requirements in terms of protecting the environment and constantly strives to deliver performance on environmental indicators, which exceed the established norms. We support the introduction of international environmental standards in Ukraine. The Group is actively working on evaluating, monitoring, and managing possible risks to the environment and the impact on local communities, caused by production processes. Environmental issues are of primary importance to the Group s industrial enterprises. Environmental issues management is based on world best practice and meeting the ISO environmental standards. In accordance with ISO requirements, Metinvest has instituted and certified environmental management systems at all six of its Ore Mining Division companies and at Khartsyzsk Pipe Plant (KHTZ). Other Metinvest companies are currently undergoing preparations to implement these standards. At DTEK, elements of the ISO system have also been instituted, and all enterprises are expected to receive ISO certification by the end of SCM is introducing new technologies and processes that have a positive impact on the environment and is working to reduce energy consumption and to use energy-efficient technologies in all areas of its activity. Group companies continu-

66 SCM Group Public Report ally analyze their CO2 emissions and those of other greenhouse gases, in order to effectively manage and reduce them. When implementing new investment projects, SCM applies efficient and environmentally friendly technologies. The Group is sympathetic with the international community in recognizing the importance of fighting climate change. To minimize its environmental footprint and reduce green house gas emissions, SCM uses Kyoto Protocol based projects to help it tackle emissions reductions and energy efficiency. For example DTEK and Metinvest are implementing coal bed methane capture and recycling projects. These projects help reduce the volume of green house gas emissions entering the atmosphere, while at the same recycle the methane to use it to power boilers to provide hot water for mines and to generate electricity. SCM actively cooperates with community organizations, government, and local communities, in order to address their environmental concerns, as well as takes stakeholder opinions into account in its decision-making process. SCM Group management actively encourages employees to protect the environment and biodiversity. Local Communities Many companies at SCM Group are the leading employers in the city or town where they are based, therefore play a major role in the lives of local communities. Naturally, the Group is concerned about the environment in which its employees live and work. The SCM companies play an active part in tackling the socio-economic issues in their regions of presence. They do this by investing in local infrastructure development and in local territory improvements. To help improve the local residents quality of life, SCM works in partnership with all stakeholder groups, including the local governments, to implement projects. Through joint efforts, they put together a cohesive set of measures, aimed at delivering specific sustainable results and bringing about tangible change. At the same time, SCM enterprises welcome and support the desire of their employees to participate in the work of the local government bodies. One of 2008 s key achievements was SCM enterprises adopting the mechanism of strategic partnership with local authorities, within the framework of social partnership agreements. Earlier, the enterprises were receiving ad hoc requests for assistance from local governments as the specific problems emerged. Today, socioeconomic partnership agreements are signed between the enterprises and the local authorities, addressing the long-term development goals of specific regions and particularly defining each party s role and responsibilities in this process creating a transparent system of cooperation. Social Investment SCM is involved in facilitating the implementation of social programs on the national level, to support the sustainable growth and development 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 the main direction of SCM social investment included education development projects. For example, in September 2008, SCM presented the Compass project, which is a rating of Ukrainian Higher Educational Institutions for Compass has become Ukraine s first nation-wide rating, based on the opinion of employers and young specialists regarding the compliance of the local higher educational institutions graduates skills and knowledge with the labor market requirements. The leading positions in the rating were occupied by the higher education institutions, providing the most valuable education from the standpoint of practicality, compliance with real economy sector requirements, and guaranteeing reliable employment (salary and career growth) perspectives to the graduates.

67 Social responsibility and sustainable development 67 Sponsorship and Charity SCM invests in sponsorship and charity programs, addressing the social problems in education, health, sport, and culture. SCM does not sponsor or provide funds for political parties, individual politicians, or political events. SCM Group does not provide sponsorship funding for institutions, events, or campaigns that support a particular religion or to organizations whose goals are purely commercial in nature and who expect to gain benefit from SCM s support as a sponsor. Metinvest CSR Projects Metinvest main CSR direction for 2008 was social development in its regions of presence, aimed, primarily, at supporting and developing city infrastructure and social facilities including health care, education, and sport. SevGOK allocated $1.5 mn for large-scale reconstruction of the Damanskiy District of Krivoy Rog. Under the project, the following works were completed: major road repairs; construction and reconstruction of public transportation stops; construction of two playgrounds and two sports grounds for children; renovation of street lighting; restoration of parks and public gardens; and reconstruction of the local civic centre. The rennovation of an entire residential community was the first, and so far the only initiative of its kind, not only in Krivoy Rog, but in Dnepropetrovsk Oblast. Avlita Stevedoring allocated $560,000 to implement the construction of a new sewerage station in Sevastopol. The company also began the reconstruction of the Gornyak Stadium in Simferopol. The first stage of stadium reconstruction will require an investment of $230,000. Within the framework of Orjonikidze District improvement project in Mariupol, Azovstal Steel Plant allocated $1.1 mn to help renovate residential buildings local territory improvement as well as road and street lighting repairs. Azovstal also took a number of measures, aimed at improving the quality of medical services available to Mariupol citizens: City Hospital #4 s intensive care unit was upgraded and the clinical department underwent major refurbishment. At City Maternity Hospital #2 the surgery department was also refurbished. Additionally, these hospitals were provided with new medical equipment and supplies. The total project investment volume amounted to $650,000. In 2008, Yenakiyevo Steel Plant (YeMZ) continued the joint project with FC Shakhtar Youth Football Academy by building three football pitches with artificial surfacing on YeMZ stadium, worth about $1 mn. DTEK Group CSR Projects In 2008, DTEK ratified its CSR policies and Corporate Ethics Code. The company also published a CSR Report, the first of its kind to be produced by a Ukrainian industrial company. The report was prepared to international social reporting standards (Global Reporting Initiative (GRI)) and AA1000 series. In 2008, in terms of cooperation with the local government authorities, DTEK enterprises made a transition from signing the memoranda of understanding to formulating a long-term social and economic cooperation strategy, based on the partnership and transparency principles. In March 2008, a long-term multilateral DTEK Social Partnership Declaration was signed. To ensure the transparency of this partnership and effectivene funding allocation, a Social Partnership Coordination Committee was created. Within this framework, DTEK and its mining business Pavlogradugol have allocated over $550,000 for the implementation of social programs in Western Donbass in the towns of Pav-

68 SCM Group Public Report lograd, Ternovka, Pershotravensk, as well as Pavlograd and Petropavlovsk districts. The social investment made under the project is more than double the sum spent for this purpose in In Pavlograd, the Chidlren s Department of the City Hospital #1 was refurbished. In addition computers and multimedia equipment were purchased for the public schools in the town. In Ternovka, the Children s Recreation Center building underwent major repair and remodeling. In Pershotravensk, the domestic waste collection, transportation, processing, and utilization program was continued by purchase of containers for waste separation. Pavlograd district used its allocated funding to purchase digital color X-Ray equipment. Petropavlovsk district used the allocated funding to provide 12 public schools with 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 allocated by DTEK within the framework of the social partnership programs in UN Assembly ratification of the Universal Declaration of Human Rights. As a Global Compact General Partner, DTEK supported the second edition of the book CSR. Expert Evaluation and Practice In Ukraine, within the framework of the Expert Magazine and Eastern Europe Foundation joint project, supported by the Media Development Fund of the US Embassy in Ukraine. The edition is intended for CEOs, top managers, government officials, and NGO managers, as well as journalists and other experts, working and interested in CSR. Detailed information on social and environmental aspects of SCM Group activity can be found in SCM Sustainable Development Report: In October 2008, the preliminary results of DTEK and USAID (United States Agency for International 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 local governments in the regions where DTEK operates (7 City Councils and 2 District Councils) and has as its objective the improvement of the strategic planning processes to assist in increasing the competitiveness and the investment attractiveness 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 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-Monopoly 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 formalized, the enterprise will be integrated into SCM Group. Within the framework of Krasnodonugol s long-term development program at Molodogvardeyskayа mine the reactivated 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 manufacturers 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 Telecommunications 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 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 construction industry by producing reinforcing bars and steel rounds 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 development 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 labor 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 modern 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 efficiency 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 SCM presented the SCM Group Sustainable Development Report The report structure fully complies with SCM CSR priorities, and meets the leading international standards of the GRI sustainable development and reporting guidelines, UN Global Compact principles, and Ukrainian legislation requirements. The independent verification 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 framework 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 management 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 investment 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, according 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 transparency 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 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 In the 1st quarter of 2009, Azovstal Steel Plant invested about $200,000 in environmental improvement activities, 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 compliance 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 amounted 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 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 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 Director, were both ranked number one. Besides, Mr. Syry and Mr. Timchenko were declared the best CEOs in the metallurgy 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 representatives 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 consolidation 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.