2013 Integrated Annual Report of OJSC Atomenergomash: COMPANY DEVELOPMENT STRATEGY

COMPANY DEVELOPMENT STRATEGY

Primary focuses of the Company’s strategic development

In 2013, OJSC Atomenergomash, under the initiative of Rosatom State Corporation, has updated its strategy for the period until 2030 envisaging a transformation of the Division into a high-tech diversified holding that will be competitive on the global market and sustainable in the long term.

Strategic vision of OJSC Atomenergomash:

The guaranteeing single-source supplier of major nuclear power plant equipment
The key player with a strong position in the non-nuclear power engineering markets
The efficient manufacturer and supplier of competitive solutions

Accordingly, the Company has set the following strategic objectives implementation of which will facilitate improvement of Rosatom State Corporation competitiveness as a whole:

Expanding the presence of the Division's enterprises in related sectors (thermal power and alternative energy, gas and petrochemical industry);
International cooperation with global leaders through incorporation into their production chains, establishing alliances, and localizing advanced foreign technologies in Russia;
Globalization of operations, including the localization of production in priority regions where the Company operates;
Expanding the list of services offered before, during and after the sale of products;

Improving the efficiency of production activities through the implementation of cost-cutting, technological development and R&D programs aimed at introducing advanced and highly efficient design and manufacturing processes;
Implementing programs to improve product quality and develop personnel.

Key stages of development and objectives of AEM

The Company’s strategy identifies long-term targets that outline the implementation of the aforementioned strategic objectives:

Long-term targets of the Strategy

20%

22%

50%

Share of the Russian power engineering industry

42%

39%

50%

Share of revenue from non-nuclear sectors

16%

25%

Share of revenue generated by foreign operations

2013 г.

Forecasted for 2014

Target for 2030

By 2020 it is planned to almost double the revenue from traditional markets and almost triple the revenue from new markets. By 2030, OJSC Atomenergomash predicts a quantum leap, including multiple growth of EBITDA margin and triple productivity growth.

High standards of quality, safety and reliability adopted at the Division's enterprises enable fulfilling orders not only for nuclear power plants. If we created a competitive enterprise, it must prove its competitiveness by winning tenders outside the nuclear industry. Competitiveness of an enterprise is determined not by the scope of orders in the industry, but by the scope of external orders.

Sergei Kirienko,
Chief Executive Officer of Rosatom State Corporation

Power engineering market in 2013.

The global power engineering market is currently valued at about USD 100 billion per year, and the volume of this market may expand to about USD 150 billion per year by 2030.

In 2013, the largest share of investment for new power plant equipment was spent on thermal power development. The proportion of expenses on equipment in nuclear power and thermal power is expected to even out by 2030.

The Russian power engineering market (hereinafter referred to as PEM) will follow general global trends for the next few years.

The main focuses of the power engineering market in Russia involve plans to introduce new generating capacity in accordance with the general plan for the siting of electricity facilities before 2020 and the long-term period prior to 2030 and also in accordance with the road map for the construction of nuclear power plants prepared by Rosatom State Corporation.

In addition, in 2013, the Ministry of Energy of the Russian Federation approved the Scheme and Program for Development of the Unified Energy System of Russia for 2013-2019.

According to the information of System Operator of the Unified Energy System, total installed capacity at the power plants of UES of Russia amounted to 226,470.18 MW as of the end of 2013.

Installed capacity of UES of Russia power plants increased by 3,991.97 MW due to the commissioning of new generating equipment and the modernization of existing power plant equipment, including:

the commissioning of new capacity of UES of Russia power plants in 2013 totaled 3,738.37 MW taking into account the power plants of industrial enterprises;
increase in installed capacity of existing generating equipment due to modernization totaled 253.6 MW.

Structure of the installed capacity UES of Russia power plants by type of generating equipment as of January 1, 2014:

30.9%

11.2%

20.6%

28.6%

8.7%

TPP power units

NPP

HPP

CHP

GTP, CCGTP

The Company’s position in the global and Russian power engineering industry

According to the results of 2013, OJSC Atomenergomash shared 20% of the domestic power engineering market, having once again taken the leading position in terms of revenue in this market.

It should be noted that product lines of each player as a whole are unique, which is a proof of limited competition in the market.

Share in the Russian branch of power mechanical engineering

26%

20%

14%

10%

Power Machines, including EMAlliance

Atomenergomash

OMZ

Elektrozavod

NPO Saturn

Tyazhmash

Belenergomash

PMZ

UTZ

Elsib

Sibenergomash

Other

Source: reports of companies, media, AEM assessment, RBK.

Nuclear power

Today Rosatom State Corporation ranks as number one in the world in terms of the number of NPPs in the construction stage or in preparation for construction.

The companies of the OJSC Atomenergomash corporate profile are designers and manufacturers of the equipment installed at all nuclear power plants built in the countries of the former Soviet Union and at several foreign nuclear power plants (in Bulgaria, Hungary, the Czech Republic, Slovakia, the former East Germany and Finland with VVER-440 and VVER-1000 reactors).

In 2013, key equipment for Leningrad NPP-2, Novovoronezh NPP-2, Rostov NPP and Beloyarsk NPP was produced. In addition, supplies and services were provided to Balakovo NPP, Beloyarsk NPP, Bilibino NPP, Kalinin NPP, Kola NPP, Kursk NPP, Smolensk NPP, Zaporizhia NPP (Ukraine), Rivne NPP (Ukraine), Mochovce NPP (Czech Republic), Kudankulam NPP (India), Kozloduy NPP (Bulgaria), Paks NPP (Hungary), Jaslovské Bohunice NPP (Slovakia), Temelin NPP (Czech Republic) and Tianwan NPP (China).

The Division's enterprises are continuously performing work to modernize the equipment of existing NPPs in order to improve reliability, economic performance and increase service life.

Gas and petrochemical industry

To achieve the goal of increasing the portion of revenue from non-nuclear areas in the medium-term, a task to multiply the share of the Division's enterprises in the gas and petrochemical equipment market was set.

The main challenge for OJSC Atomenergomash in this segment is the high competition in the market due to the large number of players with established brands that results in high market entry barriers. In order to fulfill the goals and objectives, OJSC Atomenergomash plans to actively work with potential customers.

In 2013, the Volgodonsk branch of CJSC AEM Technologies, Atommash, shipped hydrotreaters to Orsk Refinery and Ryazan Oil Refinery (TNK-BP) and two reactors for CJSC RNPK (OJSC Rosneft OC). A contract for reconstruction of Kogalymneftegaz Refinery (OJSC Lukoil) was concluded. In addition, CJSC AEM Technologies was accredited in OJSC Rosneft OC, OJSC Lukoil, and OJSC AFK Sistema.

Thermal power

The main purpose of the business area is consolidation and development of the abilities of the Division for planned revenue growth in this area. A significant portion of the revenue of the segment is generated by production of boiler equipment at the production premises of ZIO-Podolsk.

The main challenge in development of the segment in 2013 became the severe price competition that increases due to the completion of power units construction within the framework of the CSC (Capacity Supply Contracts) Program.

In the reporting period, the Division's companies have fulfilled their obligations to supply equipment for Nizhnevartovsk TPP, Nazarovo TPP, Yuzhnouralsk TPP-2. In addition, the Czech company Chladicí věže Praha has signed two contracts for the development of project documentation and supply of technological equipment for OJSC Fortum (TGK-10). The contracts were concluded in relation to the construction of three 247.5 MW combined cycle gas turbine units at Chelyabinsk TPP.

An important focus of business for enterprises of OJSC Atomenergomash (primarily OJSC ZiO-Podolsk) is participation in projects to modernize TPPs in Russia and CIS countries. In particular, two tenders to modernize Starobeshevo TPP (Ukraine) and Reftinskaya TPP (Sverdlovsk region) were won. The Company’s strategic goal is to gain a 40-50% share of the target markets for modernization projects.

OJSC Atomenergomash plans to actively develop its experience in the very latest technology for construction of 600-900 MW coal-fired power units at thermal power stations for ultra-supercritical steam parameters, by increasing its market share to 20%.

Special steels market

This business segment has been formed at OJSC Energomashspetsstal.

The main challenge in 2013 was the increased competition among producers of special steels due to the reduction in the economic growth rate and industrial production in CIS and Eurozone countries. In order to improve competitiveness, OJSC Energomashspetsstal is actively implementing an industry-wide and divisional programs to optimize it's production technology.

In 2013, OJSC Energomashspetsstal implemented large-scale projects for production of a support roll for plate mill "5000" from a unique ingot weighing 415 tons, a hydraulic roll for Dnestrovskaya HPP from an ingot weighing 355 tons, and castings for shells with connections for RITM 200 project weighing 290 tons.

Also, in 2013, OJSC Energomashspetsstal approved itself as a supplier for Rolls-Royce, ALSTOM, and ArcelorMittal.

Among the objectives in the Special steels segment for 2014, the following should be noted:

to complete the certification conducted by ALSTOM and BHEL;
to ship castings for Belarusian NPP and RITM-200;
to complete the qualification for the VVER-TOI project (shipping core shell );
to launch production of castings for Akkuyu NPP;
to manufacture equipment for production of forged and die stamped steam generator heads of reactor plants.

Wind energy

In the development of wind energy, the priority goal of OJSC Atomenergomash is the full cycle model that enables control over the entire value chain, from designing development projects and production of wind power plant (WPP) components to operation of wind power stations (WPS) and sales of electricity.

One of the important focuses is designing and selling ready for use WPS development projects with a contract for supply of components (tower, hub, frame, brake plates). For implementation of development projects, a special unit, CJSC VetroOGK, was founded within the Division's structure.

In 2013, agreements for cooperation on prospective construction of WPSs with the municipal administrations of Stavropol and Astrakhan regions were signed. In addition, in June 2013, wind monitoring was started at the construction site of the proposed wind power station in the Republic of Adygea.

In June 2014, CJSC VetroOGK plans to participate in the tender for selection of CSC investment projects covering renewable energy sources with a number of projects to a total capacity of 345 MW. For implementation of the development projects, it is planned to use other subsidiaries of OJSC Atomenergomash.

At its production facilities, OJSC Atomenergomash is ready to organize production of a number of key components for WPPs to orders from original manufacturers, not only for its own projects, but for other market players as well.

Currently, OJSC Atomenergomash is negotiating with industry leaders about an order for components production, to achieve the required level of localization in the Russian Federation.

Sustainable development strategy of the Company

Sustainable development is the kind of development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

UN World Commission on Environment
and Development

For the first time, the Company announced the important role of sustainable development in its activity in the Report for 2010, where it recognized following the concept of sustainable development as one of the most important success factors in the medium and long term.

A mandatory condition for achieving the strategic goals of the Company is integration of the sustainable development aspects in its key priorities and plans.

Konstantin Tulupov,
Strategy Director, OJSC Atomenergomash

At that time, there were plans drawn up to develop this area, the main objective of which was to form a Sustainable Development Strategy and build a Sustainable Development Management System. Later on, the plans were annually updated due to the complexity of the objective and necessity of interaction between all divisions of the Company.

The Report of 2011 presented the sustainable development concept of OJSC Atomenergomash.

The agenda for sustainable development was worked out in detail, and the next objective was to link it with the initiatives being implemented or have been planned by the Company.

. This work was performed in 2013 and its results formed the basis for the Draft sustainable development strategy of OJSC Atomenergomash until 2020 which was presented for the public dialogue.

In its Sustainable Development Strategy, the Company has defined a list of the main areas of activity, based on the global agenda for sustainable development, the priorities of Rosatom State Corporation and the opinion of the Company's key stakeholders.

The strategic areas for sustainable development of OJSC Atomenergomash are presented below:

Strategic areas for sustainable development

  Optimization of production processes,
  Foreign partner engagement,
   Operations in the regions
   Economic performance,

  Industrial safety,
  Innovative activities ,
  Human resources,
   Energy efficiency .

Currently, strategic plans are not ready for all the areas; at this stage, for some of the areas only a strategic vision is prepared. In addition, the planning horizons are different for the areas due to the objective reasons, including applicable rules and requirements.

GANZ EEM introduced a unique product – an innovative transportable containerized mini hydro power plant for production of electricity in remote areas without central power supply. The development of the innovative product is financially supported by the Hungarian government. The total project cost is 738 million forints (2.46 million Euro).

Preferences in the development of hydropower engineering, according to some scientists, should be given to construction of small and mini HPPs, and stream flow power plants. Hydroelectric power plants are currently categorized as the most environmentally friendly energy sources; but large HPPs are costly and may not always be suitable. Today, mini HPPs can be a good alternative to thermal and nuclear power plants because the resources of small water streams are virtually unlimited and are scarcely in use.

The Hungarian mini HPP consists of a generator, a medium capacity radial-flow (Francis) turbine with a horizontal shaft, and a control system. The generator provides a voltage of 400 V, 50 Hz. The operating head of the water flow for the mini HPP should be 60-65 m at rated discharge of 1 m3/s. With this basic data, the system's rated power will be equal to 500 kW. If the water flow head is 120 m at a discharge of 1 m3/s, the rated electric power of the system will be 1 MW.

The main advantage of the Hungarian mini HPP is that all necessary equipment is mounted in a standard container and the system is ready for connection to the local network immediately after installation. The installation of the mini HPP requires a foundation, a water intake, a valve, a charge pipe, and a connection to the local network, so the production of electricity can be started in a short period. Control and monitoring can be done via a satellite link. A mini 0.5 MW HPP can supply remote villages in the "island" mode and industrial oil producing plants, logging plants, mines, etc.

This project has no analogues in the world. The prototype of the mini hydropower plant will be ready by the summer of 2014. Interest in this product has already been expressed by representatives of Russia, countries of the Central Asia, Turkey, Indonesia and other countries.

In 2013, GANZ EEM signed a cooperation agreement with a Turkish company TEMSAN. In Turkey, 56 hydropower plants from 1 to 10 MW are being built. The Hungarian enterprise can participate in designing hydraulic turbines with capability of up to 10 MW, in production of impellers and other components for hydraulic turbines. Turkish experts were invited for training in the production premises of GANZ EEM.

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Mission of OJSC Atomenergomash	To establish and develop globally competitive technological solutions for the power industry in order for people to maintain a comfortable life and to achieve growth in the Company’s business results.
Sustainable development of OJSC Atomenergomash	A system of consistent and interrelated activities ensuring the balance of the strategic goals of the Company and interests of all stakeholders in the economic, social and environmental areas of activity in order to preserve and grow the potential of the present and future generations.