Gazprom – Joint Stock Company

On February 17, 1993 State Gas Concern Gazprom was transformed into Russian Joint Stock Company (RAO) Gazprom pursuant to the Russian Federation Government Directive and following the Russian Federation President Decree of November 5, 1992. RAO Gazprom was reincorporated into an open joint stock company in 1998.

As a vertically integrated energy company, Gazprom Group is comprised of the parent company – OAO Gazprom and its subsidiaries engaged in gas, oil and other hydrocarbons extraction, transmission, processing and marketing, underground gas storage, thermal and electric power generation and distribution as well as other activities including pipeline systems monitoring, oil and gas wells drilling, equipment supply, R&D, information processing and banking services.

This sector covers more than 20 subsidiary companies engaged in hydrocarbon fields exploration and development.

Transmission of natural gas is vested in 19 subsidiary companies conveying gas by gas trunklines. Seasonal and peak gas demand is met with the use of 25 underground gas storage facilities located in the Russian Federation and operated by OOO Gazprom UGS and 3 UGS facilities in Belarus.

Gas, gas condensate and oil processing is carried out at six gas and condensate processing plants of OAO Gazprom as well as by OAO Gazprom Neft and OAO Gazprom Neftekhim Salavat.

Natural gas is sold in the domestic market primarily by OOO Gazprom Mezhregiongaz through 49 Russian regional gas marketing companies and their affiliates.

Since the late 1990s Gazprom has been acquiring stakes in gas distribution companies that own and operate medium and low pressure gas transmission networks used for gas delivery to ultimate consumers. OAO Gazprom Gazoraspredeleniye manages the assets.

Gazprom’s products are exported via the wholly owned subsidiary OOO Gazprom Export.

OAO Gazprom Neft is the mainstay of Gazprom’s oil business. It comprises around 80 oil production, refining and marketing companies in Russia, within and beyond the former Soviet Union (FSU).

Gazprom owns three largest generating companies in Russia – OAO Mosenergo, OAO TGC-1 and OAO WGC-2 (consolidated on the books of a specialized subsidiary company – OAO Gazprom Energoholding). Electric power is supplied to Gazprom Group companies by a specialized company – OAO Mezhregionenergosbyt. OOO Gazprom Energo operates power supply networks of low and medium voltage at Gazprom Group member companies.

Ancillary activities. Gazprom Group comprises structural units performing activities that are ancillary to the core business. Such activities include repair, upgrading and monitoring of the Unified Gas Supply System; process communications and R&D.

Any large corporate structure is continuously changing according to the company’s development logic. Gazprom is not an exception.

The corporate structure of OAO Gazprom undergoes reform for improvement purposes.

The completed phase 1 of the reform was targeted at improving the parent company’s management techniques, regulatory procedures and budgeting system.

Phase 2, which is underway, aims at enhancing the efficiency of OAO Gazprom as a vertically integrated company and streamlining the core businesses management structure of its subsidiaries. While pursuing these objectives, individual activities were concentrated within specialized wholly owned subsidiaries of OAO Gazprom.

The corporate reform activities centered on Gazprom’s gas production and transmission companies. Underground gas storage facilities that used to be part of those are now consolidated within a specialized subsidiary – OOO Gazprom UGS. While the Group’s processing companies were integrated within OOO Gazprom Pererabotka, well operation maintenance was vested in OOO Gazprom Severpodzemremont and OOO Gazprom Yugpodzemremont. OOO Gazprom Tsentrremont (consolidates repair and maintenance assets), OOO Gazprom Inform (an integrated IT services subsidiary) and OOO Gazprom Dobycha Shelf were set up.

Personnel structure of Gazprom Group’s major gas production and transmission companies in 2011.

In order to improve the investment efficiency, wholly owned specialized subsidiaries OOO Gazprom Invest Zapad, OOO Gazprom Invest Vostok and OOO Gazprom Invest Yug were established.

It is further planned to complete the consolidation of maintenance services.

The restructuring helps the Company unbundle cash flows in production, transmission, processing, underground storage and marketing of gas and liquid hydrocarbons as well as to significantly enhance costing transparency in its businesses.

In furtherance of the corporate governance system reform aimed at the Company’s structural transparency and visual identity of OAO Gazprom both in Russia and abroad, basic wording principles for subsidiaries’ names have been developed. The principles stipulate that a subsidiary’s name contains the parent company’s name – Gazprom.

RAO Gazprom (since 1998 – OAO Gazprom) was privatized fully in line with the Russian Federation privatization laws as well as the Decrees and Directives of the Russian Federation President, and the Resolutions of the Russian Council of Ministers – the Government.

The Decree to transform Concern Gazprom into a joint stock company was considered by the Presidium of the Russian Supreme Council on October 26, 1992. At the time RAO Gazprom was founded, 100 % of the Company’s shares were held by the Russian Federation.

As a result of the shares distribution held between 1993 and 1995, 41 % remained under the state ownership, 10 % were acquired by Gazprom in exchange for privatization vouchers, 15 % were paid by the Company’s current and former employees in vouchers (at least 50 % payment) and in cash, 32.9 % were acquired by the residents of 60 Russian regions in exchange for vouchers, and 1.1 % were handed over to OAO Rosgazifikatsiya. 8.3 million privatization vouchers and around RUB 17 billion were paid for Gazprom’s shares. 1.03 million Russian citizens became the Company’s shareholders.

Just like shareholders of other joint stock companies, Gazprom’s shareholders are basically entitled to:

• participate in the General Shareholders Meeting with a voting right on all issues within the General Shareholders Meeting competence;
• receive dividends.

A 2 % ownership stake enables a shareholder or a group of the Company’s shareholders to nominate candidates for the Gazprom Board of Directors and Audit Commission as well as to bring forward the shareholders meeting agenda items. A shareholder or a group of shareholders possessing a 10 % ownership stake may call for an extraordinary shareholders meeting of Gazprom to be summoned.

In order to facilitate efficient protection of its shareholders’ rights and interests, Gazprom was one of the first Russian companies to adopt the Code of Corporate Governance (Conduct) in 2002. The document sets out the basic principles and mechanisms enabling shareholders to exercise their rights as well as creating conditions for the Board of Directors to efficiently control the activity of Gazprom’s executive bodies, i.e. the Management Committee and the Management Committee Chairman.

In addition to the Code requirement for corporate data disclosure to the shareholders, the Board of Directors has adopted OAO Gazprom Provision on Information Disclosure.

The Company participates in and arranges numerous charitable and sponsorship events aimed at developing culture, sports, science and education, it also assists socially disadvantaged citizens.

The Company does not provide any direct financial support to its shareholders.

The Chairman and the Members of the Company’s Management Committee are elected for a 5 year term by the Board of Directors entitled to early termination of their powers.

The dividend amount depends on OAO Gazprom’s net profit calculated under the Russian accounting standards in compliance with the Russian laws and regulations. The net profit is determined by the Company’s operating and financial results.

OAO Gazprom Dividend Policy was approved by the Board of Directors on October 27, 2010.

The Dividend Policy provides for the following distribution procedure for the net profit in a reporting period.

In compliance with the Company’s Articles of Association a share of the net profit is channeled to form the reserve fund unless it reaches the size specified in the Articles of Association (7.3 % of the authorized capital).

A share of the net profit in the amount of 10 % is used for dividend payouts.

40 to 75 % of the net profit is retained for the Company’s investment purposes.

The remaining share of the net profit is divided into equal parts to pay out dividends and to form the reserve for investment purposes.

The net profit intended for dividend payouts may be adjusted for the amount of Gazprom’s financial investments revaluation. This enables the Company to allocate the profit secured by the real cash flow for dividend payouts and investment purposes.

The Dividend Policy contains a provision on the dividend payouts (from 17.5 to 35 % of the net profit provided that the reserve fund has been replenished).

The decision on the annual dividend distribution, as well as the amount and method is adopted by the Shareholders Meeting on the Board of Directors recommendation. The annual dividend payments should not exceed the amount recommended by the Board of Directors.

In June 2012 the annual General Shareholders Meeting of OAO Gazprom approved the proposal to pay out RUB 8.97 per share in annual dividends based on Gazprom’s operating results in 2011. It is the record dividend amount in the entire corporate history of OAO Gazprom.

The share emission prospectus did not originally provide for any preferred shares issue. All the shares of Gazprom are ordinary ones.

An independent auditor of OAO Gazprom is appointed through an annual tendering procedure. The procedure results are considered by the Board of Directors of Gazprom, and the auditor’s candidacy is approved at the annual General Shareholders Meeting.

In June 2012 the annual General Shareholders Meeting of OAO Gazprom approved ZAO PricewaterhouseCoopers Audit as the Company’s auditor for 2012.

OAO Gazprom and ZAO PricewaterhouseCoopers Audit started cooperating in 1995. ZAO Price-waterhouseCoopers Audit performs:

• audit of OAO Gazprom (parent company) Accounting Statements prepared in accordance with the applicable Russian laws and regulations;
• audit of Gazprom Group Annual Consolidated Accounting Statements prepared in accordance with the applicable Russian laws and regulations;
• audit of Gazprom Group Annual Consolidated Accounting Statements prepared in accordance with the International Financial Reporting Standards.

OAO Gazprom shares can be bought from their legal holder. Shares can be acquired under a purchase and sale agreement drawn up in accordance with the applicable legislation with subsequent re-registration of proprietary rights in the register keeper’s office (depository) at the share owner’s banking account location. The Company’s shares can also be bought or sold at Gazprombank offices.

Additionally, one can buy or sell Gazprom’s shares through a professional stock exchange broker. As a rule, such services are offered by investment companies and commercial banks.

ADR is an American Depositary Receipt publicly traded in foreign stock markets and issued against shares of a non-US company deposited with a US bank. ADR is an instrument of international share trading. ADRs for Gazprom’s shares are issued to ensure circulation of the Company’s shares in foreign markets. Before April 18, 2006 one ADR represented 10 shares of OAO Gazprom. Subsequently, the number of OAO Gazprom ordinary shares per ADR was reduced from ten to four. Since April 18, 2006 it has been possible to convert OAO Gazprom ordinary shares into ADRs and vice versa.

Starting from April 21, 2011 the number of OAO Gazprom ordinary shares per ADR was reduced from four to two. Previously outstanding shares were automatically converted according to the new ratio. This step allowed to open up the access to Gazprom’s ADRs for a wider range of investors, increase the receipts liquidity and will contribute to long-term growth in the Company’s market value.

At present, Gazprom’s ADRs are listed on the London Stock Exchange, traded in the US over-the-counter stock market and on European stock exchanges, namely the Berlin and Frankfurt Stock Exchanges. As at the end of 2011, about 28.35 % of Gazprom’s shares were floating in the form of ADRs.

Yes, it is. There are currently no legislative restrictions on foreign ownership of OAO Gazprom shares.

OAO Gazprom ADR Program provides any shareholder with an opportunity to convert the Company’s shares into Gazprom’s ADRs. Thus, the shares are to be deposited with a local custodian bank (currently Gazprombank), and then the Bank of New York Mellon (ADR Program depository bank) issues a relevant amount of ADRs to the shareholder’s account opened with a foreign bank. Since this depositing procedure requires a thorough understanding of the entire process (including respective paperwork, fees and timing), it is more expedient to vest the conversion operation in a professional equity market player – a brokerage company or a bank that, at the shareholder’s request, will take all necessary actions.

At the same time, it is noteworthy that upon receipt of an ADR the shareholder becomes the owner of a foreign security and is liable to the Russian Federation currency laws.

Gazprom’s shares are traded as ADRs in foreign markets. Thus, in order to be sold in a foreign market, shares are to be converted into ADRs first. It is reasonable to vest the conversion operation in a professional equity market player – a brokerage company or a bank that, at the shareholder’s request, will take all necessary actions.