Message from the Chairman of the Management Board

Chairman of
the Management Board
Oleg Budargin

The results of the reporting period show that the Company, the largest electric grid company in Russia and in the world, continues to move forward with confidence, successful in attaining its priorities.

DEAR SHAREHOLDERS!

The previous year saw an important step taken by the Company in achieving the strategic goals set by the country’s leadership with respect to the effective development of the Russian electric grid sector and its further modernization based on innovation and high technology.

The reporting period witnessed the commissioning of 50 notable electric grid facilities, including under federal-level projects. The Company put into operation a part of the automated electricity metering system specified in the Comprehensive Program of Measures to Reduce Above-standard Electricity Losses in Distribution Networks in the North Caucasus in 2010–2013 with financing of 5.3 billion rubles; put facilities into operation for the external electricity supply to the Raspadskaya Mine and enhanced the reliability of electricity supply to the Mezhdurechensk District, Kemerovo Region; provided network connections for Pump Station-2 and Pump Station-3 of Caspian Pipeline Consortium-R (CPC-R) with the value of work totaling 3.3 billion rubles; and renewed cable lines in Saint Petersburg.

Kubanenergo, a subsidiary of the Company, is engaged in carrying out 16 capital investment projects (with the total investment estimated at 30.7 billion rubles) under the Program of the Construction of Olympic Games Sites and the Development of Sochi as a Mountain Climate Resort. These projects involve the rehabilitation and construction of

• five substations rated 110 kV with total installed capacity of 340 MVA;
• nine power lines rated 110 kV with a total length of 198 kilometers, including 150 kilometers of overhead lines and 48 kilometers of cable lines;
• the City Electricity Distribution Network (6–10 kV) with a total length of 807 kilometers in four Sochi Electricity Distribution Network Regions.

The construction of the following substations was completed: Krasnopolyanskaya (110 kV) in Chelyabinsk, Severnaya Dolina (110/10 kV) in Saint Petersburg, Erzya (110/10 kV) in Saransk, and Vereshchaginskaya (110 kV) in Sochi. The commissioning of the above-mentioned new electric power facilities and many others gave a powerful impetus to working toward regional socioeconomic development, enhancing the regions’ appeal for investors, and ensuring Russia’s energy security and electric grid sector reliability in general.

In 2012, the Company made certain decisions essential for achieving its goals. The Regulations for the Uniform Technical Policy in the Electric Grid Sector of the Russian Federation were approved, introducing common standards into the country’s entire electric grid sector, synchronizing and unifying the operation of transmission and distribution grids, and creating conditions for the further innovative development of electric grid facilities, including bringing Smart Grid technology into use. The Board of Directors of the Company approved the Strategy for Development of the Company and its subsidiaries in Information Technology, Automation and Telecommunications until 2016.

In the reporting year, careful attention continued to be given to the technical upgrading, rehabilitation, and renewal of production assets, with 75 billion rubles (exclusive of VAT) spent for this purpose. The implemented Automated Project Management System made it possible to appreciably improve construction efficiency for significant capital investment projects as related to the period, cost, and quality of work. Additionally, the Group completed energy conservation and energy efficiency enhancement programs, achieving a considerable reduction in electricity losses in spite of substantially increasing electricity delivery.

The Company in 2012 developed the Consolidated Investment Program for 2012–2017, approved by the Board of Directors on January 24, 2013. The Program involves measures to decrease electricity losses by more than 6.2 billion kWh.

Last year will be remembered as a year of severe acts of nature. Windstorms, snowfalls previously unseen in Russia, quick changes between frosts and thaws, floods, etc. caused power outages on frequent occasions. No regional company would be able to cope with a calamity on its own. This is a reason why extraordinary situations, such as the Krymsk disaster, required coordinated joint actions. The tactic of promptly deploying an additional repair and recovery force by engaging personnel of the joint mobile reserve proved to be a success. Electricity companies’ exceptional efforts to restore the power supply within the shortest time possible received high appreciation from senior officials of the Russian Ministry of Energy.

Very importantly, the previous year witnessed a major landmark in implementing the decisions of the Russian President and the Russian Government on the consolidation of the electric grid sector. The exercise by Federal Grid Company (FGC UES) of the powers of the Company’s sole executive body from July 10, 2012, followed by the formation of Russian Grids was a remarkable step in this process. This ensured a unified approach to adhering to the technical policy and the principles of management of Russia’s electric grid sector; pursuing uniform investment, financial, economic, and personnel policies; and systematically cutting costs. It is certain that the uniform rules have made the electricity supply more reliable and have raised the transparency and efficiency of network connection services.

A few figures for information. In 2012, the number of signed network connection contracts increased by 22 percent, while completed contracts for applicants whose capacity is below 15 kW and in the range of 15 to 150 kW grew by 25 percent and 27 percent respectively. This was achieved because Holding, together with Federal Grid Company and several other major electric utilities, have applied and continue to apply extensive efforts to simplify and cheapen the network connection procedure. We are determined to keep working hard to reach the goal set by the country’s leadership in relation to making this procedure even more transparent and affordable.

Another important area of the joint development of last year’s innovation activities was the decision to combine the innovative development programs of Holding and FGC UES and make the common R&D plan. This integration will enable both companies to eliminate the overlapping of work and measures and achieve qualitatively better results.

We understand that the Company can be successful in realizing its potential only if it keeps up with the main global trends in development. In this connection, we consistently introduce new business techniques and methods into all areas of activities. The year 2012 saw the continued strategic cooperation between the Company and France-based electric utility ERDF as related to a subsidiary of the Company, Tomsk Distribution Company, managed by the foreign partner.

In 2013, five years after the Company’s inception, we are entering a qualitatively new phase of its development. I am certain that if we have an effective team, support from our shareholders and investors, and trust from our partners and customers, the electric grid sector will enjoy long-term viability. The high efficiency of Russian Grids will undoubtedly ensure a qualitative breakthrough in the modernization and synchronous development of transmission and distribution grids and infrastructure to secure the reliable, high-quality, and affordable power supply in Russia on a long-term basis.

Chairman of the Management Board Oleg Budargin
Russian Grids
Federal Grid Company