Shareholder Letter

The past year gave the Board of Directors and management an opportunity to show their management skills during economic instability. Tariff restraints and last-mile consumer attrition have placed our possibility to achieve good financial and economic results in jeopardy.

However, cost cutting and adjustment of our plans helped us both complete a largescale investment program and close the year in the black.

During 2012 the Board of Directors focused on maintaining management at a high level and providing a high operating efficiency under unfavorable conditions. The BoD approved several fundamental documents, including our business plan and investment program. The Board of Directors determined the implementation of the Production Asset Management System as the Company’s priority. With a view to reduce operating costs we approved our Energy-saving and Efficiency Increase Program.

The Board of Directors has paid a lot of attention to maintaining financial stability of the Company and completion of all production and investment programs. In particular, we reviewed issues on borrowings (interest-bearing non-convertible bearer commercial papers) and approved the Issuance Decision and prospectus. In 2012 Moody’s has assigned us a long-term international credit rating Ba2 and domestic credit rating Aa2ru.

Our withdrawal from Kurganenergo and acquisition of a stock in Lenenergo also became one of the most important events. On the whole, it should be noted that the BoD was more prolific that earlier. Thus, in 2012 there were 23 BoD sessions (including 5 in-presentia sessions) during which we reviewed 391 key operating issues.

BoD resolutions echoed in management resolutions. Reduced transmission tariffs for residents and transfer of large consumers to FSK had a primary impact on our revenues. In 2012 our overall revenues were lower than 2011 ones and reached RUR 51.3 bln. Despite the recession the Company maintained economic stability and closed the year with RUR 625.8 mln net profit. The Company retained its positive capex despite the revenue cuts. Transition of all branches to RAB-regulation and well-balanced credit policy helped us complete our RUR 7.037 bln. investment program. The funds were spent to decrease equipment deterioration (strategic goal of the whole sector), derestrict connection in energy-deficient zones, construct new power centers as well as provide network reliability.

The Company retained its positive capex despite the revenue cuts

In 2012 we put several large power centers into operation. In the Sverdlovsk region we completed a new 110/6 kV substation (Prirechnaya substation, Nizhnyi Tagil) consisting of two 25 MVA main transformers. The substation shall become a new power center for the Leninsky district of the city. The capital of the South Urals obtained a new 110/10 kV Krasnopolskaya substation, consisting of two 40 MVA main transformers designed to supply newly-constructed microdistricts in the Kurchatovsky district (Chelyabinsk). We constructed 110/35/6 kV Palniki substation in the Dobryanka district (the Perm region) to supply construction sites near recreation zones on the Chusovaya river. We intend to maintain high investment activity in future.

During 2012 the number of our consumers has also grown: there were over 18.3 thous. new consumers (approx. +2 thous. on 2011). The overall capacity of newly-connected consumers exceeded 470 MW.

In 2012 we continued to expand our market share: the company acquired and leased over 4.3 thous. c.u. of grid facilities. In particular, our specialists from the Chelyabinsk branch commenced to service the grids of Verkhnyi Ufaley and grids belonging to Kyshtym Copper-Electrolyte Plant under rental contracts. Besides, they also leased 110/10 kV Asphaltnaya substation (Chelyabinsk). In the Sverdlovsk region we acquired the Nevyansk grids comprising appox. 190 km of 0.4-10 kV lines and 59 transformer substations and distribution centers. In the Perm region the Company has won the tender related to the rental of the Solikamsk grids.

Our specialists serviced and diagnosed equipment installed on these grids and scheduled repair plans. Real equipment status and deterioration level defined the volumes and directions of the repair program. Repair plans for 2012 was approved equal to 2011 ones and totaled RUR 1 304 mln. Completion of the repair plan totaled RUR 1 364 mln. or 105%.

The Company also pays a lot of attention to working conditions and discharge of its liabilities. We implement the program on production facility renewal. Social protection is covered by the collective agreement. In 2012 670 employees were granted state, sector and corporate awards for high results and contributions into the perfection and development of the Urals grids.

We can surely underline that the Company has taken all required steps to minimize the influence of external negative factors on financial and economic results. Revenue decrease has not ended in the failures of production and investment programs. On the contrary, the Board of Directors and management have made correct steps to balance the situation and increase production results. This became possible due to successful preparation for deterioration period. The course, that proved its efficiency during previous years, shall be a solid basis for reaching the goals set up by the shareholders in future.

The BoD Chairperson
Igor Khvalin
General Director
Valery Rodin