2015 Annual Report. APPROVED at the PJSC Rosseti Annual General Shareholders Meeting on 30 th of June 2016 (minutes as of 5 th of July 2016)

Transcription

1 APPROVED at the PJSC Rosseti Annual General Shareholders Meeting on 0 th of June 06 (minutes as of 5 th of July 06) 05 Annual Report PJSC ROSSETI, Director-General O.M. Budargin

2 Annual Report 05 RELIABLE NETWORKS SECURE FUTURE

3 ROSSETI: THE WORLD S LARGEST ELECTRIC GRID COMPANY IN TERMS OF THE NUMBER OF CUSTOMERS AND THE LENGTH OF NETWORKS; ONE OF THE MOST SIGNIFICANT INFRASTRUCTURE COMPANIES IN RUSSIA; THE COUNTRY S LARGEST EMPLOYER. ROSSETI: FORWARD-LOOKING STATEMENTS: For its customers ROSSETI striving to provide services of high quality: a reliable electricity supply and timely and transparent electricity network connection at affordable prices; For the regions and local government authorities ROSSETI working to satisfy the economy s demand for transmission and distribution capacity, acting as a reliable partner in planning and carrying out regional development programs, and being a bona fide taxpayer and employer; For its staff, an efficiently organized ROSSETI that has a transparent and comprehensible corporate governance system and offers opportunities for personnel to realize their full potential; For the investor community, an effective instrument for investment, ensuring the payback, reliability, return, and liquidity of invested capital. > > This Annual Report contains, inter alia, information concerning the Company s future production and business operations based on projections and estimates of the Company s management relying upon the current situation; > > This Annual Report can also contain forward-looking statements regarding changes in prices of products/services, output and consumption, costs, estimated expenditures, development prospects, and other similar factors and predictions with respect to the development of the industry and markets and to the start and end dates of specific projects related to the Company s business; > > By virtue of their particularities, forwardlooking statements involve inherent risk and uncertainty of a general and specific nature, and there is a risk that estimates, predictions, projections, or other forwardlooking statements may not materialize; > > Forward-looking statements are generally identified by words such as intend, strive, project, expect, estimate, plan, believe, assume, may, can, should, will, continue, and other similar or related words and expressions; > > The Company shall not be liable for any losses that may be incurred by any individuals or corporate entities relying upon forward-looking statements. In each particular case, such forward-looking statements are only one of the numerous scenarios and shall not be regarded as the most likely; > > Except where otherwise specifically provided for in law, the Company shall not be obligated to publish any updates on or changes in forward-looking statements based on new information or subsequent events.

4 Contents 4 COMPANY OVERVIEW STRATEGY REVIEW Report on the Report 6 Message from the Chairman of the Board of Directors 0 Message from the Director General of ROSSETI Company Profile 8 Business Position of the Company. Development Strategy 5 Operating Overview 4 Operating Results 5 Investment and Innovation 5 Review of Financial Results 66 Corporate Governance System 84 Governance Structure 9 Management Bodies 96 Control Bodies 8 Internal Control and Risk Management Systems 0 Information Policy 40 The Company for Shareholders and Investors: Securities; Dividend Policy 4 Human Resource Management and Personnel Policy 50 Stakeholder Relations 55 Occupational Safety 68 Charity and Social Programs 69 Implementation of Environmental Programs 70 Changes in Key Performance Indicators 7 Contact Information 74 Additional Information for Shareholders 77 Disclaimer 78 Glossary of Terms and Abbreviations 79

5 COMPANY OVERVIEW. MILLION KILOMETERS (+0,000 kilometers) LENGTH OF POWER LINES 490 THOUSAND UNITS (+0,000 units) NUMBER OF SUBSTATIONS DELIVERING ENERGY AND EXPANDING We distribute electricity in 78 Russian regions and contribute to economic and social development in the regions of our operations and in the country as a whole

6 . COMPANY OVERVIEW Report on the Report Report on the Report Operating Indicators of the ROSSETI Group Corporate Highlights of ROSSETI in the Reporting Period LENGTH OF POWER LINES, MILLION KILOMETERS NUMBER OF SUBSTATIONS, THOUSAND UNITS TRANSFORMER CAPACITY, GVA 0.0 Cooperation agreement with OPORA RUSSIA is signed to create the favorable conditions for developing and supporting small and mediumsized businesses in Russia.0 Strategic cooperation agreement with Belenergo is signed 9.05 Agreement with the Russian Direct Investment Fund on the Smart Grid Construction joint project is signed BO-04 exchange-traded bonds totaling 0 billion rubles are placed BO-0 exchange-traded bonds totaling 5 billion rubles are placed 0.0 The International electric power industry forum «RUGRIDS-ELECTRO is organized by ROSSETI 0.0 Uniform Procurement Standard of ROSSETI is approved by the Board of Directors NUMBER OF EMPLOYEES*, THOUSAND PEOPLE 8 6 Action Plan to Introduce the Corporate Governance Code into ROSSETI is approved by the Board of Directors.0 Consolidated investment program for 05 and for is reviewed Annual General Meeting of Shareholders of the Company is held 9.09 All-Russian Forum Accessible Networks: Projects, Experience, Current Issues is organized by ROSSETI in Saint Petersburg 06.0 Cooperation agreement with WorldSkills Russia is signed 0. Shares placement of Additional Issue started aimed at recapitalization of LENENERGO and the construction of key electrical grid facilities in time for the 08 FIFA World Cup *Total staff on the payroll of SDCs engaged in the ROSSETI Group s core business. JV agreement with State Grid Corporation of China is signed Increase in the share capital of ROSSETI is approved by Extraordinary General Meeting of Shareholders 6.0 Forum of regional small businesses of the member countries of the Shanghai Cooperation Organisation and BRICS with the partnership of ROSSETI 6 7

7 . COMPANY OVERVIEW Report on the Report Growth Strategy. Strategic cooperation agreement with Fingrid Oyj is signed 6. Restated versions of the Risk Management Policy, the Internal Audit Policy, the Internal Control Policy, the Regulations for the Quality Management System, and the Regulations for the Procedure for Formulating and Implementing the Innovative Development Program are approved by the Board of Directors 7. Series BO-05 bonds totaling 0 billion rubles are placed 08. Series BO-06 bonds totaling 6 billion rubles are placed. billion rubles in federal loan bonds, received..05 from the Government, are used by ROSSETI as payment for shares in LENENERGO 8. ooperation agreement with the Federal Corporation for the Development of Small and Medium Business is signed After the Reporting Period 0.0 Addendum to the Memorandum with the Agency for Housing Mortgage Lending under the Housing for Russian Families program is signed 4.0 Regulations for the Procedure for Establishing and Using the Sponsorship and Charity Fund and the Information Policy is approved by the Board of Directors.0 Revaluation of financial investments (shares) at current market value as of March, 06 is reassessed, resulting in an increase of 6.5 billion rubles in the value of shares RELIABILITY MODERNIZATION EFFICIENCY ACCESSIBILITY 5% SPECIFIC ACCIDENT RATE 4% AVERAGE DURATION OF POWER OUTAGES RELATED TO PROCESS FAILURES. BILLION RUBLES (INCLUSIVE OF VAT) FINANCING. BILLION RUBLES COMMISSIONED CAPITAL ASSETS,869 МVА COMMISSIONED CAPACITY 4, % TOTAL PURCHASES FROM SMALL AND MEDIUM- SIZED BUSINESSES % SHARE OF PURCHASES FROM SMALL AND MEDIUM- SIZED BUSINESSES AFTER PROCUREMENT PROCEDURES THAT MAY APPLY ONLY TO SMBS < 5% SHARE OF IMPORTED PRODUCTS IN SDCS PURCHASES 40% REDUCTION IN THE TIME REQUIRED TO OBTAIN AN ELECTRICITY CONNECTION, FROM CONTRACT TO CERTIFICATE FOR REQUESTS FROM SMALL AND MEDIUM- SIZED BUSINESSES FOR FACILITIES RATED 5 50 KW AS COMPARED WITH 0 KILOMETERS COMMISSIONED CAPACITY 49 LEGALLY PROTECTED DOCUMENTS AT 9 SUBSIDIARIES 54 R&D SUBJECTS AT SUBSIDIARIES 8 9

8 . COMPANY OVERVIEW Message from the Chairman of the Board of Directors Message from the Chairman of the Board of Directors Novak Alexander Chairman of the Board of Directors Dear Shareholders! I would like to present to you the Annual Report of ROSSETI for 05. Despite the difficult macroeconomic environment, the ROSSETI Group continued to grow steadily last year. The Company s staff ensured stable grid operation and a reliable power supply, achieving positive results for basic operational indicators. Their high professionalism enabled employees of ROSSETI s electric grid subsidiaries to reduce the number of process failures by % in 05 compared with 04. In the reporting year, the Company s Board of Directors and management paid much attention to increasing the transparency and efficiency of its operations. Specifically, measures were taken to optimize the organizational structure and cut general and administrative expenses. Throughout 05, the Board of Directors monitored the financial and economic situation in the ROSSETI Group s entities, which made it possible to increase the responsibility of both the managers of subsidiaries and the Company s management. In 05, ROSSETI switched over to the Uniform Procurement Standard approved by the Board of Directors and developed by the Company with the involvement of the Federal Antimonopoly Service and the Ministry of Energy. As the coordinator of the Group s procurement policy, ROSSETI introduces the provisions of the Uniform Procurement Standard into the operations of all its subsidiaries, which unifies procurement and enhances its transparency. Back to financial performance. There was an almost threefold decrease in ROSSETI s net loss in accordance with RAS in 05 compared with 04: from 5. to 8. billion rubles. I would like to note that the net loss for 05 is entirely due to the negative revaluation of the Company s financial investments (the value of shares in ROSSETI s subsidiaries), which totaled.8 billion rubles. At the same time, the Group s consolidated net profit in accordance with IFRS reached 8.6 billion rubles against a loss of 4. billion rubles in the previous year. At the end of 05, ROSSETI had an upward change in the value of its shares (+8.5%) compared with the beginning of the year (the share price on MICEX rose to 0.46 rubles per share). This is an important indicator because, after several years of downward changes, the share price began to go up. Carrying out instructions of the Russian President and as part of implementing unified and synchronized approaches in the operational areas of the Company s subsidiaries, the Board of Directors approved the risk management, internal audit, and internal control policies of ROSSETI, along with the schedules of improving the operating and investment efficiency of the Company and reducing its expenses. All this became important steps toward optimizing the management structure, increasing the operating efficiency, and reducing costs of ROSSETI and its subsidiaries. Unification also extended to the key area of ROSSETI s activities, namely securing a safe, reliable, and uninterrupted power supply. The Company s Board of Directors approved the uniform rules for subsidiaries of ROSSETI for accident prevention and management at electric grid facilities. ROSSETI continued in 05 to work to improve the accessibility of electric grid services. Efforts made by ROSSETI s subsidiaries MOESK and LENENERGO in this area were appreciated by the World Bank. Russia ranked 9th in the Getting Electricity ranking of Doing Business in 06, climbing as high as 4 positions on the previous year. Work continues in the current year on reducing the connection time and cost for networks of the ROSSETI Group s entities. Best practices in this area will extend to all subsidiaries of ROSSETI. It is deserving of special note that ROSSETI continues to participate in the implementation of major national infrastructure projects: > > Completing the integration of the Crimea energy system into the Russia s United Power System; > > Securing a reliable and uninterrupted power supply for the Kaliningrad Region and the Northwest Integrated Power System; > > Providing a power supply for the Power of Siberia gas transportation system; 8.6 BILLION RUBLES IFRS CONSOLIDATED NET PROFIT OF THE ROSSETI GROUP > > Constructing and rehabilitating electric power facilities under the Program of Preparations for the 08 FIFA World Cup in Russia; > > Providing a power supply for the Baikal-Amur Mainline and the Trans- Siberian Railroad. Last year, ROSSETI received.47 billion rubles of federal budget funds to finance work on the preparation of power supply facilities for the 08 FIFA World Cup. These funds were channeled to ROSSETI s subsidiaries Yantarenergo, LENENERGO, and IDGC of Volga for the implementation of measures to build and rehabilitate electric power facilities involved in the holding of the 08 FIFA World Cup. In addition, as part of government support measures and pursuant to decisions of the President and the Government of the Russian Federation in 05, federal loan bonds with a par value of billion rubles were used as the Russian Federation s contribution to the share capital of ROSSETI. The proceeds from the sale of these federal loan bonds were directed toward measures for the financial recovery of LENENERGO, a subsidiary of ROSSETI. In addition, as part of government support measures and pursuant to decisions of the President and the Government of the Russian Federation in 05, federal loan bonds with a par value of billion rubles were used as the Russian Federation s contribution to the share capital of ROSSETI. The proceeds from the sale of these federal loan bonds were directed toward measures for the financial 0

9 . COMPANY OVERVIEW Message from the Chairman of the Board of Directors recovery of LENENERGO, a subsidiary of ROSSETI. To ensure compliance with new legislation and introduce best corporate practices are one of the most important areas of the activities of the Company s Board of Directors In 05, considerable work was done on introducing the provisions of the Corporate Governance Code recommended by the Bank of Russia into ROSSETI and its subsidiaries. The Board of Directors approved the Company s constitutive and internal documents governing the disclosure procedures, risk management, internal audit, and the activities of the advisory and deliberative committees of the Board of Directors. Several documents were aligned with the Listing Rules of the stock exchange. We can say as early as now that the conditions have been created for maintaining the Company s securities in the stock exchange s quotation lists and attracting potential investors. There are plans to continue in 06 to work to improve the corporate governance system ROSSETI s cooperation with federal executive authorities in improving the regulatory and legal framework governing the investment activities of the ROSSETI Group s entities, network connection services, and mechanisms for enhancing payment discipline deserves to be appreciated and will be continued. Speaking of the Company s international activities, it is worth noting significant progress in carrying out integration and cooperation projects. For instance, we have signed and already started to perform a joint venture agreement with State Grid Corporation of China. Traditionally, great attention is given to cooperation with foreign equipment manufacturers, including the localization of production in Russia, and dialog with Asian financial institutions. Assessing ROSSETI s prospects for growth, the Company s Board of Directors and management are aware that the difficult macroeconomic situation will continue to be a challenge to the ROSSETI Group in 06. The projected high market volatility and other external influences compel us to focus on the search for internal sources to improve efficiency. The Board of Directors plans to consider and introduce a new list of quarterly and annual KPIs for management, taking into account the proposals of the Russian Ministry of Energy, taking into consideration the increasing importance of financial and economic indicators, and focusing on the enhancement of the Company s financial performance and efficiency. In the short term, ROSSETI s Board of Directors and management will work toward import substitution, cost reduction, stricter payment discipline, enhanced efficiency and energy conservation, innovation, and improvements to the Company s personnel policy. ROSSETI, of course, will focus its efforts on securing a safe, reliable, and highquality power supply. I hope that constructive cooperation among the government, minority shareholders, and management of the Company will allow the achievement of the goals of the Strategy for Development of the Electric Grid Sector and will increase the utilization efficiency and accessibility of the grid infrastructure, ultimately ensuring further capital gains for the benefit of the shareholders of ROSSETI. Sincerely, Chairman of the Board of Directors Alexander Novak Message from the General Director Budargin Oleg Chairman of the Management Board General Director Dear Shareholders! ROSSETI s priorities in 05 were to improve the operational indicators of electric grid subsidiaries through control and centralized management, make the Company more attractive to investors by increasing return on invested capital and optimizing costs, and continue to adhere to the principles of corporate social responsibility. We succeeded in achieving positive results in all of these areas. The fulfillment of the provisions of the Uniform Technical Policy by all of ROSSETI s subsidiaries, strict compliance with technical regulations, the timely and high-quality implementation of the repair and capital investment programs, the continuous upgrading of employee skills, and practical training

10 . COMPANY OVERVIEW Message from the General Director allowed us to take another step toward building the architecture of tomorrow s electric grid sector with maximal energy efficiency and minimal electricity losses in transmission and distribution grids. Total electricity transportation increased by 0.7% in 05 compared with the previous reporting period to 70.5 billion kwh. At the same time, on a basis comparable with 0, electricity losses in 05 totaled 9.%, which is 0.4 pp or.5% lower than in 04 on a basis comparable with 0 (9.6%). A package of measures carried out in 05 to optimize electricity losses saved,46.8 million KWh. To minimize financial losses associated with network process failures, we worked to reduce accident rates at ROSSETI s electric grid facilities. For instance, the specific accident rate was decreased by the ROSSETI Group by 5%, while the average duration of power outages caused by process failures was reduced to.9 hours. Moreover, Moscow and Saint Petersburg received the highest reliability of supply index from the World Bank in 05 (Russia was ranked among the top 9 countries out of 89 with respect to this indicator). This resulted from comprehensive efforts made by technical and operational personnel. In 05, ROSSETI paid close attention to improving access to electric grid services and enhancing the terms of network connection. Specifically, subsidiaries signed 9,7 network connection certificates in the reporting period, totaling 9,705 MW. The number of completed network connection contracts in the reporting period grew by 4% against 04. The rise in capacity (MW) also reached 4%. Russia made an impressive breakthrough in grid infrastructure accessibility in the ranking, which measures the World Bank s Doing Business rankings. Owing to efforts made by ROSSETI s subsidiaries, namely MOESK and LENENERGO, Russia rose from the 4rd to 9th position in the Getting Electricity ranking of Doing Business in 06. Extremely important elements in the chain of process measures aimed at improving power supply quality and reliability are the complete and high-quality implementation of ROSSETI SDCs repair programs We carried out all of our plans in 05. For instance, the Company repaired almost 55 thousand kilometers of power lines and more than,00 substations of different voltage classes (5 kv and above) and cleared almost,000 hectares of power line pathways in the reporting period. Work on improving operational indicators and efficiency allowed us even in the difficult macroeconomic environment in 05 to achieve higher key financial indicators, which proves ROSSETI s stable development. A significant factor that had an adverse impact on ROSSETI s financial performance was the issue of receivables. However, our extensive measures to introduce changes into legislation affecting delinquent payers and establish regional commissions under the heads of regional administrations to deal with the collection of debts to electric grid companies stabilized the debt growth situation and kept it down almost at the level of 04. Despite this and the difficult macroeconomic situation, ROSSETI increased revenues by.6% in 05 to billion rubles on 04. In accordance with International Financial Reporting Standards, the consolidated net profit,46.8 MILLION KWH SAVED ELECTRICITY LOSSES IN 05 was 8.6 billion rubles compared with a consolidated loss of 4. billion in the previous year. As the government s strategically important asset securing a reliable electricity supply in 78 regions, ROSSETI strictly adheres to the principles of corporate social responsibility in its day-to-day activities. This applies to both the Company s stable development and improved efficiency as mentioned above and to the provision of care for personnel and the environment, along with involvement in solving social problems in the regions where the Company has a presence. To realize the full potential of ROSSETI s and subsidiaries employees, the Company engaged leading Russian and foreign experts to hold training sessions and organized practical training, including with the participation of allied organizations and executive authorities, in 05. We maintained contact and continued to share experience with foreign partners, including under joint integration projects. The Company invested substantially in human resource development. ROSSETI built up a system of interaction with 0 energy-related universities in the country. More than,500 students were provided with summer externships at the Company s facilities. Students. Over 400 best graduates of energy-related universities were hired by ROSSETI s subsidiaries. Considerable attention was paid to the environmental safety of power facilities. The rehabilitation of existing facilities and the construction of new ones used modern technology and equipment making it possible to additionally reduce harmful environmental impacts. ROSSETI believes that an important element of society relations is to take preventive measures to reduce the risk of electrical injuries that may affect outsiders. In order to achieve the highest result, the Company approved the Uniform Program of Electrical Injury Prevention in 05, and all subsidiaries started its implementation. In 05, the ROSSETI Group continued work on the outstripping development of the electric grid infrastructure to create the conditions for improving the socioeconomic situation in the regions of its operations. Providing additional capacity, ROSSETI and subsidiaries not only created vacancies for their facilities but also stimulated job creation in outside organizations, along with performing high-quality electricity supply services for existing and new housing developments. ROSSETI will continue in 06 to implement the approved long-term development strategy with the aim of improving the efficiency of production processes, providing investors with higher return on invested capital and making the Company and subsidiaries more attractive to them, and strengthening its social role. Sincerely, Chairman of the Management Board General Director Oleg Budargin 9 th IN THE GETTING ELECTRICITY RANKING OF DOING BUSINESS IN

11 STRATEGY REVIEW 70.5 MILLION KWH (+0.8%) ELECTRICITY DISTRIBUTION 5% THE SPECIFIC ACCIDENT RATE WAS DECREASED BRINGING ENERGY CLOSER TO YOU, WORKING RELIABLY AND EFFICIENTLY Our strategic priorities: reliability, modernization, efficiency, accessibility

12 . STRATEGY REVIEW Company Profile Company Profile Development History ROSSETI WAS ESTABLISHED ON APRIL 4, 0 ROSSETI IS INCLUDED ON THE LIST OF STRATEGIC ENTERPRISES AND ORGANIZATIONS STRATEGIC ENTERPRISE LEADING INFRUSTRUCTURE COMPANY ROSSETI GROUP IS ONE OF THE WORLD S LARGEST ELECTRIC UTILITIES 87.8% STAKE IN THE SHARE CAPITAL OF ROSSETI IS FEDERALLY OWNED GOVERNMENT-LINKED COMPANY THE GOVERNMENT S AGENT IN MANAGING THE ELECTRIC GRID SECTOR THE OPERATOR OF RUSSIAN ELECTRIC GRIDS Public Joint Stock Company ROSSETI was established pursuant to the Decree of the President of the Russian Federation of November, 0. Pursuant to the Decree the Strategy for Development of the Electric Grid Sector of the Russian Federation was approved by Ordinance of the Government of the Russian Federation No. 5- r of April, 0. The goal of the structural transformations aimed at the consolidation of electricity transmission and distribution grids was to create a single center of responsibility to the shareholders, coordinate work on improving the economic efficiency of investing activities, develop uniform quality standards and indicators, and enhance the operating efficiency of electric grid companies. Decree of the President of the Russian Federation No. 567 of November, 0, On Joint Stock Company ROSSETI. In order to align the Company s Articles of Association with the Civil Code of the Russian Federation, the shareholders approved the Company s new corporate name on June 0, 05, renaming ROSSETI s legal form a public joint-stock company. 8 9

13 . STRATEGY REVIEW Company Profile Geographic Presence Regions of Operations Altai Territory Amur Region Arkhangelsk Region 4 Astrakhan Region 5 Belgorod Region 6 Bryansk Region 7 Vladimir Region 8 Volgograd Region 9 Vologda Region 0 Voronezh Region Jewish Autonomous Region FGG UES INTERREGIONAL GRID COMPANIES DISTRIBUTION GRID COMPANIES REGIONAL RETAIL COMPANIES REAL PROPERTY HOLDERS R&D AND DESIGN COMPANIES SERVICE AND CONSTRUCTION COMPANIES 44 Republic of Dagestan 45 Republic of Ingushetia 46 Republic of Kabardino-Balkaria 47 Republic of Kalmykia 48 Karachay-Cherkess Republic 49 Republic of Karelia 50 Komi Republic 5 Republic of Marij El 5 Republic of Mordovia 5 Republic of Sakha FGG UES INTERREGIONAL GRID COMPANIES DISTRIBUTION GRID COMPANIES REGIONAL RETAIL COMPANIES REAL PROPERTY HOLDERS R&D AND DESIGN COMPANIES SERVICE AND CONSTRUCTION COMPANIES Trans-Baikal Territory 54 Republic of North Ossetia-Alania Ivanovo Region 55 Republic of Tatarstan 4 Irkutsk Region 5 Kaliningrad Region 6 Kaluga Region 7 Kemerovo Region 8 Kirov Region 9 Kostroma Region 0 Krasnodar Territory Krasnoyarsk Territory Kurgan Region Kursk Region 56 Republic of Tuva 57 Udmurtian Republic 58 Republic of Khakassia 59 Rostov Region 60 Ryazan Region 6 Samara Region 6 Saratov Region 6 Sverdlovsk Region 64 Smolensk Region 4 Leningrad Region 65 Stavropol Territory 5 Saint Petersburg 66 Tambov Region 78 REGIONAL BRANCHES, PART OF FGC UES 4 DISTRIBUTION GRID COMPANIES 8 DISTRIBUTION GRID COMPANIES 6 Lipetsk Region 7 Moscow Region 8 Moscow 9 Murmansk Region 0 Nizhni Novgorod Region Novgorod Region Novosibirsk Region Omsk Region 4 Orenburg Region 5 Oryol Region 6 Penza Region 67 Tver Region 68 Tomsk Region 69 Tula Region 70 Tyumen Region 7 Ulyanovsk Region 7 Khabarovsk Territory 7 Khanty-Mansijsk Autonomous District 74 Chelyabinsk Region 75 Chechen Republic 76 Chuvashi Republic 7 Perm Territory 77 Yamalo-Nenets Autonomous District Primorie Territory 9 Pskov Region 78 Yaroslavl Region 40 Republic of Adygeya INTERREGIONAL GRID COMPANIES REGIONAL RETAIL COMPANIES ELECTRICITY TRANSMISSION GRID ENTITIES (PMES S) 4 Republic of Altai 4 Republic of Bashkortostan 4 Republic of Buryatia 0

14 . STRATEGY REVIEW Company Profile Business Model of the ROSSETI Group NUCLEAR POWER PLANTS THERMAL POWER PLANTS REGULATION, SUPERVISION, AND STANDARDIZATION GOVERNMENT MINISTRY OF ENERGY MINISTRY OF ECONOMIC DEVELOPMENT FEDERAL ANTIMONOPOLY SERVICE FEDERAL AGENCY FOR STATE PROPERTY MANAGEMENT REGIONAL ENERGY COMMISSIONS FEDERAL SERVICE FOR ENVIRONMENTAL, TECHNOLOGICAL AND NUCLEAR SUPERVISION MARKET COUNCIL SUPPLIERS OF LAST RESORT (ENERGY RETAILERS) TERRITORIAL GRID ORGANIZATIONS OUTSIDE THE ROSSETI GROUP HYDRAULIC POWER PLANTS RENEWABLE ENERGY SOURCES SMALL GENERATION POWER GENERATION TRANSMISSION AND DISTRIBUTION ENERGY CONSUMPTION DIRECT CUSTOMER FOREIGN ENERGY SYSTEMS DISPATCHING, MARKET BALANCING, AND SETTLEMENTS SYSTEM OPERATOR TRADING SYSTEM ADMINISTRATOR FOREIGN ENERGY SYSTEMS FINANCIAL SETTLING CENTER

15 . STRATEGY REVIEW Company Profile Group Structure Business Position of the Company. Development Strategy TRANSMISSION GRID COMPANY FGC UES 80.% 5.9*% INTERREGIONAL DISTRIBUTION GRID COMPANIES MOESK 50.90% IDGC of Center and Volga Region 50.40% Tyumenenergo 00% IDGC of Urals 5.5% IDGC of Centre 50.% LENENERGO 64,.49% DISTRIBUTION GRID COMPANIES Yantarenergo 00% TDC 85.77% Chechenenergo 7.66% Kubanenergo 9.4% ROSSETI RETAIL COMPANIES Karachaevo-Cherkesskenergo 00% Kalmenergosbyt 00% Tyvaenergosbyt 00% Kabbalkenergo 65.7% Dagestan Energy Supply Company 5% Sevkavkazenergo 49% R&D SDCs REC IDGC, VNIPIENERGOPROM, SKB VTI 00% ENIN.4% Urals Power Engineering Company, SevZap NTC, VPEC 5% + share The stakes are specified as of December, 05; The stakes do not include the placed shares of the current securities issue. CONSTRUCTION, PROCUREMENT, AND SERVICE ORGANIZATIONS Power Grid Optical Networks Engineering, Engineering Center UES Real Estate 00% NWEMC 49%, Grozenergo 49% IT Energy Service 9.99% ZES 9.5% THE ROSSETI GROUP OPERATES IN THE ELECTRICITY TRANSMISSION AND DISTRIBUTION SEGMENT Energy Sector in 05 Economic and regulatory risks; Decreased electricity consumption; Lower growth rate of energy prices; Substantially increased receivables; High borrowing rates in the debt financing market; Sanctions and currency risks; Curtailed capex programs. Position of the ROSSETI Group in the Energy Sector The Strategy for Development of the Electric Grid Sector of the Russian Federation defines ROSSETI as the sector s largest group and mainstay. The vast majority of the ROSSETI Group s subsidiaries operate as natural monopolies and are subject to government regulation. In the regions of their operations, the ROSSETI Group s subsidiaries account for about 70% and 90% of companies engaged in distribution and transmission respectively. ROSSETI implements measures to consolidate territorial grid organizations. As of the end of 05, a total of about,700 territorial grid organizations operated in the Russian Federation GOAL OF THE ELECTRIC GRID SECTOR Securing the reliable, highquality, and affordable energy supply for customers on a long-term basis >50% REDUCTION IN THE NUMBER OF TERRITORIAL GRID ORGANIZATIONS BY 50% BY 07 (COMPARED WITH 0) AND BY 50% BY 00 (COMPARED WITH 07). IDGC of Siberia 55.59% IDGC of North-West 55.8% IDGC of Volga 67.6% IDGC of Northern Caucasus 9.00% Ingushenergo 49% NURENERGO % Challenges to ROSSETI and Solutions In 05, energy companies ensured the reliable and uninterrupted operation of the Russian energy system while taking extensive measures to carry out a policy on the improvement of government-linked companies efficiency. CHALLENGE Decreased electricity consumption Increased receivables Larger share of network connection services on preferential terms Curtailed capex program with reliability to be maintained at a high level High interest rates in debt capital markets SOLUTION > Reduced electricity losses > Decreased electricity underdelivery > More effective debt collection > Reduced overdue receivables > Optimized engineering solutions > Lower specific capex > Lower specific opex > Lower specific capex > Optimized borrowing portfolio IDGC of South 5.66% Sanctions and currency risks > Reduced share of imported products, accounting for less than 5% of electric grid subsidiaries purchases 4 5

16 . STRATEGY REVIEW Business Position of the Company. Development Strategy Competitive Advantages of the ROSSETI Group Prospects for Development THE ELECTRIC GRID SECTOR SERVICED BY THE ROSSETI GROUP IS UNIQUE IN THE WORLD Main Development Areas of ROSSETI Development Strategy MISSION OF ROSSETI To be the leader in developing the management system of the electric grid sector and secure a reliable and high-quality electric power supply satisfying the growing demand of the Russian economy and social sector at service prices affordable for customers The Strategy for Development of the Electric Grid Sector of the Russian Federation provides for the formation of a single electric grid management company based on ROSSETI. AS A SINGLE MANAGEMENT COMPANY, ROSSETI COORDINATES > > Tariff policy; > > Technical policy; >5% OPERATING EXPENSES >0% REDUCTION IN SPECIFIC INVESTMENT COSTS. UNIQUENESS The ROSSETI Group is unique in terms of its serviced area, operating in special climatic conditions. LENGTH The Company together with its subsidiaries owns and operates. million kilometers of electricity transmission and distribution lines on the territory of the biggest state in the world. UNIFORMITY The Uniform Technical Policy enables the Group to unify its production processes and ensure efficient equipment operation. EXPERIENCE Due to many years of experience and the available workforce capacity, ROSSETI is able to ensure the effective fulfillment of its tasks. A priority in the current macroeconomic situation is to unconditionally secure a reliable and uninterrupted power supply for all categories of customers and maintain the accessibility of infrastructure. CONDITIONS FOR THE ELECTRIC GRID SECTOR S GROWTH Accessibility of tariff and borrowing resource Improvement of operating and investment efficiency FINDING THE RIGHT BALANCE With limited investment resources and curtailed capex programs, the main task is to find the right balance between the need to retain the level of reliability and the fulfillment of obligations related to network connection and development. REDUCING LOSSES AND IMPROVING DISCIPLINE Our priorities include the tasks of bringing down commercial losses and improving payment discipline. IMPORT SUBSTITUTION An important task is to reduce the dependence of the Russian fuel and energy sector on imported equipment, technical devices, and component parts. ROSSETU S FUNCTIONS > > Strategic functions; > > Controlling functions; > > Coordinating functions; > > Accomplishment of the industry s institutional goals; > > Participation in the consolidation of territorial grid organizations. > > Investment planning; > > Transparency of financial and economic activities; > > Anti-corruption policy. The principal goal of the electric grid sector is to secure the reliable, high-quality, and affordable energy supply for Russian customers on a long-term basis by building a network infrastructure that is maximally efficient and conforms to international standards, with electricity transmission and distribution tariffs that will make electricity expenses acceptable to the Russian economy and enable the industry to be attractive to investors through adequate return on capital. Approved by Ordinance of the Government of the Russian Federation No. 5-r of April, 0. MILLION KILOMETERS LENGTH OF THE ROSSETI GROUP S POWER LINES 6 7

17 . STRATEGY REVIEW Business Position of the Company. Development Strategy FACTORS IN THE COMPANY APPEAL FOR INVESTORS Principal goals of ROSSETI SECURING THE RELIABLE AND HIGH-QUALITY PROVISION OF SERVICES Ensure that SDCs attain the reliability and quality indicators Carry out the Action Plan Enhancing the Affordability of the Power Infrastructure IMPROVING THE OPERATING EFFICIENCY Reduce operating expenses by 5% (adjusted for inflation) compared with 0 OPTIMIZING INVESTMENT ACTIVITIES Reduce specific expenses by an average of 0% compared with 0 (in rubles per physical unit: kilometers, MVA) ENHANCING ENERGY CONSERVATION AND ENERGY EFFICIENCY Reduce electricity losses by % compared with 0 by 07. MAINTAINING INTEGRATED SECURITY AT THE NECESSARY LEVEL, TAKING ACCOUNT OF TERRORISM THREATS AND THE RISK OF ECONOMIC DAMAGE ROSSETI makes use of comprehensive business planning. The key indicators of the approved business plans in the medium term are linked to the objectives of ensuring the achievement of the targets and to the key operational risks. ROSSETI takes an active part in the preparation of proposals for draft regulations to implement the Strategy for Development. A LARGE TAXPAYER INVESTING IN HUMAN RESOURCE DEVELOPMENT AND CORPORATE SOCIAL INCREASINGLY WIDE IN-HOUSE INFRASTRUCTURE; NETWORK CONNECTIONS PROVIDED FOR NEW CUSTOMERS; INTERNATIONAL TIES ON THE RISE TRANSPARENCY, INCREASINGLY ACTIVE DIALOG WITH ALL STAKEHOLDERS AN INNOVATIVE COMPANY DEVELOPING IMPORT SUBSTITUTION THE INDUSTRY S MAINSTAY, INCLUDED ON THE LIST OF STRATEGIC ENTERPRISES A PRESENCE IN MOST RUSSIAN REGIONS 90% OF TRANSMISSION GRIDS AND 70% OF DISTRIBUTION GRIDS UNDER MANAGEMENT COMPLIANCE WITH ADVANCED STANDARDS OF CORPORATE GOVERNANCE, ADHERENCE TO THE PRINCIPLES OF SUSTAINABLE DEVELOPMENT A PUBLIC COMPANY TRADED ON THE MOSCOW STOCK EXCHANGE AND THE LONDON STOCK EXCHANGE 8 9

18 . STRATEGY REVIEW Business Position of the Company. Development Strategy Long-Term Development Program of ROSSETI ROSSETI s Long-Term Development Program (LTDP) is an internal policy document covering the period from 05 to 09 and containing the lists of mechanisms and measures to ensure the achievement of ROSSETI s strategic goals. The approved LTDP of ROSSETI meets the Russian Government s requirements relating to workforce productivity growth, labor resource availability, import substitution, the enhancement of the Company s transparency and efficiency, and an annual reduction of at least % in operating expenses. Approved by the Board of Directors of ROSSETI in December 04. The LTDP is formulated in accordance with Instructions of the President of the Russian Federation No. Pr-086 of December 7, 0, and the Recommended Guidelines for Developing the Long-Term Development Programs of Strategic Open Joint-Stock Companies and Federal State Unitary Enterprises and Open Joint- Stock Companies in Which the Russian Federation Holds an Aggregate of More than 50% of Shares issued by the Ministry of Economic Development of the Russian Federation. LTDP Goals and Objectives SECURING A RELIABLE AND UNINTERRUPTED POWER SUPPLY AND ENSURING ENERGY SECURITY > > Reduce the number and duration of accidents; > > Decrease electricity underdelivery to customers; > > Manage the condition of electric grid assets; > > Optimize repair programs in order to lower equipment failure probability; > > Reduce the time of remedying process failures (accidents) and increase the mobility of repair crews; > > Ensure compliance with the reliability and safety requirements applicable to commissioned capital facilities; > > Develop the certification system for equipment, materials, and systems as the incoming inspection of technical characteristics of equipment used by SDCs facilities; > > Develop the technical supervision and control system of ROSSETI. IMPROVING SERVICE QUALITY AND INCREASING CUSTOMER SATISFACTION > > Reduce the number of network connection stages from 0 to 6 by 05 and to 5 by 08; > > Ensure the territorial accessibility and convenient conditions of face-to-face customer service; > > Develop and ensure the accessibility of remote and electronic (online) customer service. MAINTAINING THE ACCESSIBILITY OF INFRASTRUCTURE AND CREATING THE CONDITIONS FOR ECONOMIC GROWTH > > Improve the accessibility of electricity infrastructure as related to network connection; > > Implement strategic infrastructure projects, governmental target-oriented programs, and international grid construction projects; > > Study the issues related to improving the long-term planning of electric power facilities sites, including forecasting network connection and optimizing facilities utilization rates. ENHANCING THE OPERATING EFFICIENCY OF ELECTRIC GRIDS > > Operating activities; > > Investment activities; > > Energy efficiency; > > Import substitution; > > Innovative development; > > Environmental security; > > Institutional transformations; > > Anti-corrupt practices; > > Internal control, risk management, and internal audit. KEEPING A BALANCE BETWEEN THE INTERESTS OF DIFFERENT KEY STAKEHOLDERS > > Corporate governance and shareholder/investor relations; > > Dividend policy; > > Financial stability; > > Improvements to the tariff policy. The key measures of the Long- Term Development Program were implemented in 05 under the relevant programs affecting the following key functional areas: > > Consolidated Investment Program; > > Innovative Development Program; > > Action plan to improve the operating efficiency and ensure the financial soundness of the ROSSETI Group in the current macroeconomic conditions; > > Electricity Loss Reduction Program of ROSSETI SDCs for 05 00; > > Development plans for production asset management systems of ROSSETI SDCs for 05 07; > > Injury risk mitigation programs for personnel of ROSSETI SDCs and outsiders at electric grid facilities for 04 07; > > Road Map Enhancing the Affordability of the Power Infrastructure. More detailed information can be found in the corresponding sections of the Annual Report. The implementation of the planned measures resulted in attaining the target values of the Company s key performance indicators. It is possible to evaluate how the Company has attained the target values specified in the LTDP after the LTDP audit for 05 and after the submission of the audit results (audit report) scheduled for June 06. ACTION PLAN TO IMPLEMENT THE LONG-TERM DEVELOPMENT PROGRAM OF ROSSETI The Board of Directors approved the Long- Term Development Program of ROSSETI for The Board of Directors approved the Standard for Auditing the Implementation of the Long- Term Development Program of ROSSETI The Board of Directors resolved to ensure that, on an annual basis, starting from 06, the audit of implementing the Long-Term Development Program of ROSSETI would be conducted The Board of Directors reviewed and took note of the report on the implementation of the Long-Term Development Program of ROSSETI for the st half of Audit of the Long-Term Development Program of ROSSETI for 05 Pursuant to paragraphs,, and 4 of Instructions of the President of the Russian Federation No. Pr-086 of December 7, 0. 0

19 . STRATEGY REVIEW Business Position of the Company. Development Strategy Attainment of key performance indicators LONG-TERM GOALS INDICATORS TARGET VALUE IN 05 ACHIEVED RESULTS Reducing electricity losses Electricity losses 9.56% Electricity losses were not higher than the target value. The accomplishment of ROSSETI s priority goals of development is evaluated by the Company s system of key performance indicators (KPIs). The Company s KPI system is aligned with the priorities defined by the Strategy for Development of the Electric Grid Sector of the Russian Federation, the goals of the Company s Long-Term Development Program, and specific QUARTERLY INDICATORS instructions issued by the Government of the Russian Federation. The KPI system and calculation technique were adjusted by the Board of Directors of ROSSETI in 05, reclassifying the total shareholder return and workforce productivity indicators as control indicators (taken into account in the motivation system), clarifying the procedure for calculating the reduction of operating expenses pursuant to the Directive of the Operational KPIs Financial KPIs Investment KPIs Government of the Russian Federation, and adding the evaluation of the Company s and SDCs liquidity as a component of the quarterly financial soundness indicator (starting from the 4 th quarter of 05). In accordance with the above-mentioned decision adopted by the Board of Directors of the Company, the following key performance indicators and their target values were prescribed in 05: Securing a reliable and uninterrupted power supply Improving investment efficiency Improving investment efficiency Improving service quality and increasing customer satisfaction Achieved reliability of services Reduction of specific investment costs Compliance with commissioning schedules Compliance with network connection deadlines 90%. In 05, the average duration of power outages at all of ROSSETI SDCs branches was not greater than the values prescribed by governmental regulators in charge of tariff regulation. Thus, the reliability of services was achieved in all of the regions of ROSSETI s operations. The implementation of the consolidated investment program of ROSSETI SDCs engaged in electricity distribution resulted in achieving the required reduction of specific investment costs in 05. Compliance with commissioning schedules was achieved in full. Measures to ensure the accessibility of the ROSSETI Group s grid infrastructure resulted in a 5% reduction in the time required to obtain an electricity connection, from contract to certificate, for network connection requests for facilities rated below 50 kw as compared with 0. LONG-TERM GOALS INDICATORS TARGET VALUE IN 05 ACHIEVED RESULTS Securing a reliable and uninterrupted power supply No growth of large accidents No growth Reduced number of large accidents. Ensuring high personnel efficiency and their workforce productivity growth Workforce productivity indicator,490 rubles/man-hour Workforce productivity was higher than the target value. Improving power supply safety Ensuring financial soundness ANNUAL INDICATORS No growth of casualties No growth All necessary measures taken in 05 resulted in a reduction in occupational injuries compared with 04. The number of casualties from among SDCs personnel decreased substantially. Financial soundness and liquidity indicator > soundness 0.85; > liquidity 0.85 LONG-TERM GOALS INDICATORS TARGET VALUE IN 05 ACHIEVED RESULTS Enhancing investor attraction Enhancing investor attraction Total shareholder return (TSR) Return on invested capital (ROIC) > the average value of the indicator for the three previous years 0.9 The Management Board of ROSSETI formulated and approved the action plan to improve the operating efficiency and ensure the financial soundness of the ROSSETI Group in the current macroeconomic conditions. The implementation of the plan is a priority established for ROSSETI. Further information about the results can be found in the Section Information on the Company s Securities. Return on invested capital was higher than the target value. The target values of all key performance indicators were attained in 05; the attained target values accounted for at least 00% of the plan. The values attained in the reporting year are not compared with prior periods due to changes in the approaches to setting most target values and calculating most actual values in 05. The KPI values for 06 and thereafter are set forth in the Long-Term Development Program of ROSSETI, including the values required to achieve the targets set by the Strategy for Development of the Electric Grid Sector of the Russian Federation (Ordinance of the Government of the Russian Federation No. 5-r of April, 0) with respect to reducing specific operating expenses by at least 5% against 0 by 07, reducing specific investment costs by at least 0%, and reducing electricity losses by % against 0. The Company s system of key performance indicators is interlinked with the variable component of management s remuneration: each indicator is assigned a specific weight in the bonus pool, and quarterly and annual bonuses are paid if the corresponding KPIs are attained. 00% ATTAINMENT OF TARGET VALUES Approved by Ordinance of the Government of the Russian Federation No. 5-r.; Minutes of the Meeting No. 7 of December 5, 05; No. 0p-P of April 6, 05. Reducing operating expenses Reduction of specific operating expenses 0% In 05, pursuant to Directive No. 0p-P of April 6, 05, Annual Reduction of at Least Percent in Operating Expenses (Costs), the ROSSETI Group achieved a reduction of over 0% in specific operating expenses with the target value of %.

20 . STRATEGY REVIEW Operating Overview Operating Overview Operating Results Roman Berdnikov Member of the Management Board First Deputy Director General ROSSETI The key goal of ROSSETI s operating activities is to secure a reliable and highquality electricity supply by subsidiaries implementing the provisions of the Uniform Technical Policy, complying with technical regulations, and carrying out repair and capital investment programs in a timely manner. UNDER THE LONG- TERM DEVELOPMENT PROGRAM, ROSSETI WILL CONTINUE TO INCREASE THE AFFORDABILITY OF ELECTRICITY DISTRIBUTION SERVICES, SIMPLIFY NETWORK CONNECTION PROCEDURES, AND CUT CONNECTION COSTS Overall, ROSSETI s grid subsidiaries distributed 70.5 billion kwh of electricity in the reporting period, or 0.7% more than in 04. The ROSSETI Group s specific accident rate was down by 5%, electricity underdelivery decreased by %, and the average duration of power outages due to process failures was reduced by 4%. These data suggest that our package of measures to improve electricity supply reliability produces the expected results. The increased affordability of services provided by the ROSSETI Group is evidenced by the following data: 9,7 network connection certificates were signed, totaling 9,705 MW. The number of completed network connection contracts in 05 grew by 4% against 04. The rise in capacity (MW) also reached 4%. These figures show an increase in customer confidence. A very important and large-scale area of work is to modernize the electric grid infrastructure, including management and metering systems for electricity consumed by customers, and increase our customer focus. To this end, the Company carries out various projects, including the introduction of Smart Grid technology in the regions of its operations, the installation of up-to-date equipment and smart electricity meters, R&D in the field of electric power, and the opening of modern convenient customer service centers along with the development of online services. ROSSETI will continue in the current year to work to create the architecture of an actively adaptive grid, reduce the number and duration of process failures, and decrease electricity underdelivery to customers. There is still much to do, including carrying out subsidiaries production programs and implementing targeted measures such as maintaining employee qualifications at the appropriate level and reducing occupational and, especially, child injury rates. Truly yours, First Deputy Director General Roman Berdnikov Electricity Transmission and Distribution ROSSETI SDCs are engaged in electricity transmission and distribution in the regions of their operations and are responsible for a reliable and uninterrupted power supply and for compliance with international standards of reliability. Operating Results of ROSSETI SDCs in 05 SDCS DELIVERY TO NETWORKS, MILLION KWH ELECTRICITY LOSSES, MILLION KWH +5. BILLION KWH ELECTRICITY TRANSMISSION AND DISTRIBUTION (+0.7%) ELECTRICITY LOSSES, % IDGC of Centre 64,75.5 6,556. 5,949. 5, IDGC of Center and Volga Region 55, ,58.8 5, , IDGC of Volga 54,9.5 5,907.5,68.4, IDGC of North-West 9,75.0 9,475.4,547., IDGC of Siberia 74, , , , TDC 6,050. 5, IDGC of Urals 79, ,5.5 6,40.6 6, IDGC of South 9,55.8 8,776.0,745., IDGC of Northern Caucasus 8, ,484.7,57.8 4, Chechenenergo,5., , Kubanenergo,57.7,0.6,85.7, MOESK 88, ,68.4 7, , LENENERGO 4,08.4 4,46.7,79.5 4, Tyumenenergo 7,40. 7,55.7,868., Yantarenergo 4,98.4 4, TOTAL FOR DISTRIBUTION GRIDS 646, ,75.5 5, , FGC UES 56, ,47.,6., TOTAL for ROSSETI SDCs 790, , ,0.0 76, TOTAL for ROSSETI SDCs 4 790, , ,0.0 74, ROSSETI s total result takes account of ROSSETI SDCs subsidiaries and dependent companies engaged in electricity distribution; The calculation of FGC UES s electricity losses is based on electricity delivery from FGC UES s networks to customers electricity networks; Increased electricity losses were caused by changes in the operation mode of Russia s United Power System in 05. On a basis comparable with 0, electricity losses in 05 totaled 9.%, which is 0.4 pp lower than in 04 on a basis comparable with 0 (9.6%). The table detailing changes in revenues from electricity distribution services is contained in Section 6. of the Appendix to the Annual Report. The calculation of ROSSETI s total result takes account of the electricity flow balance between electricity networks of FGC UES and electricity networks of ROSSETI s subsidiaries and dependent companies engaged in distribution; 4 The calculation of ROSSETI s total result takes account of the electricity flow balance between electricity networks of FGC UES and electricity networks of ROSSETI s subsidiaries and dependent companies engaged in distribution and excludes electricity losses caused by the special operation mode of Russia s United Power System in

21 . STRATEGY REVIEW Operating Results 9.% ELECTRICITY LOSSES (0.4 PP LOWER) FACTORS CONTRIBUTING TO A DECREASE IN ELECTRICITY DISTRIBUTED BY CERTAIN SUBSIDIARIES Industrial customers require less electricity; Large customers optimize their expenses associated with electricity distribution services; Customers begin to use a higher voltage; Customers switch over from distribution networks to the Unified National (All-Russian) Electric Grid; Electricity generators lease out their equipment; Customers build in-house generation facilities. Network Connection Stages Submitting Network Connection Request The request is accepted for processing on the date when the requesting entity provides all information and documents specified in the Network Connection Rules Network Connection Network Connection Chain Network connection is one of the main regulated services provided by the ROSSETI Group. Network connection is the actual connection of power-receiving equipment of electricity consumers, power generation facilities, and electric grid facilities owned by grid organizations and other persons to networks of grid organizations. THE PREVIOUSLY CONNECTED CAPACITY OF POWER-RECEIVING EQUIPMENT IS INCREASED THE ELECTRICITY SUPPLY RELIABILITY CATEGORY IS CHANGED After request submission: NETWORK CONNECTION SERVICES Entering into Network Connection Contract Completing network connection procedures and obtaining permits THE PREVIOUSLY CONNECTED CAPACITY REMAINS THE SAME, BUT THE EXTERNAL ELECTRICITY SUPPLY SCHEME IS CHANGED THE CONNECTION POINT IS CHANGED Obtaining the authorization to operate the requesting entity s facilities Power-receiving equipment is connected using temporary or permanent electricity supply schemes. POWER-RECEIVING EQUIPMENT IS PUT INTO OPERATION FOR THE FIRST TIME THE PRODUCTION OPERATION TYPE IS CHANGED Actual network connection provided by the grid organization for the requesting entity s facilities Actual receipt (delivery) of voltage and capacity by turning on the switching device (the switching device is in ON position) Receiving Network Connection Certificate MEASURES TO ENSURE THE ACCESSIBILITY OF THE ROSSETI GROUP S GRID INFRASTRUCTURE RESULTED IN A 5% REDUCTION IN THE TIME REQUIRED TO OBTAIN AN ELECTRICITY CONNECTION, FROM CONTRACT TO CERTIFICATE, FOR NETWORK CONNECTION REQUESTS FOR FACILITIES RATED BELOW 50 KW AS COMPARED WITH 0. THE TIME OF OBTAINING AN ELECTRICITY CONNECTION, FROM CONTRACT TO CERTIFICATE, FOR SMALL AND MEDIUM-SIZED BUSINESSES NETWORK CONNECTION REQUESTS FOR FACILITIES RATED 5 50 KW WAS DECREASED BY 40% AS COMPARED WITH 0. The federal antimonopoly service supervises statutory compliance and oversees the activities of electric grid companies in relation to network connection services. Legislation establishes requirements governing the network connection procedure, and any grid organizations that are in breach of such regulations are subject to penalties: fixed penalties under article 9. of the code of administrative offences of the Russian Federation. To improve the reliability and quality of services provided by grid companies, the Federal Antimonopoly Service of the Russian Federation applies economic incentives by annually adjusting minimum regulated revenue in the calculation of electricity distribution tariffs. Enhancing the Affordability of the Power Infrastructure The ROSSETI Group s highest priority for network connection is to achieve the targets of the Action Plan (Road Map) Enhancing the Affordability of the Power Infrastructure (hereinafter, the Road Map Enhancing the Affordability of the Power Infrastructure ): Reducing the time required to obtain an electricity connection for power-receiving equipment of requesting entities Decreasing the number of electricity connection stages for power-receiving equipment of requesting entities Cutting electricity connection costs Network Connection Achievements of ROSSETI SDCs in 05 MAIN IMPLEMENTED MEASURES > > The time of preparing and sending draft network connection contracts was reduced to 0 days with the prescribed time of 5 days for facilities rated below 50 kw and to 0 days with the prescribed time of 0 days for facilities rated kw; > > The required number of a requesting entity s visits (for maximum capacity of below 50 kw) was decreased to, while this number is 4 in common practice; 40% REDUCTION IN THE TIME REQUIRED TO OBTAIN AN ELECTRICITY CONNECTION > > The time necessary for a grid organization to prepare for providing a network connection (for maximum capacity of 5 50 kw) was reduced to 90 days with the prescribed time of 0 80 days; > > The list of ROSSETI SDCs performance indicators with respect to the implementation of measures under the Road Map from 04 to 07 was expanded: the synchronization of SDCs capex programs and Russian regions grid development schemes by facility; the share of network connection contracts without capital expenditures; the share of contracts with delayed completion. In accordance with the Strategy for Development of the Electric Grid Sector of the Russian Federation approved by Ordinance of the Government of the Russian Federation No. 5-r of April, 0; Approved by Ordinance of the Government of the Russian Federation No. 44-r of June 0, 0; Pursuant to Directive of the Government of the Russian Federation No. 746p-P of December, 0, and as resolved by the Board of Directors of ROSSETI on December 7, 0 (Minutes of the Meeting No. 4 of December 0, 0), the implementation of the Action Plan (Road Map) Enhancing the Affordability of the Power Infrastructure approved by Ordinance of the Government of the Russian Federation No. 44-r of June 0, 0, is a priority for the Company s activities. 6 7

22 . STRATEGY REVIEW Operating Results Doing Business Rankings Targets in the Getting Electricity Ranking of Doing Business TARGET UNIT F Position in the Getting Electricity ranking Number of procedures Pcs. 0 4 Time Days Cost (% of income per capita) %,85 0 ROSSETI approved the action plan to attain the key electricity connection indicators necessary to reach the target position in the Getting Electricity ranking of the Doing Business rankings in 05 : > > Enter into agreements with Russian regional executive authorities for the allocation of land for the construction of electric grid facilities under a simplified network connection procedure > > Enter into an agreement with the Federal Service for Environmental, Technological and Nuclear Supervision of the Russian Federation for the simplification of the procedure for issuing permits to electric grid facilities built in the course of network connection > > Enter into agreements with energy retail companies in Russian regions for the implementation by grid companies of the procedure for verifying electricity meters and issuing electricity supply contracts to requesting entities The legal regulations issued in accordance with the Road Map Enhancing the Affordability of the Power Infrastructure in 05 are listed in the Appendix 6.. to the Annual Report. > > Use in-house resources to provide network connection for electrical installations rated 5 50 kw As resolved by the Board of Directors of the Company on December 9, 04; Minutes of the Meeting No. 74 of December, 04. Measures for the Doing Business Rankings in 06 Inform requesting entities of the existing network connection procedure and reforms in the electric grid sector Develop online functionalities and services for the Personal Login Page on the customer service website (портал-тп.рф) and ROS- SETI SDCs websites ТОР 0 OSSETI S TARGET IS TO ACHIEVE THE INCLUSION OF RUSSIA IN THE TOP 0 COUNTRIES ACCORDING TO THE DOING BUSINESS RANKINGS BY 08 Cooperate with Russian regional executive authorities in the planning of requesting entities sites for electrical installations rated 5 50 kw Carry out measures to optimize procurement procedures under network connection contracts using outsourced services and inhouse resources In accordance with ROSSETI s action plan to attain the benchmarks of the Road Map Enhancing the Affordability of the Power Infrastructure for 06. Changes in Network Connection Provided for Customers and Generation Facilities (05 vs. 04) received requests signed contracts completed contracts Changes in Network Connection for 0 05, pcs. received requests signed contracts completed contracts Changes in Network Connection for 0 05, MW 54,64 received requests signed contracts % ,69 pcs. % ,0 8,4 0 0,6 59,4 MW +4% 6,70 69,09 pcs. 4% 488,4 5,0 8,5 46, ,9 MW 6% 9,7 pcs. 9,705 MW +4% +4% ,69 59,4 9,7 69,09 05 completed contracts 9,566 0,468 7,46 7,9 9,

23 . STRATEGY REVIEW Operating Results Network Connection Provided for Customers in 05 Major Network Connection Projects SUBSIDIARY/DEPENDENT COMPANY NAME NUMBER OF NETWORK CONNECTION REQUESTS SIGNED NETWORK CONNECTION CONTRACTS SIGNED NETWORK CONNECTION CERTIFICATES PCS. MW PCS. MW PCS. MW IDGC of Centre 60,54,798 49,566,66 6,99,5 LENENERGO,68,58 8, ,87 80 MOESK 0,05 8,646 68,695,90 77,55,07 IDGC of Volga 8,497,9 5, , Yantarenergo 6,5 89 4,8 0 4, 9 IDGC of South 8,97,569 5, , Kubanenergo 6,080,098 9,449 65,0 67 IDGC of Northern Caucasus 9, , ,040 7 Tyumenenergo 5, , , IDGC of Siberia 40,86,86 0, , TDC,45 45,05 68,09 6 IDGC of North-West 7,640,74, , IDGC of Urals 6,,8 0, , IDGC of Center and Volga Region 60,595,68 5,088,89 48,408,065 Other 0,07,49 4, ,5 445 TOTAL for distribution grids 478,4,46 68,790,755 9,995 0,6 FGC UES 97,76 95,009 0,766 TOTAL for ROSSETI SDCs 478,5 4,80 68,985 4,764 9,5,77 Network Connection Provided for Generation Facilities in 05 SUBSIDIARY/DEPENDENT COMPANY NAME NUMBER OF NETWORK CONNECTION REQUESTS SIGNED NETWORK CONNECTION CONTRACTS SIGNED NETWORK CONNECTION CERTIFICATES PCS. MW PCS. MW PCS. MW IDGC of Centre LENENERGO MOESK IDGC of Volga Yantarenergo 4, IDGC of South Kubanenergo IDGC of Northern Caucasus Tyumenenergo IDGC of Siberia 0 5 TDC IDGC of North-West IDGC of Urals IDGC of Center and Volga Region Other 5, TOTAL for distribution grids 4, FGC UES 50,7 5,65 5 5,49 TOTAL for ROSSETI SDCs 6 6,49 54, ,8 FGC UES network connection for Units and, Nizhnyaya Tura TPP по 0 MW T Plus IDGC OF NORTHERN CAUCASUS network connection for Gotsatlinskaya HPP 00 MW RusHydro FGC UES network connection for Unit, Chelyabinsk TPP 5 MW Fortum Average Network Connection Fee for Distribution Grids for , rubles/kw 8,0 The average network connection fee rate (rubles/kw) is calculated by dividing network connection revenues for the period by connected capacity for the same period. 9,487 6,97 Best Practices and Pilot Projects for Network Connection IDGC OF SIBERIA The Creation of the Back Office project was put into test operation. The implementation of the project will reduce unjustified measures related to network construction and rehabilitation, optimize the number of employees by spreading the workload, and prevent abuse of authority. 4,9 In accordance with Ordinance of the Government of the Russian Federation No. 4-r of August, 00, On the Approval of the List of Generation Facilities Used for the Supply,96,606, MOESK Steps, Visits program. The number of stages was reduced from 5 to ; the time of preparing draft contracts for facilities rated below 50 kw was decreased from 9 to 7 days. The year 05 saw the launch of the 0 Visits program: all network connection stages are through the Personal Login Page on the Internet, using a digital signature and payment by bank card, which will make it completely Detailed information about network connection fees is contained in Section 6. of the Appendix to the Annual Report. Detailed information about changes in revenues from network connection services is contained in Section of the Appendix to the Annual Report. unnecessary for a requesting entity to visit the company s office in person. In 05, MOESK received 9,000 electronic network connection requests (or about 0% of the total number of received network connection requests). 40 4

24 . STRATEGY REVIEW Operating Results Consolidation of Electric Grid Assets STRATEGY FOR DEVELOPMENT OF THE ELECTRIC GRID SECTOR TASK Reducing the fragmentation of territorial grid organizations and stiffening control over them RISK OF IMPAIRED RELIABILITY OF THE ELECTRIC GRID SECTOR > > If TGOs are numerous, this increases risks affecting the electric grid sector s operation; > > The principle of uniformity of engineering solutions is violated; operating expenses and investment costs overlap; > > Small TGOs do not have sufficient resources to independently remedy accidents and emergency situations. TARGETS OF THE STRATEGY FOR DEVELOPMENT OF THE ELECTRIC GRID SECTOR STAGE (04 07) About half of the existing TGOs will leave the market due to their failure to qualify as a territorial grid organization and because of excluding one-customer grids expenses from the pool tariff STAGE (07 00 The number of TGOs will decrease to around 800 by 00 under the influence of economic incentives and due to bringing benchmarking tools into use and to stiffening quality and reliability requirements in tariff regulation NUMBER OF TERRITORIAL GRID ORGANIZATIONS,000,700, Principal Goals of the Consolidation of Electric Grid Assets Create a single center of responsibility for securing a reliable, high-quality, and affordable electricity supply Increase the share of ROSSETI s subsidiaries in pool-based revenues from electricity distribution services provided for regional customers Reduce TGOs receivables for electricity distribution services Build up an optimal electric grid infrastructure OBJECTIVES Reduce the fragmentation of TGOs and stiffen control over them Cut overlapping investment costs Improve the operating efficiency of the electric grid sector and reach a new level of manageability Secure a high-quality and reliable power supply and ensure energy security in the regions Work on consolidating electric grid assets at the level of ROSSETI s subsidiaries is done under the programs to consolidate electric grid assets approved by their boards of directors. Under the consolidation programs, the ROSSETI Group purchased,56 MVA of transformer capacity and,8 kilometers of power lines in 05; at the end of 05, 4,88 MVA of transformer capacity and 44,705 kilometers of power lines were held under lease Electric Grid Facilities Purchased in 0 05, MVA, kilometers (for the respective period) Transformer capacity Power lines Electric Grid Facilities Held Under Lease in 0 05, MVA, kilometers (at the end of the respective period) Transformer capacity Power lines 98 0,04,446,905,4 0 4,475 ROSSETI SDCs cooperate with authorized executive agencies of constituent entities of the Russian Federation, local government authorities, and TGOs in preparing road maps for consolidating electric grid assets and taking inventory of ownerless electric grid facilities ,705 KILOMETERS POWER LINES HELD UNDER LEASE IN 05,778,8 8,459,56 4, ,705 An example of positive experience of cooperation in this area is the joint work done by LENENERGO and the Government of Saint Petersburg. 4 4

25 . STRATEGY REVIEW Operating Results Implementation of Road Maps for Consolidating Electric Grid Assets in Russian Regions Growth of Automation in 05 5% 58% IT Achievements in 05 The Company implements the Strategy for Development CONSTITUENT ENTITY OF THE RUSSIAN FEDERATION START DATE OF IMPLEMENTATION Ingushetia August 8, 04 Dagestan August 9, 04 North Ossetia August 8, 04 Kabardino-Balkaria August, 04 Karachay-Cherkessia July 5, 04 Vladimir Region April, 04 Karelia June 8, 05 Komi December 9, 05 MAIN AREAS OF AUTOMATION UNDER THE ITT STRATEGY automation of production processes, availability of telecommunications IT infrastructure supportability automation of business and production processes USE OF DOMESTICALLY MADE SOFTWARE AND AUTOMATION TOOLS IN THE ELECTRIC GRID SECTOR 8% 40% 04 4% 45% 05 of ROSSETI and Its Subsidiaries and Dependent Companies in Information Technology, Automation and Telecommunications Until 06 (ITT Strategy) and the ITT Strategies of all ROSSETI SDCs. IMPROVED NETWORK OBSERVABILITY AND CONTROLLABILITY The Common Treasury was set up, whose software and hardware platform enables all participating companies to conduct payment transactions on a real time basis ACCESSIBLE SERVICES FOR CUSTOMERS The Network Connection Portal (портал-тп.рф) was modernized, providing a friendlier user interface and, consequently, considerably increasing the number of visitors Use C software products for the automation of the ROSSETI Group s business processes; Switch workstations over to domestically made equivalent application software on a phased basis; +5% OVERALL GROWTH OF AUTOMATION In order to increase the transparency of implementing the ITT Strategy, the Company uses an evaluation system for the achieved results in terms of the scope of functions that can be automated. The calculation of the scope of such functions is transparent and uniform for all participants in the process. ROSSETI initiated centralized bidding procedures ensuring cost reduction due to economies of scale: for instance, the centralized purchase of software in 05 reduced its purchase price by a half. The ROSSETI Group s principle method for IT cost reduction is the use of resources of its wholly owned subsidiary, Power Grid Optical Networks Engineering, for the operation of information systems and equipment. Give preference to the use of domestically devised solutions for telecommunications, telemetry, and automated process control systems and switch over to longterm planning and close cooperation with domestic manufacturers of such equipment. GOAL FOR 06 TO UPDATE THE ITT STRATEGY WITH A PLANNING HORIZON UNTIL

26 . STRATEGY REVIEW Operating Results Operating Activities 4% 5.8 5% % Main Results of Securing a Reliable and Uninterrupted Power Supply In 05, branches of electricity distribution grid companies did not exceed the prescribed target values of the indicator approved by the relevant regional energy commissions, adjusted for the tolerance factor. Many SDCs attained the indicator with substantial improvements. THE CRITERION FOR ASSESSING THE LEVEL OF RELIABILITY IS THE DURATION OF POWER OUTAGES. The equivalent criterion for electric grid companies is the average outage duration indicator determined by regional energy commissions. DESCRIPTION Repaired power lines, kilometers 7,875 54,409 Comprehensive repairs to substations rated 5 kv and above,6, Major repairs to transformers and autotransformers 4,906 5,7 Major repairs to switching devices, units 7,54 7,968 Cleared power line pathways, hectares 40,59,97 AVERAGE DURATION OF POWER OUTAGES RELATED TO PROCESS FAILURES Repair Program The goal of the repair program is to secure a reliable and high-quality electricity supply and ensure the accidentfree operation of facilities in the heat deficit period. With curtailed capex programs, special attention was given in 05 to maintaining the reliability and quality levels prescribed by the regulator. AS PART OF PREPARATIONS FOR THE 05/6 HEAT DEFICIT PERIOD, ROSSETI SDCs COMPLETED A LARGE- SCALE REPAIR CAMPAIGN TOTALING 5.8 BILLION RUBLES BILLION RUBLES LARGE-SCALE REPAIR PROGRAM PRINCIPAL SCENARIO CONDITIONS OF THE 05 REPAIR PROGRAM The scope of the repair program in physical terms is not less than in the previous year and is not lower than the scope approved by the regulator in tariff and balancing decisions The scope in physical terms and financial resources are so planned as to cover at least 90% and 0% of the repair program in the st rd quarters and the 4 th quarter respectively The measures affecting the accident-free operation of facilities in the 05/6 heat deficit period are so planned as to be completed before October, 06 Specific Accident Rate (number of process failures /,000 conditional units of equipment) SPECIFIC ACCIDENT RATE THE TIMELY IMPLEMENTATION OF THE REPAIR PROGRAM IS KEY TO SUCCESS IN THE ACCIDENT-FREE OPERATION OF FACILITIES DURING THE HEAT DEFICIT PERIOD REDUCTION IN PROCESS FAILURES IN NETWORKS RATED 6 KV AND ABOVE Reducing Accident Rates In 05, ROSSETI SDCs recorded and investigated 95,849 process failures (accidents) in networks rated 6 kv and above (% down from 04), including,66 process failures in networks rated 0 kv and above (6% down)

27 . STRATEGY REVIEW Operating Results Average Outage Duration Indicator Related to Process Failures (hours) % 4% 0% The system of recording electric grid facilities process failures in ROSSETI SDCs is governed by the following documents: Rules for investigating into the causes of accidents in the electricity industry whereby all process failures in any network of 6 kv or above are classified as accidents; 04 0 Guidelines for calculating the level of reliability and quality of supplied goods and rendered services for the organization managing the unified national (all-russian) electric grid and territorial grid organizations. To evaluate the electric grid sector s performance with respect to accident rates and electricity supply reliability, ROSSETI uses Avariynost, a software system for recording process failures (accidents), which enables the Company to consolidate and analyze information on power outages. Main Causes of Accidents 0% % 4% % 8% To reduce accident rates, the Company continued in 05 to work under the target-oriented multiyear programs to: > > widen narrow clearings; % 7% % 4% > > replace oil circuit breakers rated 6 0 kv (with an expired standard operating life) with modern vacuum circuit breakers and SF6-insulated circuit breakers;.0 worn-out (damaged) insulation.8 Physical damage, including damage, caused by outsiders Atmospheric (lightning) overvoltage damage caused by icing and wind loads, acts of nature altered properties of materials trees falling onto overhead line wires obstruction caused by birds/animals damaged customer equipment other defective operations Work continued in the reporting period on sectionalizing long feeders with the installation of reclosers and on replacing circuit breakers with modern devices. Measures were developed and carried out to prevent consistent failures of overhead lines, and target-oriented programs to improve reliability were adjusted. REDUCTION IN THE NUMBER OF PROCESS FAILURES CAUSED BY WORN-OUT INSULATION THE ROSSETI GROUP S EFFECTIVE PRODUCTION OPERATIONS IN 05 REDUCED PROCESS FAILURES (ACCIDENTS) CAUSED BY WORN-OUT INSULATION AND ADVERSE ATMOSPHERIC PHENOMENA (LIGHTNING) BY 5% AND 4% RESPECTIVELY Average Duration of Process Failures Related to Power Outages in 05, hours REDUCTION IN THE NUMBER OF PROCESS FAILURES CAUSED BY ADVERSE ATMOSPHERIC PHENOMENA Reducing Electricity Underdelivery The duration of power outages is the principal parameter that can be influenced by an electric grid company. KUBANENERGO IDGC OF NORTH-WEST IDGC OF NORTHERN CAUCASUS LENENERGO IDGC OF CENTER AND VOLGA REGION IDGC OF URALS IDGC OF SOUTH IDGC OF VOLGA TYUMENENERGO YANTARENERGO IDGC OF CENTRE IDGC OF SIBERIA TDC MOESK FGC UES ROSSETI REDUCTION IN THE NUMBER OF PROCESS FAILURES RESULTING IN POWER OUTAGES % REDUCTION IN THE TOTAL DURATION OF POWER OUTAGES > > replace surge arresters rated 6 0 kv with overvoltage suppressors, etc

28 . STRATEGY REVIEW Operating Results Energy Conservation and Energy Efficiency Enhancement 96. Energy Resource Consumption for Business Purposes in Electricity Distribution Grids in 05 The ROSSETI Group s energy conservation and energy efficiency enhancement measures are aimed at the efficient use of fuel and energy and at the reduction of the process consumption of electricity transported in networks. ROSSETI SDCs formulated and carry out 6 energy conservation and energy efficiency enhancement programs. Targets of the ROSSETI Energy Conservation Program Reduce electricity losses Reduce specific electricity consumption for business purposes Provide modern electricity meters for the retail market IN 05, THE COMPANY FORMULATED THE CONSOLIDATED PROGRAM OF ENERGY CONSERVATION AND ENERGY EFFICIENCY ENHANCEMENT OF ROSSETI FOR PRODUCTION SUBPROGRAM OF ENERGY CONSERVATION program of organizational and production measures to reduce electricity losses program to reduce energy consumption for production and business purposes program to renew electric grid equipment long-term development program for electricity metering systems in the retail market MILLION RUBLES ECONOMIC EFFECT OF TARGET- ORIENTED MEASURES TAKEN TO REDUCE ENERGY RESOURCE CONSUMPTION 5,79.6 MILLION RUBLES EXPENSES ASSOCIATED WITH THE PURCHASE OF FUEL AND ENERGY FOR PRODUCTION AND BUSINESS PURPOSES IN ELECTRICITY DISTRIBUTION GRIDS TARGET VALUE/INDICATOR UNIT OF MEASUREMENT 05 (PLAN) 05 (ACTUAL) Resource consumption for business purposes, including by resource type million rubles 6,66.4 5,407.8 Electricity Heat Hot water supply Cold water supply Other (gasoline, kerosene, diesel fuel, etc.) Natural gas million rubles million kwh million rubles thousand Gcal thousand cbm million rubles thousand cbm million rubles thousand tonnes of fuel equivalent million rubles thousand cbm million rubles,00.07, , , ,89. 0, , , , , , Energy Resource Consumption for Business Purposes in Electricity Transmission Grids in 05 TARGET VALUE/INDICATOR UNIT OF MEASUREMENT RESOURCE CONSUMPTION FOR BUSINESS PURPOSES, INCLUDING BY RESOURCE TYPE ELECTRICITY IN BUILDINGS, STRUCTURES, AND FACILITIES 05 (PLAN) UNDER THE ENERGY CONSERVATION PROGRAM 05 (ACTUAL) Electricity consumption in buildings, structures, and facilities thousand kwh.6. Reduction of electricity consumption in buildings, structures, and facilities thousand kwh Savings related to energy purchase expenses and resulting from reduced electricity consumption thousand rubles (exclusive of VAT),46.99,55.4 HEAT IN BUILDINGS, STRUCTURES, AND FACILITIES Heat consumption in buildings, structures, and facilities thousand Gcal Reduction of heat consumption in buildings, structures, and facilities thousand Gcal.0.06 Savings related to energy purchase expenses and resulting from reduced heat consumption thousand rubles GASOLINE Gasoline consumption thousand liters 7,958 6,990.6 Reduction of gasoline consumption thousand liters Savings related to gasoline purchase expenses thousand rubles (exclusive of VAT) DIESEL FUEL Gasoline consumption thousand liters 7,958 6,990.6 Reduction of gasoline consumption thousand liters Savings related to gasoline purchase expenses thousand rubles (exclusive of VAT) Further information about ROSSETI SDCs energy resource consumption for business purposes in the reporting year is contained in Section 6.7 of the Appendix to the Annual Report. 50 5

29 . STRATEGY REVIEW Operating Results The following solutions contributed to meeting the targets of the Program of Energy Conservation and Energy Efficiency Enhancement: LED lighting Improved thermal insulation specifications of buildings, namely the use of windows and fencing structures with high thermal resistance Use of heat pumps and solar collectors and the installation of automatic heating and lighting control systems for substations Use of GPS systems on motor vehicles Reducing Electricity Losses Electricity Loss Reduction Measures ROSSETI Group carries out a package of measures to optimize (reduce) electricity losses. IN 05, SAVINGS TOTALED,46.8 MILLION KWH DUE TO: Organizational measures,,5.0 million kwh; Technical measures, 86.5 million kwh; Measures to improve electricity metering, 5. million kwh. 6,900 reports on noncontractual consumption of electricity totaling 05.4 million kwh were issued and paid in the reporting period, which made it possible to avoid expenses of,508. million rubles, exclusive of VAT. Detailed information about electricity loss reduction measures is contained in the Appendix 6. to the Annual Report.,46.8 MILLION KWH SAVINGS ARISING FROM MEASURES TO OPTIMIZE ELECTRICITY LOSSES +7.6% SAVINGS ARISING FROM MEASURES TO REDUCE ELECTRICITY LOSSES (IN PHYSICAL TERMS) IN 05 WERE HIGHER THAN PLANNED >79 THOUSAND ELECTRICITY METERS WERE MODERNIZED IN 05 (WITH EXPENSES OF.9 BILLION RUBLES) Investment and Innovation Svetlana Balaeva Deputy Director General for Investment ROSSETI ROSSETI continued in 05 to carry out capital investment projects of paramount importance for securing a reliable, highquality, and affordable electricity supply. In the reporting period,,869 MVA of capacity and 4,850 kilometers of power lines were put into operation. The value of commissioned capital assets totaled billion rubles. Financing for the consolidated investment program totaled billion rubles, inclusive of VAT. Priority projects include those of national significance such as work on energy security for the Kaliningrad Region and the Northwest Integrated Power System and preparations for the 08 FIFA World Cup. As part of implementing the Strategy for Development of the Electric Grid Sector of the Russian Federation, we carried out measures to optimize the value of the consolidated investment program. The effect of applying the Technique for the Reduction of Investment Costs is expected to be 6.9 billion rubles, exclusive of VAT, for commissioned distribution facilities in 05. ROSSETI WILL CONTINUE IN 06 TO WORK TOWARD DEVELOPING ELECTRIC GRIDS IN THE REGIONS OF ITS OPERATIONS AND IMPROVING THEIR RELIABILITY AND ACCESSIBILITY BY MEANS OF THE NEW CONSTRUCTION, REHABILITATION, TECHNICAL UPGRADING, AND CONSOLIDATION OF ELECTRIC GRID ASSETS More detailed information about ROSSETI s achievements in investment in 05 can be found below in this section. Very truly yours, Svetlana Balaeva Deputy Director General for Investment >0 THOUSAND ELECTRICITY METERS WITH ORGANIZED REMOTE DATA COLLECTION 5 5

30 . STRATEGY REVIEW Investment and Innovation Investment and Innovation.. Key Indicators of the Consolidated Investment Program in 05 ROSSETI carries out projects of national significance: energy security for the Kaliningrad Region and the Northwest Integrated Power System preparations for the 08 FIFA World Cup The principal goal of the electric grid sector is to secure the reliable, high-quality, and affordable energy supply for customers on a long-term basis. Investment efficiency is a necessary step toward achieving the principal goal. Under its capex programs, the ROSSETI Group invests in: > > new construction; > > rehabilitation, extension, and technical upgrading of production and nonproduction facilities; > > acquisition of buildings, structures, equipment, land, and facilities intended for the use of natural resources; > > acquisition and creation of intangible assets and other capital investment expenses; > > purchase of shares in electric grid companies. In the reporting period, the greater part of investment was directed to network connection for customers and generation facilities (4%), technical upgrading and rehabilitation (9%), and new construction (%). The financing sources for the capital investment program were tariff-based revenues, borrowed funds, and connection fees. BILLION RUBLES INCLUSIVE OF VAT FINANCING BILLION RUBLES COMMISSIONED CAPITAL ASSETS Areas and Breakdown of Financing Under the Consolidated Investment Program, million rubles (inclusive of VAT) AREAS OF FINANCING 04 05* Network connection 8,887 87,797 4% Technical upgrading and rehabilitation 70,55 59,546 9% New construction 58,6 44,740 % Other 9,,677 7% Total 40,7 05,760 00% *For comparability purposes with respect to reports for prior years, information does not include ROSSETI s subsidiary SDCs: Yargorelektroset, Svet, Tsarskoye Selo Energy Company, Kurortenergo, Saint Petersburg Power Grid, and Petrodvorets Electric Company. Principal Financing Sources for the Consolidated Investment Program, %.% 8.5% 48.% Tariff-based revenues Borrowed funds Connection fees and other sources In the reporting period, ROSSETI did not make investments with estimated ROI of more than 0% per year. SDC FINANCING, MILLION RUBLES (INCLUSIVE OF VAT) COMMISSIONED CAPITAL ASSETS, MILLION RUBLES (EXCLUSIVE OF VAT) COMMISSIONED CAPITAL ASSETS, MVA COMMISSIONED CAPITAL ASSETS, KILOMETERS IDGC of Siberia 6,96 5,689 64,6 TDC Tyumenenergo 0,7 9, ,606 IDGC of Urals 7,04 6,488 84,07 IDGC of Volga,, IDGC of South,07, Kubanenergo 9,956 8,580 8,09 IDGC of Northern Caucasus,79, Chechenenergo IDGC of Center and Volga Region 5,904 5,487 5,484 IDGC of North-West 4,8 4,067 4,098 LENENERGO,45, Yantarenergo, IDGC of Centre 5,84,758,8 4,785 MOESK 6,95 4,458,59 6,06 Tyvaenergo ENCE,4, FGC UES 85,888 99,48 7,585,5 Total for ROSSETI SDCs 05,760 0,895,756 4,700 Tsarskoye Selo Energy Company Kurortenergo Svet Saint Petersburg Power Grid 4,784, Petrodvorets Electric Company 8 Total for ROSSETI SDCs including subsidiary SDCs Changes in Financing for 0 05, million rubles (inclusive of VAT) 05* 04 0,78,86,869 4,850 05,760 40,7,449 *For comparability purposes with respect to reports for prior years, information does not include ROSSETI s subsidiary SDCs: Yargorelektroset, Svet, Tsarskoye Selo Energy Company, Kurortenergo, Saint Petersburg Power Grid, and Petrodvorets Electric Company

31 . STRATEGY REVIEW Investment and Innovation Changes in Commissioned Capacity Under the Consolidated Investment Program for 0 05 (MVA),869 МVА SDCS МVА /04% 05/04% KILOME- TERS МVА KILOME- TERS МVА KILOME- TERS МVА KILOMETERS IDGC of Siberia 5, ,97 64, TDC Tyumenenergo , IDGC of Urals 644,854 46,060 84,07 0 IDGC of Volga 779,8 45, IDGC of South Kubanenergo ,567 8, IDGC of Northern Caucasus Chechenenergo IDGC of Center and Volga Region 694,95 64,8 5,484 4,850 КМ COMMISSIONED CAPACITY IDGC of North West 57,66 400,66 4,098 9 LENENERGO 907,846,450, Yantarenergo IDGC of Centre,6 5,689,07 5,0,8 4,785 6 MOESK 4,45 6,95,440 8,64,59 6, Tyvaenergo ENCE FGC UES 0,79,690 9,5, 7,585,5 64 Total for ROSSETI SDCs*,46 0,84 9,40,89,756 4, For comparability purposes with respect to reports for prior years, information does not include ROSSETI s subsidiary SDCs: Yargorelektroset, Svet, Tsarskoye Selo Energy Company, Kurortenergo, Saint Petersburg Power Grid, and Petrodvorets Electric Company. Reduction of the Value of Capital Investment Projects As part of implementing the Strategy for Development of the Electric Grid Sector of the Russian Federation as related to reducing specific investment costs by 0% compared with 0, based on the results of ROSSETI SDCs consolidated investment program for distribution grids for 05, the actual effect of applying the Technique for the Reduction of Investment Costs is 6.9 billion rubles, exclusive of VAT, for capital assets commissioned in 05. Capital Investment Projects Financed from the Federal Budget. Planned Completion Dates The ROSSETI Group is involved in most construction projects of national significance. One of such projects implemented by the Company is preparations for the 08 FIFA World Cup in Russia. It is planned that the tournament will take place at stadiums in cities, six of which (Volgograd, Samara, Saransk, Rostov-on-Don, Saint Petersburg, and Kaliningrad) are in the area of responsibility of four ROSSETI SDCs (IDGC of Volga, IDGC of South, LENENERGO, and Yantarenergo). The construction and rehabilitation of the power supply infrastructure in these cities are included in the federally funded program of preparations for the 08 FIFA World Cup. of IDGC of Northern Caucasus. The program of high priority measures to renew cable lines of 6 0 kv is aimed at improving the operating reliability of the city cable network and securing an uninterrupted electricity supply for Saint Petersburg and Kronshtadt. In 05, ROSSETI reported to the Ministry of Energy on the completion of all cable lines rated 0 kv (9 project titles) in 04 with a total length of 74 kilometers. With the aim of reducing commercial electricity losses in networks of IDGC of Northern Caucasus in the Republic of Dagestan, the Republic of Ingushetia, and the Chechen Republic, the Company launched the comprehensive program of measures to reduce above-standard electricity losses in 0 with plans to automate 66,6 electricity meters. Two other key construction projects are the comprehensive program to renew cable lines of 6 0 kv in Saint Petersburg and the program to reduce commercial electricity losses in networks 56 57

32 . STRATEGY REVIEW Investment and Innovation The data collection and recording system was put into commercial operation in the Republic of Ingushetia in 05. In seven of electric grid districts in the Chechen Republic, construction and installation work was completed. It is planned that the comprehensive program in the Republic of Dagestan will be completed in 06. Information on Spent Federal Budget Funds PROGRAM Program of Preparations for the 08 FIFA World Cup in Russia Program to Renew Cable Lines of 6 0 kv in Saint Petersburg Comprehensive Program of Measures to Reduce Abovestandard Electricity Losses COMPLETION DATES BILLION RUBLES, OF VAT ACTUAL EFFECT OF APPLYING THE TECHNIQUE FOR THE REDUCTION OF INVESTMENT COSTS RECEIVED FEDERAL BUDGET FUNDS SPENT FEDERAL BUDGET FUNDS TOTAL % BALANCE OF FEDERAL BUDGET FUNDS EXPECTED SAVINGS 04 07, % ,000 4, % ,950, % 997 TOTAL,4 9, %,5 488 Material Events in the 4 th Quarter of 05: Resolution of the Government of the Russian Federation No. 076 of October 8, 05, On the Allocation of Public Funding to Public Joint Stock Company ROSSETI under Capital Construction Projects [ ] in Order to Create the Power Supply Infrastructure for the 08 FIFA World Cup in Russia was issued; On December 8, 05, the Ministry of Energy of the Russian Federation, the Federal Agency for State Property Management of the Russian Federation, and ROSSETI signed a tripartite public funding agreement; 6.9 All funds received from the Federal Budget for 05 (,47.8 million rubles) were used as payment for placed shares in ROSSETI SDCs, specifically 85.7 million rubles for Yantarenergo, 580. million rubles for LENENERGO, and 66.8 million rubles for IDGC of Volga. More detailed information is contained in Section 6. of the Appendix to the Annual Report. Priority Projects Planned to Be Implemented in In the period from. It is planned to implement 57 capital investment projects from 06 to 00, meeting the criteria for qualifying as priority projects, including 5 capex projects for transmission grids (FGC UES) and 9 capex projects for distribution grids, of which the most significant are the following: > > Facilities for supplying capacity from Leningrad NPP-; > > Facilities for supplying capacity to Novovoronezh NPP-; > > Facility for supplying capacity to Rostov NPP; > > Measures to ensure the reliable operation of Russia s United Power System with the separation from the Baltic energy systems; > > Facilities securing a reliable electricity supply for the 08 FIFA World Cup; > > Facilities for providing network connection for large industrial customers; > > Creation of the 0 kv smart electricity network for the Skolkovo Innovation Center. Detailed information about priority projects under the capital investment project is contained in the Appendix 6. to the Annual Report Long-Range Activities The high physical depreciation of equipment with an expired standard operating life, the need to ensure electricity supply reliability for existing customers and provide network connection for new commercial and social facilities, the reduction of tariff-based revenues, and the insufficiency of internal sources make it necessary to decide on using federal budget funds for the development of electric grids. Jointly with IDGC of Northern Caucasus, ROSSETI developed comprehensive programs for the development of electric grids located in the North Caucasus Federal District. The amount of financing for 07 0 is 49,854. million rubles. The comprehensive programs received approval from all constituent entities of the district. Work is underway on the integration of the comprehensive programs into Government Program of the Russian Federation Development of the North Caucasian Federal District for the period until 05. Similar work is underway on the modernization of electricity networks in the Kaliningrad Region. Based on the previously developed comprehensive program to develop electricity networks in the Kaliningrad Region for and the long-term development scheme and program for the Kaliningrad Region electric power sector for and with due consideration to the current projects for preparations for the 08 FIFA World Cup and measures for new construction in relation to supplying capacity from new generation facilities in the Kaliningrad Region, the program to develop Yantarenergo s electric grid facilities until 00 was formulated. The amount of financing for is more than 0 billion rubles. The program received approval from the Government of the Kaliningrad Region; work is underway on receiving approval from the Ministry of Energy of the Russian Federation. Approved by Resolution of the Government of the Russian Federation No. 09 of April 5, 04; Approved by Ordinance of the Governor of the Kaliningrad Region No. 4-r of April

33 . STRATEGY REVIEW Investment and Innovation.9 5 BILLION RUBLES INNOVATIVE DEVELOPMENT EXPENSES IN 05 MODE- EV CHARGING STATIONS INSTALLED IN 05 Innovative Development Program The goal of the ROSSETI Group s Innovative Development Program is to switch over to a technologically new electric grid with qualitatively new characteristics of reliability, efficiency, affordability, manageability and customerorientedness in the ROSSETI Group as a whole. In order to achieve this goal, work is done in the following areas under the Innovative Development Program: Ensuring the development and introduction of advanced technology and creating the conditions for carrying out innovation projects Automating the operation of electric grid facilities Implementing pilot projects and solutions 4 5 Building up an efficient management system for innovative development and streamlining the business process management system Developing and introducing new energy efficiency technology and making use of modern engineering solutions aimed at energy efficiency enhancement 6 Developing and improving electricity metering systems 7 Employing up-to-date quality control methods for the management system 8 Carrying out the Research and Development (R&D) Program 9 Minimizing the adverse impact of electric grids on the environment and public health 0 Improving the system of mutually beneficial collaboration with innovative small and medium-sized businesses and carrying out projects and R&D activities aimed at the development of innovative technologies, products, and services Creating the conditions for the development of employees competencies in innovation, research, and engineering by improving personnel training programs and providing the Company s employees with targeted training, advanced training, retraining, and pre-evaluation training An important result of accomplishing the key goals of the Innovative Development Program is the practical use of solutions and technologies, namely focused and comprehensive projects, with their subsequent commercialization. > > Pursuant to Instructions of the President of the Russian Federation No. Pr-0 of December 9, 04, the Board of Directors approved the Regulations for the Procedure for Formulating and Implementing the Innovative Development Program on November 6, 05. > > The Innovative Development Program of ROSSETI is subject to approval by the Board of Directors in the nd quarter of 06. Innovative Development Expenses (thousand rubles, inclusive of VAT) SDCs 05 IDGC of Centre 67,846.4 IDGC of Center and Volga Region 785,80.0 IDGC of North-West 490,950.0 IDGC of Urals 76,50.0 IDGC of Volga 78,89.0 IDGC of Siberia,40,500.0 TDC 54,675. IDGC of South 7,.5 Kubanenergo 954,99. IDGC of Northern Caucasus 69,440.0 MOESK 470,790.0 LENENERGO 649,60.0 Tyumenenergo 85,88.9 Yantarenergo,045.0 TOTAL FOR DISTRIBUTION GRIDS 6,7,60.0 FGC UES 5,89,780.,00 Total for ROSSETI SDCs,90,

34 . STRATEGY REVIEW Investment and Innovation Major projects under the Innovation program 49 NATIONAL PROJECTS Pursuant to Ordinance of the Government of the Russian Federation No. 7-r of July, 04, On the Approval of the Action Plan (Road Map) Introducing Innovative Technologies and Modern Materials into the Fuel and Energy Industry Sectors for the Period Until 08, two national projects were included in the draft of the Innovative Development Program of ROSSETI for 06 00:. Develop and bring into use an automated protection and control system for a new generation of electrical substations (isas);. New construction technologies for overhead power lines using towers made of composites. The material prepared by ROSSETI with respect to the national projects were approved by the working group on the selection of national projects under Russian Minister of Energy A.V. Novak. EV Charging Station Infrastructure Since 0, ROSSETI has been involved in the nationwide program to develop the electric vehicle charging station infrastructure. In the reporting year, ROSSETI installed five Mode- EV charging stations. IN 05, ON THE INITIATIVE OF ROSSETI: > > the transport tax on electric vehicles was abolished; > > the Russian Government issued the resolution allowing to install charging infrastructure at filling stations. R&D A significant part of the Innovative Development Program is research and development (R&D). The formulation of the R&D Program takes account of the challenges faced by the electric grid sector and takes into consideration the promising innovative areas of R&D. The R&D Program contains measures to develop breakthrough technologies aimed at creating fundamentally new products, techniques, and methods and covers practical areas of improving existing technologies. Goal of R&D: LEGALLY PROTECTED DOCUMENTS AT 9 SUBSIDIARIES 54 R&D SUBJECTS AT SUBSIDIARIES Switch over to a technologically new electric grid with qualitatively new characteristics of reliability, efficiency, affordability, manageability and customer-orientedness and ensure sustained innovative development 6 6

35 . STRATEGY REVIEW Investment and Innovation The main R&D deliverables in 05 are as follows: R&D PRODUCTS BROUGHT INTO USE AT ELECTRIC GRID FACILITIES quick-installed metal tower for OL 5-0 kv for accident recovery work (IDGC of Siberia) software and hardware system for online status diagnostics of constructional parts of OL 5 0 kv (Tyumenenergo) bridge-type centralized relay protection for standard substations (Tyumenenergo) completion of the creation of a high-temperature superconducting (HTSC) DC cable line rated 0 kv and,500 A with a length of up to,500 meters (FGC UES) protection with improved sensitivity and selectivity for the connection of grounding devices in electricity networks rated 6 5 kv (IDGC of Volga) TOR 00 ADZ 54 adaptive protection terminal for power lines rated 0 0 kv (Tyumenenergo) fire protection for substation transformers using water mist (FGC UES) As part of improving the system of introducing innovative solutions, including deliverables under the R&D Program, ROSSETI formed the Innovation Commission for electric grid facilities, composed of employees from the parent company and subsidiaries. In 05, the test operation of R&D products was successfully completed, while were brought into use at electric grid facilities. Detailed information about the implementation of the R&D Program is contained in the Annual Report on the Implementation of the R&D Program of the ROSSETI Group in 05 posted on ROSSETI s corporate website in the Section Investment and Innovation R&D Program R&D PROGRAM Financing The actual amount of financing for the R&D Program, was 77.6 million rubles. Prospects As a long-range development direction of the R&D management system, the ROSSETI Group is considering setting up the centralized Foundation for Research, Development, and Innovation Support (R&D Foundation) and the Center for Technology Monitoring and Transfer. The R&D Foundation is expected to give added impetus to the development of R&D due to the possibility of carrying out long-term projects with confirmed financial support from the R&D Foundation, the possibility of spreading R&D deliverables among all SDCs, and the co-financing of major projects jointly with industry and government foundations

36 . STRATEGY REVIEW Financial Results Financial Results Yegor Prokhorov Deputy General Director for Finance ROSSETI s financial activities evolved in 05 as expected and reached a qualitatively new level, capitalizing invested efforts and the results of prior years. The Group set up the Common Treasury to centralize its cash flow management. This made it possible to increase the transparency of the Group s financial flows due to effective control of large payments made by ROSSETI subsidiaries, build an effective system for monitoring the implementation of the cash flow budget, create a centralized infrastructure to raise funding, and introduce mechanisms for intragroup financing. The centralization and coordination of measures to raise funding at the level of the parent company, ROSSETI, within the Common Treasury allowed us to keep the borrowing costs of the distribution companies included in the Common Treasury at a level substantially below the market average. In addition, the debt burden was reduced. At the end of 05, the weighted average value of the loan portfolio of the companies included in the Common Treasury was 0.% per annum, while the average lending rate for nonfinancial organizations was % per annum according to the Bank of Russia. Centralized financing did not lead to an increase in the debt burden on the ROSSETI Group but made it possible to greatly bring down debt service costs. As part of centralized financing, funds were provided to IDGC of Centre, IDGC of Urals, Kubanenergo, IDGC of South, IDGC of North-West, and Yantarenergo. The economic effect of centralized borrowings within the Common Treasury exceeded. billion rubles. On June 8, 05, ROSSETI placed the debut issue of Series BO-04 exchangetraded bonds totaling 0 billion rubles. ROSSETI raised 6 billion rubles in bonds (Series BO-06) from Vnesheconombank on December 8, 05, callable after 0 years, with a coupon rate of 0.9%. ROSSETI offered the lowest coupon rate among all Russian corporate borrowers in 05, while the borrowing term is 0 years. As regards international cooperation, ROSSETI continued consistent work in the capital markets of the Asia-Pacific region, especially on the possible placement of its Eurobonds on major Asian exchanges and building up dialog with local financial institutions and investors. Additionally, we carried out largescale measures to consolidate Saint Petersburg s electric grids; for instance, Saint Petersburg Power Grid, the city s third largest electric utility behind LENENERGO and Petrodvorets Electric Company, joined the ROSSETI Group. Work continued on selling noncore assets, which has been one of our priorities since 00. ROSSETI, together with its subsidiary IDGC of Centre, completed the first large-scale project in the Russian electric grid sector in 05 by entering into a concession agreement between IDGC of Centre and the Tambov Region Administration in relation to electricity transmission and distribution facilities. The project was awarded the national prize ROSINFRA-05, Russia s only award instituted by PPP Development Center, in the category Best PPP Project in Energy. We hope that the year 06 will be no less successful for ROSSETI and we will make every effort to achieve this result!! Very truly yours, Deputy Director General for Finance Yegor Prokhorov Oksana Shatokhina Deputy Director General for Economic Affairs In the reporting year, the ROSSETI Group s entities worked to ensure financial and economic stability and improve the relevant indicators. Despite a difficult year in the Russian economy, the ROSSETI Group achieved high results by the end of 05 owing to a wellbalanced policy to increase operating efficiency and cut costs. Timely tariff indexation and the implementation of the government s initiatives to regulate the industry allowed us to increase revenues from electricity transmission and distribution to billion rubles. Combined with an increase in other revenues, this offset decreased revenues from electricity sales due to the termination of certain subsidiaries supplier of last resort functions. As a result, total revenues for the period grew to billion rubles. We were able to reduce operating expenses by 4.% compared with 04, largely because of the implementation of the program to improve operating efficiency and reduce costs in the ROSSETI Group s entities As a result, the Group s EBITDA reached 48.9 billion rubles, which is 88.8% higher than in 04. And the implementation of measures to improve the Group s operating efficiency brought the EBITDA margin to a record.5%. The IFRS consolidated net profit reached 8.6 billion rubles compared with the consolidated net loss of 4. billion rubles in the previous year. Our priorities for 06 will continue to include controlling counterparties payment discipline and maintaining the stable financial condition of our key subsidiaries, which is a prerequisite for the successful achievement of the ROSSETI Group s goals. More detailed information about our economic and financial achievements in 05 can be found below in this section. Very truly yours, Deputy Director General for Economic Affairs Oksana Shatokhina 66 67

37 . STRATEGY REVIEW Financial Results Tariff Policy The goals of the tariff policy are to provide operating and investing activities with financing sources and achieve attractive return on invested capital. PRINCIPLES OF THE ROSSETI TARIFF POLICY UNIFORM METHODOLOGY > > tariff setting is based on the current guidelines, regulations, and standards governing the activities of SDCs ECONOMICALLY FEASIBLE TARIFFS Priorities ENSURE LONG-TERM AND TRANSPARENT TARIFF REGULATION IMPROVE TARIFF REGULATION TRANSPARENCY Main Changes in the Regulatory Framework for Tariff Regulation in Criteria were approved in relation to qualifying owners of electric grid facilities as territorial grid organizations The procedure was changed in relation to determining the volume of capacity purchased in the wholesale market for households and the equivalent categories of customers and in relation to determining the volume of capacity purchased by the management organization of the Unified National (All-Russian) Electric Grid (UNEG) 5. Characteristics of Tariff Regulation ROSSETI SDCs are subject to longterm tariff regulation methods: return on invested capital method (RAB) and long-term minimum regulated revenue indexation method. Each regulation method is selected by the regulator upon agreement with the Federal Antimonopoly Service of the Russian Federation. Resolution of the Government of the Russian Federation No. 78 of December 9, 0 Distribution of Long-Term Tariff Regulation Methods in The distribution of costs in the electricity distribution tariff in 05 was marked by an increase in costs incurred by other territorial grid organizations and by a rise in costs associated with compensation for electricity losses. % % Tariffs of Electricity Distribution Services THE WEIGHTED AVERAGE POOL TARIFF OF ELECTRICITY DISTRIBUTION SERVICES IN THE EXISTING AGREEMENT SYSTEM WAS.5 RUBLES PER KWH IN 05, OR 7% HIGHER THAN IN 04 69% 68% > > minimum regulated revenue from electricity distribution services and network connection services provides SDCs with the necessary resources for regulated activities LONG-TERM PLANNING > > production costs and profits from electricity distribution services and network connection services are calculated in the long term, taking into account possible adjustments to minimum regulated revenue TRANSPARENCY The Pricing Fundamentals in the Area of Regulated Prices (Tariffs) in the Electric Power Industry were amended The Pricing Fundamentals in the Area of Regulated Prices (Tariffs) in the Electric Power Industry were amended Long-term indexation RAB regulation Cost-plus pricing % % % % 68% 68% 85% > > the transparency and accessibility of information on tariff regulation and ways to improve it provides customers with all necessary information The Federal Tariff Service of the Russian Federation ceased to exist in July 05, and its functions were transferred to the Federal Antimonopoly Service. On September 4, 05, approval was given to the rules whereby the Federal Antimonopoly Service decides on tariff setting and tariff ceilings, and a collegial body was established for such decisions. Several days later, the members of the collegial body of the Federal Antimonopoly Service were appointed. Decree of the President of the Russian Federation No. 7 of July, 05.; Resolution of the Government of the Russian Federation No. 94 of September 4, 05.; Ordinance of the Government of the Russian Federation No. 785-r of September, 05. Article. of the Federal Law On the Electric Power Industry was amended 7. 4 Resolution of the Government of the Russian Federation No. 84 of February 8, 05; 5 Resolution of the Government of the Russian Federation No. 458 of May, 05; 6 Resolution of the Government of the Russian Federation of No. 079 October 9, 05; 7 Federal Law No. 450-FZ of December 0, 05. Distribution of Costs in the Electricity Distribution Pool Tariff, billion rubles Loses Territorial grid organizations UNEG Minimum regulated revenue for maintenance of electric grid facilities % +0% +% +6% 67 +% +4% % 584 +% % +% % +% % +% 9 +% +4% 6 % 40 % % +6% 8 +% +8% % 5 +% 58 +9%

38 . STRATEGY REVIEW Financial Results Weighted Average Pool Tariff of Electricity Distribution Services in , kopecks/kwh Tariff Rates of Electricity Distribution Services Related to Maintenance of Electric Grid Facilities, UNEG, , rubles/mwm ,59 87,869 6, , , , , , Review of Financial Results This review of financial results is based on the ROSSETI Group s audited consolidated financial results for the year ended December, 05 in accordance with IFRS. The consolidated results include the financial performance of subsidiaries and dependent companies. Consolidated Key Financial Indicators The ROSSETI Group s consolidated revenue rose by 0.9% to billion rubles in 05 compared with its revenue earned in 04 (759.6 billion rubles). The rise in revenue resulted from increased income from electricity distribution due to the indexation of electricity distribution tariffs from July, 05, and due to the effects of Resolution of the Government of the Russian Federation No. 458 of May, 05, and Resolution of the Government of the Russian Federation No. 84 of February 8, 05, On Deeming the Owners of Electric Grid Facilities to Be Territorial Grid Organizations and from other revenue increased by.9 billion rubles, largely because of the performance of services under construction project contracts for electric grid facilities and under capital construction contracts. Consolidated EBITDA totaled 48.9 billion rubles in 05, or 7. billion rubles higher than in the previous year. The EBITDA margin reached.5%, which is a change of 5. percentage points compared with 04. The consolidated net profit was 8.6 billion rubles in 05 compared with a loss of 4. billion rubles in the previous year. The increase in this indicator in the reporting period is primarily due to a 4.% decrease in operating Financial and Economic Performance Indicators of the ROSSETI Group, million rubles 8.6 BILLION RUBLES NET PROFIT expenses, mainly due to measures implemented under the Program to Improve the Operating Efficiency of the ROSSETI Group, partial reversal of impairment losses in relation to fixed assets with tariff and balancing decisions taken into consideration, and a decrease in depreciation deductions. INDICATOR % VS. 04 Revenue 759, ,8 0.9 On July, 05, tariff indexation of 7.5% was applied to electricity distribution services related to maintenance of UNEG electric grid facilities (tariff rates changed by 7.% compared with the end of 04). Order of the Federal Tariff Service of the Russian Federation No. 97-e/ of December 9, 04. Operating expenses (759,805) (65,58) (4.) EBITDA,84 48, Adjusted EBITDA 49,09 7, EBITDA margin 7.4%.5% 5. pp Adjusted EBITDA margin.8% 5.6%.8 pp Profit/(loss) for the period (4,57) 8,60 Adjusted net profit for the period 69,499 00,9 45. Adjusted net profit margin 9.%.% 4. pp Net cash flow from operating activities 60,676 56,688 (.5) Adjusted EBITDA is calculated as EBITDA (earnings before interest, tax, depreciation, and amortization for the reporting period) excluding losses from impairment of fixed assets, impairments of financial investments and impairment of accounts receivable.; Adjusted net profit is calculated as net profit for the period excluding losses from impairment of fixed assets, impairment of investments, impairment of accounts receivable and deferred income tax expense related to them. 70 7

39 . STRATEGY REVIEW Financial Results Revenue The ROSSETI Group s revenue is determined by changes in electricity consumption and electricity transmission and distribution tariffs. In addition, the change in revenue in 05 was affected by a decrease in revenue from electricity sales due to the supplier of last resort functions transferred by certain subsidiaries of ROSSETI to winning bidders of the supplier of last resort bidding procedures as determined by the Russian Ministry of Energy. Consolidated revenue in 05 increased by 0.9% on 04 to billion rubles. The Group s revenue from electricity and capacity sales decreased by 5.4% compared with 04 to 55.9 billion rubles. The decrease was due the supplier of last resort functions transferred by certain subsidiaries of ROSSETI to winning bidders of the supplier of last resort bidding procedures as determined by the Russian Ministry of Energy. Revenue by Segment, million rubles Revenue from electricity distribution rose by 4.9% on 04 to billion rubles, largely due to the indexation of electricity distribution tariffs from July, 05, due to the effects of Resolution of the Government of the Russian Federation No. 458 of May, 05, and Resolution of the Government of the Russian Federation No. 84 of February 8, 05, On Deeming the Owners of Electric Grid Facilities to Be Territorial Grid Organizations, and due to the changed system of pool-based mutual payments. The rise of.9 billion rubles in other revenue was mainly due to higher revenue from the performance of services under construction project contracts for electric grid facilities. +4.9% NCREASE IN ELECTRICITY DISTRIBUTION REVENUE Revenue by Reportable Segment The Group has identified 4 reportable segments. which are the Group s strategic business units. The strategic business units provide electricity transmission and distribution and network connection services in 78 constituent entities of the Russian Federation. The following companies account for a significant share in the Group s consolidated revenue: > > MOESK, 7.% > > IDGC of Centre, 0.5% > > IDGC of Center and Volga Region, 9.0% Operating Expenses Operating expenses went down by 4.% in 05 compared with 04 to 65.5 billion rubles. The decrease in operating expenses in 05 was primarily caused by measures implemented under the Program to Improve the Operating Efficiency of the ROSSETI Group, the absence of significant impairment of fixed assets, partial reversal of impairment losses with tariff and balancing decisions taken into consideration, and a decrease in depreciation deductions. Operating Expenses by Cost Item, million rubles Employee benefits increased by 7.8 billion rubles, or 5.0% compared with 04, which is considerably lower than the inflation rate. The increase was due to the indexation of production personnel pay as required under the Sectoral Wage Rate Agreement. Depreciation deductions went down by 5.4 billion rubles, or 0.% compared with 04, largely because of upward revision of the useful life of certain assets included in the Power Lines group. The decrease of 5.0 billion rubles, or.0% compared with 04, in tangible costs was due to lower purchase expenses related to electricity for sale 4.% DECREASE IN OPERATING EXPENSES IN 05 in connection with the supplier of last resort functions transferred by certain subsidiaries of ROSSETI, which, among other things, offset higher expenses related to electricity purchases for compensation for losses due to the increased cost of electricity purchases for compensation for losses. INDICATOR % VS. 04 Employee benefits 55,55 6,9 5.0 Depreciation and amortization 5,90 00,59 (0.) Impairment/(reversal of impairment) of fixed assets 8,690 (5,090) - Tangible costs (including electricity) 67,607 6,558 (.0) Production work and services 44,84 4,668 (.9) Impairment of receivables 8,87 8, INDICATOR % VS. 04 Electricity transmission and distribution 60,0 650, Network connection services 6,47 4,65 (6.) Electricity resale 86,56 55,9 (5.4) Taxes and levies except profit tax 4,78 7, Reserves,04,90 (67.6) Other 9,406 9, TOTAL 759,805 65,58 (4.) Other revenue,484 5,54 0. Government subsidies 4,,004 (75.6) TOTAL 759, ,

40 . STRATEGY REVIEW Financial Results EBITDA A reduction in operating expenses and a rise in consolidated revenue allowed the Group to improve EBITDA by 88.8% compared with 04 to 48.9 billion rubles. The principal factors in the growth were measures implemented EBITDA Analysis, million rubles under the Program to Improve the Operating Efficiency of the ROSSETI Group and the reversal of impairment losses in relation to fixed assets with tariff and balancing decisions taken into consideration. The EBITDA margin rose from 7.4% in 04 to.5% in the reporting period..5% EBITDA MARGIN INDICATOR % VS. 04 Profit/(loss) for the period (4,57) 8,60 Depreciation and amortization 5,90 00,59 (0.) Interest paid under financial obligations with amortized cost,804 4, Interest paid under finance lease obligations (44.4) Expense tax income 6,08,0 47. EBITDA,84 48, Assets The book value of the ROSSETI Group s assets as at December, 05, stood at,45.8 billion rubles, or 8.% higher than in 04. Non-current assets increased by 6.8% to,8. billion rubles. Changes in increased non-current assets were caused by a rise in the value of fixed assets due to the commissioning of capital assets under the capital investment program. The value of other long-term investments and financial assets increased by 9.0 billion rubles, largely due to an increase in the value of financial assets because of a rise in the fair value of Inter RAO shares. Long-term receivables went up by 9.6 billion rubles in 05 due to activated network connection services provided to generation facilities with payment in long-term installments. The structure of non-current assets changed insignificantly in 05. Current assets increased by 6.4% to 4.6 billion rubles in 05. Changes in the value of current assets were caused by increased inventories due to certain subsidiaries switching over to using in-house resources for repair operations, a rise in other investments and financial assets because of cash placed on deposit in banks, increased trade and other receivables due to a rise in prepayment under construction contracts, and increased cash due to the proceeds from federal loan bonds sold by LENENERGO. +8.% THE BOOK VALUE OF THE ROSSETI GROUP S ASSETS INCREASE Adjusted EBITDA 49,09 7, EBITDA margin 7.4%.5% 5. pp Adjusted EBITDA margin.8% 5.6%.8 pp Cash Flows Free cash flow decreased by 6,45 million rubles on 04, largely due to the decrease in cash flows from operating activities at the result of increase of unpaid percent for loans. Structure of Non-Current Assets, million rubles INDICATOR % VS. 04 Fixed assets,64,586,74, Intangible assets 4,00 8,5 9.6 Investments in associates and joint ventures,67,489 (8.5) Nin-current receivables 6,97 6, Other investments and financial assets,95,98 9. Cash Flows, million rubles Deferred tax assets 7,7 8, TOTAL NON-CURRENT ASSETS,696,55,8, INDICATOR % VS. 04 Net cash flows from operating activities before working capital changes, tax, and interest 5,59 4,840. Net cash flows from operating activities 60,676 56,688 (.5) Net cash flows from investing activities (66,90) (74,59) 4.9 Net cash flows from financing activities 6,7,45. Free cash flow 0,659 4,54 (9.7) Structure of Current Assets, million rubles INDICATOR % VS. 04 Inventories 6,60,9 7.4 Other investments and financial assets 7,908 6, Current income tax prepayments 4,66 4,0 (9.4) Trade and other receivables 55,776 6, Cash and cash equivalents 8,576 97, TOTAL CURRENT ASSETS 87,56 4,

41 . STRATEGY REVIEW Financial Results Equity and Liabilities The Group s equity increased by 0. million rubles in 05, or.5% on 04, to,68.9 billion rubles. The key factor contributing to changes in the Group s equity was the decision to increase the share capital of ROSSETI by placing additional uncertificated registered ordinary shares, resulting in establishing a reserve for issue of shares in the amount of.5 billion rubles. In addition, retained earnings went up by 64.6 billion rubles in 05, or 6.8% on 04, due to the ROSSETI Group s profit earned in 05. The structure of liabilities changed insignificantly in 05, with loans and borrowings representing a substantial share in non-current liabilities (80.6%) and payables accounting for 67.0% of total current liabilities. Non-current liabilities in the reporting period rose by 4.0 billion rubles, or.5%, and reached 577. billion rubles at the end of 05. The Group s longterm loans and borrowings decreased by 0.0 billion rubles, or 4.%. Changes in long-term loans and borrowings were due to long-term loans reclassified as short-term loans with respect to repayment dates, which was substantially offset by the issue of long-term bonds. The rise of 7.6 billion rubles, or 4.6%, in current liabilities in 05 was substantially due to short-term loans and borrowings increased by reclassifying some long-term loans as short-term loans with respect to repayment dates. +.5% THE GROUP S EQUITY INCREASE Structure of Current Liabilities, million rubles INDICATOR % VS. 04 Loans and borrowings (short-term) 9,7 8,8 7.5 Trade and other payables (short-term) 68,469 67,97 (0.) Provisions 8,87,4 (9.5) Current tax liabilities,547,495 (.4) TOTAL CURRENT LIABILITIES 8,4 99, Financial Stability and Loan Portfolio As of December, 05, the Company s consolidated net debt decreased by.8% on 04 to 87. billion rubles. The decrease in net debt was due to a 7.6% increase in cash and cash equivalents. Analysis of Gross Debt.8% CONSOLIDATED NET DEBT DECREASE Structure of Equity, million rubles INDICATOR % VS. 04 Share capital 6,54 6, Share premium,978, Treasury shares (,75) (,7) (0.4) Reserve for issue of shares 0,47 INDICATOR % VS. 04 Long-term debt 485, ,49 (4.)% Short-term debt 9,7 8,8 7.5% Gross debt 578,66 584,7.0% Long-term debt, % 84% 80% (4 pp) Cash and cash equivalents 8,576 97, % Net debt 496, ,8 (.8) Other reserves (,98) (,00) (47.) Retained earnings (uncovered loss) 8, ,0 6.8 Total equity attributable to equity holders of the Company 75,980 85,9. Key Financial Ratios Non-controlling interest 85,84 5, TOTAL EQUITY,08,804,68,895.5 Structure of Non-Current Liabilities, million rubles INDICATOR Adjusted EBITDA margin 0.8%.8% Operating expenses/revenue 0.7% 00.0% 85.% Net Debt / Adjusted EBITDA..0.8 Debt/ Adjusted EBITDA.4.. INDICATOR % VS. 04 Loans and borrowings 485, ,49 (4.) Trade and other payables 7,85,075.7 Employee benefits 5,5 9, Current ratio Financial leverage Long-term loans/gross debt 89% 84% 80% Deferred tax liabilities 4,89 60, TOTAL NON-CURRENT LIABILITIES 56,6 577,

42 . STRATEGY REVIEW Financial Results Credit Ratings The Company is active in cooperating with leading international rating agencies: Moody s, Standard & Poor s, and Fitch Ratings. In accordance with the methodologies of the international rating agencies, ROSSETI and its SDCs qualify as government-linked companies. Consequently, the credit ratings of the Group s entities are closely tied to the sovereign rating of the Russian Federation. Against a background of instable foreign policy, sanctions against some Russian entities and individuals, and the deteriorating economic situation, the international rating agencies in 05 revised the sovereign rating for the Russian Federation and the credit ratings for Russia s largest companies, including the ROSSETI Group s entities. ROSSETI s international credit rating from Standard & Poor s corresponds to the sovereign rating After Standard & Poor s downgraded the Russian Federation s rating to BB+, the credit ratings of ROSSETI and FGC UES, and MOESK and IDGC of Centre, were also downgraded to BB+ and BB- respectively in early 05. No rating action was associated with the ROSSETI Group s own creditworthiness in 05, which evidences the Group s stable financial condition During 05, Moody s downgraded the Russian Federation s sovereign rating twice: first, to Baa; second, to Ba. The Russian Federation s sovereign rating downgraded by Moody s resulted in downgrading the credit ratings of Russian major companies, including downgrading ROSSETI s credit rating to Ba and FGC UES s credit rating to Ba. The credit ratings of LENENERGO, MOESK, IDGC of Volga, IDGC of Urals, and IDGC of Center and Volga Region remained at Ba in 05. Fitch downgraded by one notch the credit rating of FGC UES to BBB-, while MOESK s rating remained at BB+. Receiving credit ratings from international credit rating agencies enables the Company and its subsidiaries to be increasingly attractive to investors and pursue an effective borrowing policy in public capital markets. Program for Disposing of Noncore Assets The disposal of the Company s noncore assets is governed by the Strategy for Disposing of Noncore Assets of ROSSETI and Subsidiarie s and Dependent Companies of ROSSETI and the Register (Sale Program) of Noncore Assets of ROSSETI. ROSSETI s Noncore Assets Capital assets and constructionin-progress facilities intended for use other than the generation, transmission, dispatching, and distribution of electricity and heat; Shares, issue-grade securities convertible into shares, and shareholdings in organizations that are not engaged in the generation, transmission, dispatching, distribution, and retailing of electricity and heat. METHODS FOR DISPOSING OF NONCORE ASSETS > > Sale of assets on a priority basis (in relation to assets for which the period of sale is determined); > > Retained ownership of assets for the purpose of their future designated use. THE REGISTER OF NONCORE ASSETS CONTAINS NONCORE ASSETS, SIX OF WHICH ARE SUBJECT TO RETAINED OWNERSHIP (AS ASSETS SUPPORTING THE COMPANY S CORE ACTIVITIES) AND SEVEN OF WHICH ARE SUBJECT TO SALE The plans to sell such assets involve making disposal decisions by the end of 06 and selling them by the end of 07. Noncore assets were not sold in 05. In the reporting period ROSSETI decided to sell an ownership interest in the office building located at: Nizhni Novgorod, bulvar Mira, 4, and entered into agreements to appraise shares in Urals Power Engineering Company, Volga Power Engineering Center, and ZARUBEZHENERGOSTROY. ROSSETI Group Credit Ratings as of December, 05 COMPANY CURRENT CREDIT RATING MOODY S S&P FITCH INITIAL ASSIGNMENT DATE ROSSETI Ba ВВ+ _ July 00/March 04 FGC UES Ва ВВ+ ВВВ- MOESK Ва ВВ- BB+ February 006 October 007 June 004 January 0 October 0 August 0 Disposing of noncore assets aims to reduce expenses associated with the maintenance and management of noncore assets, earn proceeds from the sale of such assets, and receive high-quality (exclusive) services supporting the core activities. Approved by the Board of Directors on June, 00; Minutes of the Meeting No. 7; A restated version was approved by the Board of Directors on October 0, 05; Minutes of the Meeting No. 06; As approved by the Board of Directors on December 5, 05; Minutes of the Meeting No. 7. Information about the sale of noncore assets in 05 is contained in Section 6.4 of the Appendix to the Annual Report. IDGC of Centre _ ВВ- _ November 009 IDGC of Volga Ва October 0 IDGC of Center and Volga Region Ва October 0 IDGC of Urals Ва October 0 LENENERGO Ва November

43 . STRATEGY REVIEW Financial Results Operating Efficiency and Cost Reduction of the ROSSETI Group Measures to Reduce Operating Expenses and Their Implementation Results In recent years, the electric grid section has been substantially affected by accumulated systemic problems: an increased burden of cross-subsidies, reduced electricity consumption, a rise in network connection on preferential terms without full reimbursement for expenses, and a growth in the volume of maintained connected reserve capacity that is not paid for by customers. In recent years, the electric grid section has been substantially affected by accumulated systemic problems: an increased burden of cross-subsidies, reduced electricity consumption, a rise in network connection on preferential terms without full reimbursement for expenses, and a growth in the volume of maintained connected reserve capacity that is not paid for by customers. ROSSETI s management formulated and approved the action plan to improve the operating efficiency and ensure the financial soundness of the ROSSETI Group in the current macroeconomic conditions, subsequently approved by the Strategy Committee of the Board of Directors of ROSSETI. The implementation of the plan in the current macroeconomic conditions is a priority for ROSSETI. In accordance with the approved action plan to improve the operating efficiency and ensure the financial soundness of the ROSSETI Group, ROSSETI SDCs and their subsidiaries formulated the action plans to improve the operating efficiency and financial and economic condition, approved by their boards of directors, and reports on their implementation are reviewed on a quarterly basis. Pursuant to Directive of the Government of the Russian Federation No. 984p- P of June 4, 05, the Company developed the Schedule of Improving the Operating Efficiency and Reducing Expenses of ROSSETI, approved by the Board of Directors. The document is fundamental to improving operating efficiency and reducing costs in ROSSETI SDCs and their subsidiaries and regulates the procedure for formulating and carrying out the Program to Improve the Operating Efficiency and Reduce Expenses of the ROSSETI Group. ROSSETI SDCs and their subsidiaries developed the schedules of improving the operating efficiency and reducing expenses, approved by their boards of directors, whereby they will formulate the programs to improve the operating efficiency and reduce expenses for Measures to increase operating efficiency aim to achieve the key targets of the Strategy for Development of the Electric Grid Sector of the Russian Federation approved by Ordinance of the Government of the Russian Federation No. 5 r of April, 0, and Directive of the Government of the Russian Federation No. 0p-P of April 6, 05, On the Annual Reduction of at Least Percent in Operating Expenses (Costs). Targets of the Strategy for Development of the Electric Grid Sector of the Russian Federation: > > reduction of operating expenses by 5% by 07, adjusted for inflation, compared with 0, per unit of maintained electrical equipment; > > reduction of specific investing expenses by 0% compared with 0 (in rubles per physical unit: kilometers, MVA); > > reduction of electricity losses by % by 07 compared with 0. The main areas of measures to improve operating efficiency and reduce costs are as follows: > > raise workforce productivity (optimize the organizational and functional structures of management, reduce the number of administrative and managerial employees, and curb the growth of pay for administrative and managerial employees by not applying wage indexation and by linking pay to managers performance); > > update standards of costs based on the commissioning of new equipment, update technical charts of production processes, improve the efficiency of procurement procedures, and cut general and administrative expenses); > > enhance energy efficiency (modernize electricity billing metering systems, decrease noncontractual and unbilled electricity consumption, ensure the conservation and efficient use of fuel and energy based on the commissioning of innovative equipment); > > improve financial stability (manage the loan portfolio and increase the effectiveness of receivables management). Reduction of Operating Expenses: Results Achieved in 0 05 YEAR REGULATORY FRAMEWORK IN ABSOLUTE TERMS, BILLION RUBLES 0 Instructions of the Ministry of Energy of the Russian Federation 9.5. (vs. 00) 04 Strategy for Development of the Electric Grid Sector of the Russian Federation Instructions of the Prime Minister of the Russian Federation, Directive of the Government of the Russian Federation regarding the reduction of general and administrative expenses by at least 5% of their actual value in Strategy for Development of the Electric Grid Sector of the Russian Federation (vs. 0) 05 Directive of the Government of the Russian Federation On the Annual Reduction of at Least Percent in Operating Expenses (Costs) IN RELATIVE TERMS, % 6. (with the target of %) Pursuant to Directive of the Government of the Russian Federation No. 0p-P of April 6, 05, On the Annual Reduction of at Least Percent in Operating Expenses (Costs), the ROSSETI Group reduced per-unit operating expenses by.%, or 6 billion rubles, in 05 compared with 04, while the target was %. TARGETS FOR 06: 5% REDUCE PER-UNIT OPERATING EXPENSES BY AT LEAST 5%, ADJUSTED FOR INFLATION, COM- PARED WITH 0 PURSUANT TO THE STRATEGY FOR DEVELOPMENT OF THE ELECTRIC GRID SECTOR OF THE RUSSIAN FEDERATION APPROVED BY ORDINANCE OF THE GOVERNMENT OF THE RUSSIAN FEDERATION NO. 5 R OF APRIL, 0 % REDUCE PER-UNIT OPERATING EXPENSES BY % PURSUANT TO DIRECTIVE OF THE GOVERNMENT OF THE RUSSIAN FEDERATION NO. 0P-P OF APRIL 6, 05, ON THE ANNUAL REDUCTION OF AT LEAST PERCENT IN OPERATING EXPENSES (COSTS) 80 8

44 CORPORATE GOVERNANCE AND SHARE CAPITAL 4 MEETINGS OF THE BOARD OF DIRECTORS DEALING WITH 94 ISSUES 4 BOND LOANS TOTALING BILLION RUBLES CONTROLLING AND MANAGING RISKS TO GAIN WIDER APPEAL AMONG INVESTORS Our goal is to respect the interests of all shareholders. Our benchmark is global best practices in corporate governance.

45 . Corporate Governance System Corporate Governance System Principles of Governance Yuri Goncharov Deputy Director General for Corporate Governance, ROSSETI ROSSETI is a unique public holding company with a corporate governance system as an essential component, which includes the management of fifteen major electric grid companies, thirteen of which are traded in the securities market. The corporate governance structure of ROSSETI and its subsidiaries includes the general meetings of shareholders, boards of directors, and executive and controlling bodies. Their activities, rights, and obligations are governed by the requirements of corporate legislation, the securities market, and the system of internal documents: articles of association, regulations, schedules and policies. This system should meet all legal requirements, adapt in a timely manner to changes in legislation, ensure managerial unity, and make it possible to reach the goals set for ROSSETI in the President s Decree on the establishment of ROSSETI and the Strategy for Development of the Electric Grid Sector and must comply with best practices in corporate governance. Conforming to high governance standards should contribute to making ROSSETI and its subsidiaries more attractive to investors and boosting the liquidity of their shares. Therefore, one of the priorities of ROSSETI s long-term development program is the continuous improvement of corporate governance. EXTENSIVE WORK WAS DONE IN 05 ON IMPROVING. WE FORMULATED THE ROAD MAP TO INTRODUCE THE CODE RECOMMENDED BY THE BANK OF RUSSIA. THE DOCUMENT CONFORMS TO NOT ONLY RUSSIAN LAWS BUT ALSO GLOBAL BEST PRACTICES IN GOVERNANCE Pursuant to the new code, amendments were made in 05 to the articles of association and internal documents of the Company and its subsidiaries, the competence of the Board of Directors was expanded, including with respect to audit, the Corporate Secretary was elected, and a preparatory process was carried out for future improvements associated primarily with the strategy and system of remuneration. Further measures to improve corporate governance in the ROSSETI Group will continue in 06, which should undoubtedly contribute to higher investor appeal for shares in the Company and its subsidiaries. Very truly yours, Yuri Goncharov First Deputy Director General Deputy Director General for Corporate ROSSETI views governance as an integral and inseparable part of the sustainability strategy and as a means of improving the efficiency of its operations, building up its reputation, and making the Company more attractive to investors The Company strives to build a corporate governance system in accordance with the laws of the Russian Federation, best practices in governance, and the Listing Rules of the Moscow Exchange. Key Principles of the Corporate Governance Code ACCOUNTABILITY FAIRNESS I. SHAREHOLDER RIGHTS AND THE EQUITABLE TREATMENT OF SHAREHOLDERS IN THE EXERCISE OF THEIR RIGHTS II. BOARD OF DIRECTORS OF THE COMPANY TRANSPARENCY Basic principles of corporate governance according to the Code In its letter of April 04, the Bank of Russia recommended that joint-stock companies whose securities are admitted to regulated trading joint-stock companies whose securities are admitted to regulated trading apply the Corporate Governance Code (hereinafter, the Code ). The Russian Government approved the list of joint-stock companies for the highpriority implementation of the principles and standards contained in the Code. ROSSETI is included in the list. > > Equitable treatment of all shareholder groups in managing the Company and receiving dividends. > > Strategic management of the company. > > Accountability to shareholders. > > Sufficient number of independent directors. > > Bona fide and reasonable activities for the benefit of the Company, with the Chairman s powers effectively exercised. > > Committees established by the Board of Directors. > > Performance evaluation in relation to the Board of Directors, its committees, and members of the Board of Directors. III. CORPORATE SECRETARY OF THE COMPANY > > Protection of the rights and interests of shareholders, support for the efficient work of the Board of Directors. Approved by the Company s Board of Directors on November 9,

46 . Corporate Governance System IV. SYSTEM OF REMUNERATION FOR MEMBERS OF THE BOARD OF DIRECTORS, EXECUTIVE BODIES, AND OTHER KEY EXECUTIVES OF THE COMPANY V. RISK MANAGEMENT AND INTERNAL CONTROL SYSTEMS VI. DISCLOSURE OF ABOUT THE COMPANY; THE POLICY OF THE COMPANY > > Sufficient level of remuneration for competent and qualified persons. Remuneration paid in accordance with the Company s policy on remuneration. > > Interrelation between the financial interests of members of the Board of Directors in the system of remuneration and shareholders long-term financial interests. > > Dependence of remuneration for executive bodies and other key executives upon the company s performance results and upon their personal contribution to achieving such results. > > Effective risk management and internal control systems designed to provide reasonable assurance that the Company achieves their goals. > > Internal audit in order to systematically independently evaluate the reliability and efficiency of the risk management and internal control system and corporate governance practices. > > Transparency. > > Equal and unhindered access to information and documents as requested by shareholders. VII. SIGNIFICANT CORPORATE ACTIONS > > Protection of the rights and interests of shareholders and other stakeholders in any actions that significantly affect the capital structure and financial condition of the Company. > > Complete information received by shareholders on significant corporate actions in a timely manner. Shareholders ability to influence the conduct of significant corporate actions and protection of shareholders rights in the course of conducting such actions. Statement from the Company s Board of Directors on Compliance with the Principles and Recommendations of the Corporate Governance Code The Board of Directors hereby states that the Company is committed to constantly improving corporate governance practices and determined to continue its work on introducing the key principles and recommendations of the Corporate Governance Code into the Company s activities As a strategic company, ROSSETI strives to follow the best standards of corporate governance, integrating the recommendations of the Corporate Governance Code and global best practices into the governance system in a phased manner. In accordance with Instructions of the Government of the Russian Federation, ROSSETI is on the list of major government-linked companies for the highpriority implementation of the principles and standards of the Code. In order for the recommendations of the Code to be implemented by the Company, ROSSETI analyzed whether existing standards and practices of corporate governance were consistent with the provisions of the Code; the Action Plan (Road Map) was developed and approved by the Board of Directors to introduce the key provisions of the Code into the Company s activities, covering all principal aspects of ROSSETI s corporate governance system. In the reporting period, the Company carried out extensive measures to implement the Road Map. Further information with regard to the implantation of the principles and recommendations of the Corporate Governance Code can be found in Section 6.5 of the Appendix to the Annual Report. No. ISh P 5859 of July, 04; On March 0, 05, (Minutes of the Meeting No. 79). Development of Corporate Governance As ROSSETI works to accomplish the objectives of the Long-Term Development Program, the Company carries out measures to improve corporate governance and implement the provisions of the Corporate Governance Code recommended by the Bank of Russia and other legal regulations. ANNUAL GENERAL MEETING OF SHAREHOLDERS APPROVED IN RESTATED VERSIONS: > The Articles of Association of ROSSETI > The Regulations for the General; Meeting of Shareholders; > The Regulations for the Board of Directors. Development of Corporate Governance in subsidiaries and dependent companies With due consideration to the tasks assigned to ROSSETI as the management company of the electric grid sector, the Company took measures in the reporting year to introduce the principles and IN MARCH 05, THE COMPANY S BOARD OF DIRECTORS APPROVED THE ACTION PLAN (ROAD MAP) TO INTRODUCE THE CORPORATE GOVERNANCE CODE INTO THE ACTIVITIES OF ROSSETI IN ACCORDANCE WITH THE ROAD MAP IN REPORTING PERIOD: BOARD OF DIRECTORS standards of the Corporate Governance Code into the activities of subsidiaries and dependent companies. In 05, the articles of association and internal documents of the Company s SDCs were developed and submitted for approval by the annual general meetings of shareholders of ROSSETI SDCs. The Company s Board of Directors resolved on August 5, 05, to elect the Corporate Secretary of the Company. APPROVED IN RESTATED VERSIONS: > The Regulations for the Audit Committee of the Board of Directors of ROSSETI; > The Risk Management Policy of ROSSETI > The Internal Control Policy of ROSSETI > The Internal Audit Policy of ROSSETI SUBMITTED FOR THE CONSIDERATION OF THE BOARD OF DIRECTORS: > Regulations for the Corporate Secretary of ROSSETI; > Restated version of the Regulations for Disclosing Material Information of PJSC ROSSETI Under Shareholder Laws and Securities Market Laws (Information Policy) SCHEDULED FOR APPROVAL IN 06: > Regulations for the Nomination and Remuneration Committee of the Board of Directors of ROSSETI; > Regulations for the Strategy Committee of the Board of Directors of ROSSETI. In June 05, the annual general meetings of shareholders of SDCs (Interregional and Regional Distribution Grid Companies) approved restated versions of the articles of association and internal documents governing the activities of their management bodies (regulations for the general meeting of shareholders and regulations for the board of directors). Approved by the Company s Board of Directors on February 4, 06; Minutes of the Meeting No. ; Restated versions of the articles of association and internal documents were approved by the following electric grid SDCs of ROSSETI (Interregional and Regional Distribution Grid Companies): IDGC of Siberia, TDC, IDGC of Volga, IDGC of South, Kubanenergo, IDGC of Northern Caucasus, IDGC of Center and Volga Region, IDGC of Centre, MOESK, IDGC of North-West, LENENERGO, and FGC UES

47 . Corporate Governance System Governance self-assessment will allow ROSSETI to form an opinion on the current status of the key processes in corporate governance for further improvement in this area Transactions of the Company The Company s activities are in strict compliance with the Russian statutory requirements applicable to major transactions and related party transactions. The Articles of Association and internal documents of the Company cover the following material transactions that require approval from management bodies: MAJOR TRANSACTIONS RELATED PARTY TRANSACTIONS TRANSACTIONS INVOLVING THE COMPANY S NONCURRENT ASSETS constituting from ten (0) percent to twenty-five (5) percent of the book value of such assets TRANSACTIONS IN CONNECTION WITH THE DISPOSAL OF THE PROPERTY that constitutes fixed assets, intangible assets, and construction-in-progress Decisions are adopted unanimously by all members of the Board of Directors, disregarding the votes by retired members of the Board of Directors Decisions are adopted by a majority votes of independent directors that are not related parties to such transactions Decisions are adopted by a majority of two-thirds of votes of the members of the Board of Directors present at a meeting Depending on the designated purpose of such property (generation, transmission, dispatching, and distribution of electricity and heat, or other uses), decisions may be adopted by a majority of two-thirds or by a majority of votes of the members of the Board of Directors present at a meeting Interrelation between the Company s Strategic Goals and Priorities and the Goals and Objectives of Corporate Governance As part of implementing the Strategy and the Long-Term Development Program, the Company deals with the following priorities: Improve the Company s and SDCs corporate governance system and implement the provisions of the Corporate Governance Code; Ensure compliance with new legislation and implement best corporate practices into the Company and SDCs, taking account of the necessity to preserve SDCs manageability; Create the conditions for the admission of the Company s securities (shares and bonds) to the highest quotation lists in order to increase liquidity. Governance Self-Assessment The Company plans to perform selfassessment in 06 in relation to the quality of corporate governance in accordance with the technique approved by Order of Federal Agency for State Property Management of the Russian Federation No. 06 of August, 04, On the Approval of the Technique for Self-Assessment in Relation to the Quality of Corporate Governance in Government-Linked Companies. THE FOLLOWING COMPONENTS OF WILL BE EVALUATED: > > Shareholder rights; > > Board of Directors; > > Executive management; > > Transparency and disclosure; > > Risk management, internal control, and internal audit; > > Corporate social responsibility, business ethics, and compliance. Performance Evaluation of the Board of Directors The Company has plans to conduct independent performance evaluation of the Board of Directors in 06. For this purpose, it is planned to engage an expert company that employs an evaluation technique based on advanced international technology and using both subjective and objective assessments, an analysis of internal documents, comprehensive diagnostics for the work of the Board of Directors and its committees and for the individual work of members of the Board of Directors, and quality evaluation for the performance by members of the Board of Directors of their functions in terms of compliance with the recommendations of the Corporate Governance Code. The result of evaluation will be a report containing recommendations to improve the performance of the Board of Directors, its committees, and corporate governance in general. TRANSACTIONS RELATED TO THE OBTAINING AND GRANTING OF LOANS, ADVANCES, GUARANTEES, PLEDGES AND SURETYSHIP in accordance with the procedure defined by the Сompany s Board of Directors TRANSACTIONS REQUIRING DECISIONS ON STAKES HELD BY THE COMPANY IN OTHER ORGANIZATIONS, and on the acquisition, disposal, and encumbrance of their shares and stakes and change in the ownership interest in the said organizations The documents listed below govern the procedure for conducting transactions and organizing the interaction of ROSSETI s divisions: > > Regulations for Contract Management of PJSC ROSSETI; > > Schedule of Planning Actions and Preparing and Agreeing Materials for Meetings of the Management Board of PJSC ROSSETI; > > Schedule of Planning Actions and Preparing and Agreeing Materials for Meetings of the Board of Directors and Committees of the Board of Directors of PJSC ROSSETI. Depending on whether the terms and conditions of transactions meet the requirements of the Regulations for Credit Policy of ROSSETI approved by the Board of Directors and depending on the creditworthiness group determined by the Company as provided for in the Regulations, decisions may be approved by the Director General or adopted by the Management Board by a majority of votes of the members of the Management Board present at a meeting or the Board of Directors by a majority of two-thirds of votes of the members of the Board of Directors present at a meeting Decisions are adopted by a majority of two-thirds of votes of the members of the Board of Directors present at a meeting and only if so required by directives of the Russian Government The measures taken to verify compliance with the requirements reveal that in 05: > > ROSSETI did not enter into transactions qualifying as major transactions under the Federal Law On Joint-Stock Companies. > > ROSSETI approved 0 transactions qualifying as related party transactions under the Federal Law On Joint-Stock Companies (for more detailed information, see Appendix 6.). > > The Board of Directors of ROSSETI approved transaction in connection with the disposal of the property As specified in Resolution of the Government of the Russian Federation No. 78 of December,

48 . Corporate Governance System that constitutes the Company s fixed assets, namely an ownership interest in the office building located in Nizhni Novgorod. > > The Board of Directors of ROSSETI approved transactions related to the granting of loans to Yantarenergo and LENENERGO to finance their operations. > > The Board of Directors of ROSSETI approved the acquisition of additional shares in the following SDCs as part of their additional share issues: IDGC of Volga: using federal budget funds of at most,59,670,000 rubles Transactions completed by ROSSETI in Yantarenergo: using federal budget funds of at most,4,46,00 rubles LENENERGO: using federal loan bonds (Issues 9006RMFS, 9007RMFS, 9008RMFS, 9009RMFS, and 900RMFS) and federal budget funds of at most 8,86,90 rubles IDGC of Siberia: purchasing 5,07,00,570 additional preference shares in the total amount of 507,0,057 rubles Related party transactions Transactions in connection with the disposal of property that constitutes ROSSETI s fixed assets Transactions related to the granting of loans to ROSSETI s SDCs Transactions requiring decisions on stakes held by the Company in other organizations, and on the acquisition, disposal and encumbrance of their shares and stakes and change in the ownership interest in the said organizations THE COMPANY APPLIES A STANDARD OF DEFINING THE POSITION OF ROSSETI ON TRANSACTIONS PLANNED BY ROSSETI SDCS IN RELATION TO PROPERTY AND PROPERTY RIGHTS CONTROL OF SPECIFIC TRANSACTIONS CONDUCTED WITHIN THE ROSSETI GROUP BOARD OF DIRECTORS AND MANAGEMENT BOARD OF ROSSETI BOARD OF DIRECTORS AND MANAGEMENT BOARD OF ROSSETI SHAREHOLDERS AND BOARDS OF DIRECTORS OF SUBSIDIARIES AND DEPENDENT COMPANIES OF ROSSETI SDCS ROSSETI s management bodies considered and approved more than 50 transactions of SDCs and subsidiaries and dependent companies of ROSSETI SDCs in 05. Define the position of ROSSETI s representatives on specific agenda items of meetings of the management bodies of ROSSETI SDCs and subsidiaries and dependent companies of ROSSETI SDCs > Decide on specific agenda items as instructed by the Board of Directors or the Management Board of ROSSETI; > The boards of directors of ROSSETI SDCs define the position of ROSSETI SDCs representatives on specific agenda items of meetings of the management bodies of subsidiaries and dependent companies of ROSSETI SDCs as instructed by the Board of Directors or the Management Board of ROSSETI Decide on specific agenda items as instructed by the boards of directors of ROSSETI SDCs Most transactions involved the acquisition, disposal, or possible disposal of the property that constitutes fixed assets, intangible assets, and construction-in-progress. This also included considering and approving several transactions in relation to shares and stakes in subsidiaries and dependent companies of ROSSETI SDCs and a number of major transactions planned by ROSSETI SDCs. In order for the Company to control transactions of the ROSSETI Group s entities, the Board of Directors and the Management Board define the Company s position on the following issues: > > major transactions entered into by SDCs; > > transactions in relation to shares and stakes in subsidiaries and dependent companies of SDCs; > > transactions in relation to the acquisition, disposal, or possible disposal of the property that constitutes fixed assets, intangible assets, and construction-in-progress. The transaction associated with the loan granted to LENENERGO in accordance with the Federal Law On Joint-Stock Companies was approved by the Board of Directors of ROSSETI as a related party transaction; Received by ROSSETI in accordance with Resolution of the Government of the Russian Federation No. 076 of October 8, 05; Received by ROSSETI in accordance with Federal Law No. 57-FZ of December, 00, On the Federal Budget for 0 and the Planning Period of 0 and 0. Independent Directors In the reporting year, the criteria for determining the independent members of the Board of Directors were set by the applicable laws and the following legal regulations: > FEDERAL LAW ON JOINT-STOCK COMPANIES The independence provisions and criteria contain recommendations to introduce best practices into joint-stock companies activities. > CODE RECOMMENDED BY THE BANK OF RUSSIA The independence provisions and criteria contain recommendations to introduce best practices into joint-stock companies activities. > ORDER OF THE FEDERAL FINANCIAL MARKETS SERVICE OF THE RUSSIAN FEDERATION NO. 6/ PZ-N OF JULY 0, 0, ON THE PROCEDURE FOR ADMITTING SECURITIES TO REGULATED TRADING > LISTING RULES OF THE MICEX STOCK EXCHANGE The Listing Rules are based on the criteria recommended by the Corporate Governance Code and define the mandatory scope of compliance with the recommendations of the Code for joint-stock companies whose securities are admitted to regulated trading and included on the Level and Level Quotation Lists. 90 9

49 . Corporate Governance System According to the Corporate Governance Code, it is recommended that an independent director shall be deemed to be a person who has sufficient professionalism, experience, and independence to form his or her own position, is able to make objective, and honest judgements independent of the influence of the company s executive bodies, certain groups of shareholders, or other stakeholders. An independent director shall be deemed to be a person who > > is not affiliated with the company; > > is not affiliated with a significant shareholder of the company; Information on independent directors for the st half of 05 NAME OF THE MEMBER OF THE COMPANY S BOARD OF DIRECTORS > > is not affiliated with a significant counterparty or competitor of the company; > > is not affiliated with the government (the Russian Federation, a constituent entity of the Russian Federation). AS PER THE CRITERIA OF THE LISTING RULES ALEXANDER SERGEYEVICH KALININ, independent director + + ALEXEI ALEKSANDROVICH MAKAROV, independent director + + SERGEI NIKOLAEVICH MIRONOSETSKY, independent director + + Information on independent directors for the nd half of 05 AS PER THE CRITERIA OF THE CODE Governance Structure GENERAL MEETING OF SHAREHOLDERS INTERNAL AUDIT COMMISSION EXTERNAL INDEPENDENT AUDITOR BOARD OF DIRECTORS COMMITTEES OF THE BOARD OF DIRECTORS STRATEGY COMMITTEE INVESTMENT, TECHNICAL POLICY, RELIABILITY, ENERGY EFFICIENCY, AND INNOVATION COMMITTEE EXECUTIVE BODIES CHAIRMAN OF THE MANAGEMENT BOARD DIRECTOR GENERAL MANAGEMENT BOARD NAME OF THE MEMBER OF THE COMPANY S BOARD OF DIRECTORS AS PER THE CRITERIA OF THE LISTING RULES VASILY MIKHAILOVICH BELOV, independent director + + ALEXEI ALEKSANDROVICH MAKAROV, independent director + + AS PER THE CRITERIA OF THE CODE NOMINATION AND REMUNERATION COMMITTEE AUDIT COMMITTEE DENIS STANISLAVOVICH MOROZOV, independent director + + Based on the decision adopted by the Board of Directors on August 5, 05 (Minutes of the Meeting No. 98); As resolved by the Annual General Meeting of Shareholders on June 0, 05, the Company s Auditor for 05 is RSM RUS LTD. The Company carried out the following measures as part of forming the Company s Board of Directors to ensure that the Board of Directors includes members who meet the independence criteria defined by the Code and the Listing Rules: > > the Company prepared and submitted to the Federal Agency for State Property Management and the Ministry of Energy its proposals for the list of nominees, including independent directors, for election to the Board of Directors of ROSSETI at the Annual General Meeting in 06; > > in November 05, the Company s authorized representative took part in a meeting of the commission for the selection of independent directors, representatives of the Russian Federation, and independent experts for election to the management and control bodies of joint-stock companies; > > the Company had questionnaires completed by nominees for the Company s Board of Directors to determine their independent status in the format approved by the MICEX Stock Exchange; > > independent directors were registered in the Interdepartmental Portal of the Federal Agency for State Property Management for their nomination as members of the Company s Board of Directors. It is planned to approve a restated version of the Regulations for the Nomination and Remuneration Committee of the Board of Directors of ROSSETI in 06 to make the Committee responsible for evaluating the independence of nominees for the Company s Board of Directors. The Company s Board of Directors did not resolve in the reporting period to recognize any members of the Board of Directors of ROSSETI as independent. 9 9

50 . Структура корпоративного управления Principal Competences of Each of the Management and Control Bodies MANAGEMENT BODIES General Meeting of Shareholders Board of Directors COMPETENCE DOCUMENTS FREQUENCY OF MEETINGS FORM OF THE MEETING > election of members of the Board of Directors and the Internal Audit Commission of the Company; > approval of annual reports and annual financial statements of the Company; > distribution of profits and losses of the Company based on the results of the financial year; > payment (declaration) of dividends based on the results of the financial year; > approval of the Company s Auditor amendments and supplements to the Articles of Association; > or approval of a restated version of the Articles of Association; > approval of internal documents governing the activities of the Company s bodies; > increase/decrease in the Company s authorized capital; > reorganization/liquidation of the Company. General management of the Company s activities except for any issues that, in accordance with the Federal Law On Joint-Stock Companies and the Articles of Association of the Company, fall within the competence of the General Meeting of Shareholders COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee Strategy Committee Consideration of issues related to: > supervision over the reliability of the Company s accounting (financial) statements; > control over the reliability and effectiveness of the internal control, risk management, and corporate governance systems; > supervision over ensuring compliance with legal requirements and informing executive bodies about nonconformities; > the coordination of interaction between the external and internal auditors. > preparing recommendations for the Board of Directors for the implementation of the Company s priority lines of development; > monitoring the implementation of the priority lines of development; > analyzing proposals and developing recommendations for the Board of Directors for the preparation of standards for formulating development plans for subsidiaries. > Russian laws > Articles of Association > Regulations for the General Meeting of Shareholders > Russian laws > Articles of Association > Regulations for the Board of Directors > Russian laws > Articles of Association > Regulations for the Board of Directors > Regulations for the Audit Committee > Russian laws > Articles of Association > Regulations for the Board of Directors > Regulations for the Strategy The Annual General Meeting of Shareholders of the Company shall be held not earlier than two months and not later than six months after the end of the financial year. The Extraordinary General Meeting of Shareholders shall be convened by the Board of Directors. > in accordance with the schedule of meetings; > at the discretion of the Chairman; > at the written request of any member of the Board of Directors; > the Internal Audit Commission, the Director General, or the Auditor. > in accordance with the schedule of meetings; > at the discretion of the Chairman of the Committee, as resolved by the Board of Directors, at the request of the Internal Audit Commission, at the discretion of a member of the Committee, at the request of the Director General, at the request of the external auditor. > in accordance with the schedule of meetings; > in accordance with the notice received from the Secretary of the Board of Directors; > at the discretion of the Chairman of the Committee, as resolved by the Board of Directors, as resolved by the Committee, at the discretion of a member of the Committee. In-person meeting Voting in absentia In-person meeting Voting in absentia In-person meeting Voting in absentia In-person meeting Voting in absentia MANAGEMENT BODIES Nomination and Remuneration Committee Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee EXECUTIVE BODIES Director General Management Board COMPETENCE DOCUMENTS FREQUENCY OF MEETINGS FORM OF THE MEETING > defining selection criteria for nominees for the Management Board and the Director General of the Company; > defining the terms and conditions of employment contracts with members of the Management Board, and the Director General of the Company; > preparing recommendations for remuneration for members of management and control bodies; > formulating recommendations for the formation of the personnel reserve of the Company and SDCs. > formulating recommendations for the Company s Board of Directors with respect to the implementation of the investment and technical policies, reliability assurance, energy efficiency, and innovative development of the Company; > monitoring the implementation of the consolidated investment program, the Annual Comprehensive Procurement Program with respect to large investees, the Innovative Development Program, the Energy Conservation and Energy Efficiency Enhancement Program, and the Regulations for the Uniform Technical Policy. The Company s day-to-day activities are managed by the Company s sole executive body (Director General) and the Company s collegial executive body (Management Board). The executive bodies are accountable to the Board of Directors of the Company and the General Meeting of Shareholders. The executive bodies of the Company organize the implementation of decisions adopted by the General Meeting of Shareholders and the Board of Directors of the Company. All issues related to the Company s day-to-day activities except for the issues falling within the competence of the General Meeting of Shareholders and the Board of Directors. > Russian laws > Articles of Association > Regulations for the Board of Directors > Regulations for the Nomination and Remuneration Committee > Russian laws > Articles of Association > Regulations for the Board of Directors > Regulations for the Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee > Russian laws > Articles of Association > Regulations for the Management Board > in accordance with the schedule of meetings; > in accordance with the notice received from the Secretary of the Board of Directors; > at the discretion of the Chairman of the Committee, as resolved by the Board of Directors, as resolved by the Committee; > at the request of the Chairman of the Board of Directors, at the request of a member of the Committee, at the request of the Internal Audit Commission, and at the request of the Director General. > in accordance with the schedule of meetings; > in accordance with the notice received from the Secretary of the Board of Directors; > at the discretion of the Chairman of the Committee, as resolved by the Board of Directors, as resolved by the Committee; > at the request of a member of the Committee. > in accordance with the action plan and as and when necessary, but at least once a month In-person meeting Voting in absentia In-person meeting Voting in absentia In-person meeting Voting in absentia The issues falling within the competence of the General Meeting of Shareholders may not be delegated to executive bodies of the Company. The issues falling within the competence of the General Meeting of Shareholders may not be delegated to the Board of Directors, except where otherwise provided for in the Federal Law On Joint-Stock Companies. The issues falling within the competence of the Board of Directors of the Company may not be delegated to executive bodies of the Company

51 . Management Bodies Management Bodies General Meeting of Shareholders Board of Directors The highest management body of the Company is the General Meeting of Shareholders. The Company should hold the Annual General Meeting of Shareholders every year, not earlier than five months and not later than six months after the end of the financial year. PRINCIPLE DECISIONS: Due to the planned issue of additional ordinary shares in excess of 5% of ROSSETI s outstanding shares, the Board of Directors resolved on July 6, 05, to convene the Extraordinary General Meeting of Shareholders on August 7, 05. Since a quorum was not present, the Extraordinary General Meeting of Shareholders of ROSSETI was declared to be aborted on August 7, 05. The procedure for convening and holding the General Meeting of Shareholders of ROSSETI is governed by the Articles of Association and Regulations for the General Meeting of Shareholders approved by the Annual General Meeting of Shareholders on June 0, 05. NOT TO PAY DIVIDENDS AND NOT TO PAY REMUNERATION TO MEMBERS OF THE BOARD OF DIRECTORS OTHER THAN THOSE WHO HOLD PUBLIC OFFICE FOR SERVING ON THE BOARD OF DIRECTORS BASED ON PERFORMANCE RESULTS IN 04 DUE TO THE RECEIVED LOSS; On August 4 and September, 05, the Board of Directors decided to convene the Extraordinary General Meeting of Shareholders on October 6, 05, and include on its agenda the issue related to an increase in the authorized capital of ROSSETI. The Extraordinary General Meeting of Shareholders of ROSSETI resolved on October 6, 05, to increase the Company s authorized capital by means of the placement of additional uncertificated registered ordinary shares On June 0, 05, the Annual General Meeting of Shareholders discussed the Company s performance results for 04. APPROVE THE LIABILITY INSURANCE CONTRACT FOR DIRECTORS AND OFFICERS, WHICH IS A RELATED PARTY TRANSACTION, AND THE COMPANY S MEMBERSHIP IN THE RUSSIAN NATIONAL COMMITTEE OF THE COUNCIL ON LARGE ELECTRIC SYSTEMS (CIGRE). ARTICLES OF ASSOCIATION OF ROSSETI REGULATIONS FOR THE GENERAL MEETING OF SHAREHOLDERS OF ROSSETI DETAILED ABOUT THE GENERAL MEETINGS OF SHAREHOLDERS OF ROSSETI IN 05 The Board of Directors acts in accordance with the laws of the Russian Federation, the Articles of Association, the Corporate Governance Code, and the restated version of the Regulations for the Board of Directors of the Company approved by the decision adopted by the Annual General Meeting of Shareholders on June 0, 05. THE PRINCIPAL OBJECTIVES AND TASKS OF THE ACTIVITIES OF THE BOARD OF DIRECTORS Define the Company s development strategy aiming to enhance its market capitalization and appeal to investors, achieve the maximum profit, and increase the Company s assets Ensure the exercise and protection of the rights and lawful interests of the Company s shareholders and contribute to resolving corporate conflicts Ensure that the information about the Company disclosed to shareholders and other stakeholders is complete, reliable, and unbiased PRINCIPLES OF THE BOARD OF DIRECTORS Make decisions based on reliable information about the Company s activities Work Planning for the Board of Directors On an annual basis the Board of Directors approves the Action Plan for the Board of Directors for the planned corporate year. Meetings of the Board of Directors are held in accordance with the approved Action Plan for the Board of Directors and as and when necessary, but at least once every six weeks. To make urgent decisions, the Chairman of the Board of Directors may decide to hold an unscheduled meeting of the Board Ensure that shareholders rights are observed with respect to participating in the management of the Company and receiving dividends and information about the Company of Directors of the Company. In order to best deal with the issues submitted for consideration by the Company s Board of Directors, the Committees of the Company s Board of Directors formulate recommendations within their competence and provide opinions on issues. For the purposes of determining whether the meeting has a quorum and tabulating the voting results with respect to any item on the agenda of the meeting of the Company s Board of Directors, written opinions of the members of the Company s Board of Directors who are Create efficient internal control mechanisms REGULATIONS FOR THE BOARD OF DIRECTORS OF ROSSETI Evaluate the performance of the Company s executive bodies on a regular basis Achieve a balance of interests of different shareholder groups and ensure that the Board of Directors makes as unbiased decisions as possible to the benefit of all shareholders not present at the meeting are taken into account, provided that such opinions are received prior to tabulating the voting results with respect to the item on the agenda. This mechanism makes it possible to take into consideration the dissenting opinions of all members of the Company s Board of Directors. For the purpose of proper control over the implementation of instructions issued by the Board of Directors, the Company s Board of Directors considers information on the implementation of its decisions on a quarterly basis

52 . Management Bodies Procedure for Electing Members of the Board of Directors The Board of Directors consists of 5 members elected by the General Meeting of Shareholders at the suggestion of shareholders holding an aggregate of % of voting shares. Members of the Company s Board of Directors are elected by the General Meeting of Shareholders by cumulative vote for a term until the next Annual General Meeting of Shareholders. The General Meeting of Shareholders may decide on early termination of their powers only with regard to all members of the Board of Directors. If any Annual General Meeting of Shareholders is not held within the period specified in the Articles of Association, the powers of the Company s Board of Directors terminate except for the powers to prepare, convene, and hold the Annual General Meeting of Shareholders. Only an individual may be a member of the Board of Directors. The members of the Company s Management Board may not constitute more than one-fourth of the members of the Company s Board of Directors. Persons elected to the Board of Directors may be reelected for any number of successive terms. Members of the Board of Directors THE MEMBERS ELECTED BY THE ANNUAL GENERAL MEETING OF SHAREHOLDERS OF THE COMPANY ON JUNE 0, 04, SERVED UNTIL JUNE 0, 05. Sergey Ivanovich Shmatko Member of Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security of the Russian Federation YEAR OF BIRTH: 966 Education: higher education, Candidate of Science (Engineering) Shares held in the Company and the Company s SDCs: N/A. Boris Ilyich Ayuyev Chairman of the Management Board, «SO UPS», JSC YEAR OF BIRTH: 957 Education: higher education Shares held in the Company and the Company s SDCs: > > % of share capital of ROSSETI ( % of ordinary shares) and > > > % of share capital of «FGC UES», (0.0075% of ordinary shares).. Oleg Gennadyevich Barkin Deputy Chairman of the Board, Association «NP Market Council» YEAR OF BIRTH: 975 Education: higher education Shares held in the Company and the Company s SDCs: N/A 4. Oleg Mikhailovich Budargin General Director, ROSSETI YEAR OF BIRTH: 960 Education: higher education, Candidate of Science (Economics) Shares held in the Company and the Company s SDCs: > > % of share capital of FGC UES ( % of ordinary shares). 5. Anatoly Fyodorovich Dyakov President, NP STC UPS Education: higher education, Associate Member of the Russian Academy of Sciences, Professor, Doctor of Science (Engineering) Shares held in the Company and the Company s SDCs: > > 0.00% of share capital of ROSSETI (0.004% of ordinary shares) > > % of share capital of FGC UES ( % of ordinary shares) > > % of share capital of IDGC of Northern Caucasus (0.0009% of ordinary shares) > > 0.007% of share capital of IDGC of North-West (0.007% of ordinary shares) > > 0.085% of share capital of IDGC of Siberia (0.085% of ordinary shares) > > % of share capital of IDGC of South ( % of ordinary shares) > > % of share capital of IDGC of Urals ( % of ordinary shares) > > % of share capital of MOESK ( % of ordinary shares) > > 0.0% of share capital of LENENERGO (0.04% of ordinary shares) > > % of share capital of IDGC of Center and Volga Region (0.0097% of ordinary shares) > > 0.008% of share capital of Dagestan Energy Supply Company (0.008% of ordinary shares) > > % of share capital of NWEMC (0.0559% of ordinary shares) 6. Andrey Yurievich Ivanov Deputy Minister of Finance of the Russian Federation YEAR OF BIRTH: 975 Education: higher education Shares held in the Company and the Company s SDCs: N/A 7. Alexander Sergeyevich Kalinin INDEPENDENT DIRECTOR First Vice President for Energy and Infrastructure, OPORA RUSSIA All- Russian Public Organization of Small and Medium Business YEAR OF BIRTH: 966 Education: higher education, Engineering Economics Shares held in the Company and the Company s SDCs: N/A 8. Vyacheslav Mikhailovich Kravchenko Deputy Minister of Energy of the Russian Federation YEAR OF BIRTH: 967 Education: higher education Shares held in the Company and the Company s SDCs: N/A 9. Alexei Aleksandrovich Makarov INDEPENDENT DIRECTOR Academician, Russian Academy of Sciences YEAR OF BIRTH: 97 Education: higher education, Doctor of Science (Economics) Shares held in the Company and the Company s SDCs: N/A 0. Sergei Nikolaevich Mironosetsky INDEPENDENT DIRECTOR Member of the Board of Directors, Siberian Generation Company YEAR OF BIRTH: 965 Education: higher education Shares held in the Company and the Company s SDCs: N/A. Denis Stanislavovich Morozov Representative of the Russian Federation on the Board of Directors of the European Bank for Reconstruction and Development YEAR OF BIRTH: 97 Education: higher education, Candidate of Science (Economics) Shares held in the Company and the Company s SDCs: N/A. Andrey Yevgenyevich Murov Chairman of the Management Board, «FGC UES» YEAR OF BIRTH: 970 Education: higher education, Doctor of Science (Economics) Shares held in the Company and the Company s SDCs: N/A. Seppo Juha Remes Director General, Kiuru YEAR OF BIRTH: 955 Education: higher education, Ph.D. in Economics Shares held in the Company and the Company s SDCs: N/A 4. Pavel Olegovich Shatsky First Deputy Director General, Gazprom Energoholding YEAR OF BIRTH: 97 Education: higher education Shares held in the Company and the Company s SDCs: > > Shares held in the Company and the Company s SDCs: % of share capital of ROSSETI ( % of ordinary shares) 5. Andrey Nikolayevich Shishkin Vice President for Energy, Industrial Safety, Occupational Safety and Environmental Affairs, Rosneft As of the time of election. YEAR OF BIRTH: 959 Education: higher education, Candidate of Science (Economics) Shares held in the Company and the Company s SDCs: N/A 98 99

53 . Management Bodies. Alexander Valentinonvich Novak. Stanislav Olegovich Ashirov. Boris Ilyich Ayuyev ON JUNE 0, 05, THE ANNUAL GENERAL MEETING OF SHAREHOLDERS OF THE COMPANY ELECTED THE FOLLOWING MEMBERS OF THE BOARD OF DIRECTORS OF ROSSETI: Indicators: Nationality Nominating shareholder (group of shareholders) Date of the first election to the Board of Directors of ROSSETI Position as of the time of election As of the time of nomination In accordance with the Listing Rules of the MICEX Stock Exchange In accordance with the provisions of the Corporate Governance Code recommended by the Bank of Russia Russian Federation Minister of Energy of the Russian Federation EDUCATION: HIGHER EDUCATION > > 99 Norilsk Industrial Institute, majoring in Economics and Management in Metallurgic Engineering > > 009 Lomonosov Moscow State University, majoring in Management POSITIONS HELD OVER THE PAST 5 YEARS: > > Deputy Minister of Finance of the Russian Federation > > 0 present: Minister of Energy of the Russian Federation MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 00 0 Member of the Board of Directors, Rosspirtprom > > 00 0 Member of the Board of Directors, United Aircraft Corporation > > 0 0 Member of the Supervisory Board, State Company Russian Highways > > 0 present: Member of the Supervisory Board, ROSATOM > > 05 present: Member of the Board of Directors, Rosneft > > 05 present: Member of the Board of Directors, GAZPROM > > 05 present: Member of the Board of Directors, Transneft Order of Honor, letters of honor from the President and Government of the Russian Federation Honorary citizen of Norilsk from 0. INDEPENDENCE: representative of the Russian Federation not independent not independent Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Chairman of the Board of Directors YEAR OF BIRTH: 97 Group of shareholders ROSSETI, namely Gazprom Energoholding jointly with Gazprom Finance B.V Director General, Mezhregionenergosbyt EDUCATION: HIGHER EDUCATION, CANDIDATE OF SCIENCE (ECONOMICS) > > 996: Sergo Ordzhonikidze State Academy of Management, majoring in Management; postgraduate studies at the State University of Management. POSITIONS HELD OVER THE PAST 5 YEARS: > > 008 present: Director General, Mezhregionenergosbyt > > 008 present: Deputy Director General for Strategic Development (part-time), Tyumen Power Sales Company MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 0 present: Member of the Board of Directors, Tyumen Power Sales Company > > 0 04 Member of the Board of Directors, Siburenergomanagement INDEPENDENCE: not independent, nonexecutive director not independent not independent Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Member of the Board of Directors, Member of the Strategy Committee, Member of the Audit Committee, Member of the Nomination and Remuneration Committee YEAR OF BIRTH: 97 Russian Federation Chairman of the Management Board, SO UPS EDUCATION: HIGHER EDUCATION > > 979: Ural Polytechnic Institute, majoring in Power Plants POSITIONS HELD OVER THE PAST 5 YEARS: > > 004 present: Chairman of the Management Board, SO UPS MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 004 Member of the Board of Directors, SO UPS > > Member of the Board of Directors, FGC UES > > Member of the Board of Directors, Energy Forecasting Agency > > Member of the Board of Directors, TSA and Financial Settling Center > > Member of the Supervisory Board, GruzRosenergo > > Chairman, Russian National Committee of the Council on Large Electric Systems (CIGRE) > > 0 05 Member of the Board of Directors, RusHydro > > 05 present: Member of the Presidium, Russian National Committee of the Council on Large Electric Systems (CIGRE) INDEPENDENCE: representative of the Russian Federation not independent not independent Shares held in the Company and the Company s SDCs,%: Member of the Board of Directors, Member of the Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee YEAR OF BIRTH: 957 > > % of share capital of ROSSETI (0,00557% of ordinary shares). > > % of share capital of FGC UES (0.0075% of ordinary shares) No transactions to acquire or transfer shares 00 0

54 . Management Bodies 4. Oleg Gennadyevich Barkin 5. Vasily Mikhailovich Belov 6. Oleg Mikhailovich Budargin 7. Anatoly Fyodorovich Dyakov Russian Federation Deputy Chairman of the Board, NP Market Council EDUCATION: HIGHER EDUCATION, MASTER S DEGREE > > 998: Moscow Power Engineering Institute (Technical University), majoring in Applied Mechanics > > 999: Moscow Power Engineering Institute, majoring in Financial Management POSITIONS HELD OVER THE PAST 5 YEARS: > > 008 0: Member of the Board and Deputy Chairman of the Board for Market Development, NP Market Council > > 0 04: Member of the Board and Deputy Chairman of the Board, NP Market Council > > 04 present: Member of the Board, Deputy Chairman of the Board, NP Market Council INDEPENDENCE: nonexecutive director (nominated as independent) not independent not independent Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Member of the Board of Directors, Chairman of the Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee Member of the Strategy Committee YEAR OF BIRTH: 975 Russian Federation Senior Vice-President for Innovations, Non-Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies EDUCATION: HIGHER EDUCATION, MBA > > 00 Faculty of Computational Mathematics and Cybernetics, Lomonosov Moscow State University POSITIONS HELD OVER THE PAST 5 YEARS: > > 00 0 Project Office Director, Interdepartmental Analytical Center > > 0 0 Executive Director of the Energy-Efficient Technology Cluster, Non- Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies > > 0 present: Senior Vice-President for Innovations, Non-Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies INDEPENDENCE: independent director independent director independent director Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Member of the Board of Directors, INDEPENDENT DIRECTOR Chairman of the Audit Committee, Member of the Strategy Committee, Member of the Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee, Member of the Nomination and Remuneration Committee YEAR OF BIRTH: 98 Russian Federation Director General, ROSSETI EDUCATION: HIGHER EDUCATION, CANDIDATE OF SCIENCE (ECONOMICS) > > 98: Norilsk Industrial Institute, majoring in Industrial and Civil Construction POSITIONS HELD OVER THE PAST 5 YEARS: > > Chairman of the Management Board, FGC UES > > 0 present: Chairman of the Management Board, ROSSETI > > 0 present: Director General, ROSSETI MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 00 0: Member of the Board of Directors, Energy Forecasting Agency > > 00 present: Member of the Board of Directors, FGC UES > > 0 present: Member of the Supervisory Board, Russian Regional Development Bank > > 0 05: Member of the Board of Directors, Inter RAO > > 0 present: Chairman of the Supervisory Board, Association of Solar Energy Enterprises Nonprofit Partnership > > 0 0: Chairman of the Board of Directors, Kubanenergo > > 0 present: Chairman of the Board of Directors, MOESK > > 0 0: Chairman of the Board of Directors, IDGC of Siberia > > 0 present: Member of the Supervisory Board, North-Caucasus Federal University > > 0 present: Member of the Board of Trustees, member of the Scientific Council, Moscow Power Engineering Institute (National Research University) > > 0 present: Member of the Board and Vice President for Environmental Issues, Association of Polar Explorers > > 0 present: Vice Chair, Responsibility for Regional Development, World Energy Council (WEC) > > 0 present: Member of the Board of Trustees, Mariinsky Theatre and Primorsky Opera and Ballet Theater > > 04 present: Member of the Board of Trustees, Primorsky Opera and Ballet Theater > > 04 present: Chairman of the Board of Directors, FTC Member of the Board of Directors, executive director YEAR OF BIRTH: 960 > > 0 present: Member of the Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security of the Russian Federation. Russian Federation President and Chairman of the Scientific and Technical Board, Scientific and Technical Council of Unified Energy System EDUCATION: HIGHER EDUCATION, ASSOCIATE MEMBER OF THE RUSSIAN ACADEMY OF SCIENCES, PROFESSOR, DOCTOR OF SCIENCE (ENGINEERING) Major: Mining Electromechanics. POSITIONS HELD OVER THE PAST 5 YEARS: > > : Chairman, Russian National Committee of the World Energy Council > > : President, Scientific and Technical Council of Unified Energy System Non-profit Partnership > > : Advisor to the Chairman of the Management Board, FGC UES MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > : Honorary Chairman, Chairman of the Technical Committee, Russian National Committee of the Council on Large Electric Systems (CIGRE) > > 04 05: Member of the Public Council of the Ministry of Energy of the Russian Federation INDEPENDENCE: representative of the Russian Federation not independent not independent Shares held in the Company and the Company s SDCs,%: Member of the Board of Directors > > 0.00% of share capital of ROSSETI (0.004% of ordinary shares) > > % of share capital of FGC UES ( % of ordinary shares) > > % of share capital of IDGC of Northern Caucasus (0.0009% of ordinary shares) > > 0.007% of share capital of IDGC of North-West (0.007% of ordinary shares) > > 0.085% of share capital of IDGC of Siberia (0.085% of ordinary shares) > > % of share capital of IDGC of South ( % of ordinary shares) > > % of share capital of IDGC of Urals ( % of ordinary shares) > > % of share capital of MOESK ( % of ordinary shares), including,044,7 shares purchased in the rd quarter of 05 > > 0.0% of share capital of LENENERGO (0.04% of ordinary shares) INDEPENDENCE: representative of the Russian Federation, Executive director not independent not independent Shares held in the Company and the Company s SDCs,%: > > % of share capital of FGC UES ( % of ordinary shares) No transactions to acquire or transfer shares > > % of share capital of IDGC of Center and Volga Region (0.0097% of ordinary shares) > > 0.008% of share capital of Dagestan Energy Supply Company (0.008% of ordinary shares) > > % of share capital of NWEMC (0.0559% of ordinary shares) Member of the Board of Directors of ROSSETI A. F. Dyakov died on August,

55 . Management Bodies 8. Andrey Yurievich Ivanov 9. Alexander Sergeyevich Kalinin 0. Alexei Aleksandrovich Makarov. Denis Stanislavovich Morozov Russian Federation Member of the Board YEAR OF BIRTH: 975 Deputy Minister of Finance of the Russian Federation EDUCATION: HIGHER EDUCATION > > : Krasnoyarsk State University, majoring in Law POSITIONS HELD OVER THE PAST 5 YEARS: > > > 008 0: Deputy Director of the Department for Budgetary Policy in Economic Sectors, Ministry of Finance of the Russian Federation > > 0 0: Director of the Department for Budgetary Policy in Innovation, Civil Industry, Energy, Communications and Public-Private Partnership, Ministry of Finance of the Russian Federation > > 0 present: Deputy Minister of Finance of the Russian Federation MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 0 present: Member of the Executive Board, Internet Initiatives Development Fund of the Agency for Strategic Initiatives > > 0 present: Chairman of the Finance and Investment Committee of the Board of Trustees, Skolkovo Institute of Science and Technology > > 0 present: Member of the Working Group on Consideration of Materials for the Supervisory Board, member of the Nomination and Remuneration Committee the Supervisory Board, member of the Working Group of the Contest for Bonuses for Contributions to Russian Socioeconomic Development (Development Bonuses), State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank) > > 0 present: Member of the Board of Directors, Special Economic Zones > > 0 present: Member of the Board of Directors, Innopolis > > 0 present: Member of the Board of Directors, Innopolis Special Economic Zone > > 0 present: Member of the Supervisory Board, State Company Russian Highways > > 0 04: Member of the Board of Directors, North Caucasus Development Corporation > > 0 04, 05 present: Member of the Board of Directors, Northern Caucasus Resorts > > 0 present: Member of the Skolkovo Foundation Board, Non-Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies > > 0 present: Member of the Board of Directors, United Aircraft Corporation > > 04 present: Member of the Supervisory Board, Chairman of the Strategy Committee, member of the Audit Committee, Russian Agricultural Bank > > 04 present: Member of the Board of Directors, Russian Railways > > Member of the Board of Directors, ROSNEFTEGAZ > > 04 present: Member of the Board of Directors, URALVAGONZAVOD > > 04 present: Member of the Supervisory Board, Monotowns Development Fund > > 05 present: Member of the Board of Directors, Russian Export Center > > 05 present: Member of the Board of Directors, Chairman of the Budget and Reporting Committee, GLONASS Russian Federation Member of the Board, Chairman of the Nomination and Remuneration Committee, Member of the Strategy Committee, Member of the Audit Committee YEAR OF BIRTH: 966 President, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business EDUCATION: HIGHER EDUCATION > > 989: Chelyabinsk Polytechnic Institute, majoring in Robotics > > 99: postgraduate studies at the Engineering Economics Department of the Chelyabinsk Polytechnic Institute > > 998: Ural Academy of Public Civil Service, majoring in Law POSITIONS HELD OVER THE PAST 5 YEARS: > > 00 04: Director, Granitny Bereg > > 0 04: First Vice President for Energy and Infrastructure, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business > > 04 present: President, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business > > 04 05: Director (part-time), Granitny Bereg MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 04 present: Member of the Board of Directors, SO UP > > 05 present: Member of the Board of Directors, Russian Small and Medium Business Corporation INDEPENDENCE: independent director not independent not independent Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Due to the acquisition of LENENERGO shares performed by the Company on December, 05 pursuant to the Ordinance of the Government of the Russian Federation No. 770r of October 0, 05, A.S. Kalinin ceased to meet independence criteria. Russian Federation Member of the Presidium, Russian Academy of Sciences EDUCATION: HIGHER EDUCATION, ACADEMICIAN, RUSSIAN ACADEMY OF SCIENCES > > 959: Kalinin Leningrad Polytechnic Institute, majoring in Energy Economics and Organization POSITIONS HELD OVER THE PAST 5 YEARS: > > 985 0: Director, Energy Research Institute of the Russian Academy of Sciences > > 0 present: Chief Research Associate, Energy Research Institute of the Russian Academy of Sciences > > 0 present: Member of the Presidium, Advisor to the Russian Academy of Sciences MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 04 present: Member of the Board of Directors, FTC INDEPENDENCE: independent director independent director independent director Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Member of the Board INDEPENDENT DIRECTOR Member of the Nomination and Remuneration Committee, Member of the Audit Committee YEAR OF BIRTH: 97 Russian Federation Representative of the Russian Federation on the Board of Directors of the European Bank for Reconstruction and Development EDUCATION: HIGHER EDUCATION, CANDIDATE OF SCIENCE (ECONOMICS) > > 99: Lomonosov Moscow State University, majoring in Political Economics > > 996: Lomonosov Moscow State University, majoring in Law > > 000: Swiss Banking School; postgraduate school of the Moscow State Institute of International Relations (University) of the Ministry of Foreign Affairs of the Russian Federation (MGIMO), majoring in International Economic Relations > > Harvard Business School under the Advanced Management Program; Columbia University s School of International and Public Affairs as a Master of Public Administration under the Program in Economic Policy Management POSITIONS HELD OVER THE PAST 5 YEARS: > > 00 00: President and CEO, Uralkali > > 0 present: Executive Director for the Russian Federation, Belarus and Tajikistan, European Bank for Reconstruction and Development (EBRD) MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > : Member of the Board of Directors, United Grain Company > > 00 00: Member of the Board of Directors, Belarusian Potash Company > > 0 04: Member of the Board of Directors, Russian Agency for Export Credit and Investment Insurance > > 0 05: Member of the Supervisory Board, ALROSA > > 0 present: Member of the Board of Directors, RusHydro > > 04 present: Member of the Supervisory Board, Russian Agricultural Bank INDEPENDENCE: independent director independent director independent director Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Member of the Board INDEPENDENT DIRECTOR YEAR OF BIRTH: 97 > > 05 present: Member of the Board of Directors, RUSNANO INDEPENDENCE: representative of the Russian Federation not independent not independent Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares 04 05

56 . Management Bodies. Andrey Yevgenyevich Murov. Oleg Romanovich Fyodorov 4. Andrey Nikolayevich Shishkin 5. Sergey Ivanovich Shmatko Russian Federation Chairman of the Management Board, FGC UES EDUCATION: HIGHER EDUCATION, DOCTOR OF SCIENCE (ECONOMICS) > > 99: Faculty of Law, Saint Petersburg State University > > 998: professional retraining in Financial Management from the Interbranch Institute of Advanced Training and Retraining of Executive Personnel > > 009: State University of Civil Aviation POSITIONS HELD OVER THE PAST 5 YEARS: > > 007 0: Director General, Pulkovo Airport Member of the Board YEAR OF BIRTH: 970 > > 0 0: Deputy Director General, IDGC Holding (from April 4, 0, JSC ROSSETI; from July 7, 05, PJSC ROSSETI) > > July 0 July 0: Acting Director General, IDGC Holding (from April 4, 0, JSC ROSSETI; from July 7, 05, PJSC ROSSETI) > > 0 0: First Deputy Chairman of the Management Board, FGC UES > > 0 0: Executive Director, IDGC Holding (from April 4, 0, JSC ROSSETI; from July 7, 05, PJSC ROSSETI) > > 0 0: Member of the Management Board, FGC UES > > 0 0: Member of the Management Board, ROSSETI > > 04 present: Chairman of the Management Board, FGC UES MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 0 0: Member of the Board of Directors, IDGC of Urals > > 0 0: Chairman of the Board of Directors, IDGC of Volga > > 0 0: Chairman of the Board of Directors, IDGC of Centre > > 0 0 Member of the Board of Directors, Kubanenergo > > 0 0: Chairman of the Board of Directors, LENENERGO > > 0 0 Member of the Board of Directors, MOESK > > 0 04: Chairman of the Board of Directors, IDGC of North-West > > 0 present: Member of the Board of Directors FGC UES > > 04 present: Member of the Board of Directors, Inter RAO > > 05 present: Member of the Board of Directors, SO UP > > 05 present: Chairman, Russian National Committee of the Council on Large Electric Systems (CIGRE) Russian Federation Member of the Supervisory Board, ALROSA EDUCATION: HIGHER EDUCATION > > 99 Lomonosov Moscow State University, majoring in Mathematics and Applied Mathematics POSITIONS HELD OVER THE PAST 5 YEARS: > > 009 0: Head of the Government and Government-Linked Company Relations Division, VTB Capital > > 0 04: Advisor to the Head, Federal Agency for State Property Management of the Russian Federation > > 0 present: Member of the Supervisory Board, ALROSA MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 04 present: Member of the Board of Directors, Vnukovo International Airport > > 0 present: Member of the Board of Directors, Russian Investment Fund of Information-Communication Technologies INDEPENDENCE: representative of the Russian Federation not independent not independent Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Member of the Board, Member of the Strategy Committee, Member of the Nomination and Remuneration Committee YEAR OF BIRTH: 968 Group of shareholders PJSC ROSSETI, namely Gazprom Energoholding jointly with Gazprom Finance B.V Vice President for Energy and Localization, Rosneft EDUCATION: HIGHER EDUCATION > > 985: Moscow Institute of Petrochemistry and Gas, majoring in Industrial Thermal Power Engineering > > 000: Finance Academy under the Government of the Russian Federation > > 00: Moscow International Higher Business School MIRBIS (Institute) POSITIONS HELD OVER THE PAST 5 YEARS: > > 00 0: Deputy Minister of Energy of the Russian Federation > > 0 present: Vice President for Energy and Industrial, Occupational and Environmental Safety (until August 7, 04), Vice President for Energy and Localization (from August 8, 04), Rosneft > > 05 present: Director General, RN-Aktiv MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 006 present: Member of the Board of Directors, Tyumen Power Sales Company > > 0 05 Member of the Board of Directors, Rusenergo Fund > > 0 present: Member of the Board of Directors, United Shipbuilding Corporation > > 0 present: Member of the Supervisory Board, NP Market Council > > 04 05: Member of the Board of Directors, Okha CHPP > > 04 present: Member of the Board of Directors, RusHydro > > 04 present: Member of the Board of Directors, Chairman of the Board of Directors, RIG Research Pte. Ltd. > > 04 present: Member of the Board of Directors, National Petroleum Consortium > > 04 present: Member of the Board of Directors, United Research and Development Centre > > 05 present: Member of the Board of Directors, Far Eastern Shipbuilding and Ship Repair Center INDEPENDENCE: dependent, nonexecutive director not independent Member of the Board YEAR OF BIRTH: 959 Russian Federation Member of the Board YEAR OF BIRTH: 966 Special Representative of the President of the Russian Federation on International Cooperation in the Electric Power Industry EDUCATION: HIGHER EDUCATION, CANDIDATE OF SCIENCE (ENGINEERING) > > 990: Faculty of Political Economics, Ural State University > > 99: Faculty of Economics, University of Marburg, Germany > > 004: Higher Academic Courses of the Military Academy of the General Staff of the Russian Armed Forces, majoring in Defense and Security Protection of the Russian Federation POSITIONS HELD OVER THE PAST 5 YEARS: > > 008 0: Minister of Energy of the Russian Federation > > 0 present: Member of the Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security of the Russian Federation > > 0 present: Special Representative of the President of the Russian Federation on International Cooperation in the Electric Power Industry MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 008 0: Chairman of the Board of Directors, IDGC Holding (from April 4, 0, JSC ROSSETI; from July 7, 05, PJSC ROSSETI) > > 008 0: Chairman of the Board of Directors, RusHydro > > 008 0: Chairman of the Board of Directors, FGC UES > > 008 0: Member of the Board of Directors, Inter RAO > > : Member of the Board of Directors, ROSNEFTEGAZ > > 008 0: Chairman of the Board of Directors, Transneft > > 008 0: Chairman of the Board of Directors, Zarubezhneft > > 009 0: Chairman of the Board of Directors, SO UP > > Member of the Board of Directors, Gazprom > > Member of the Supervisory Board, ROSATOM > > 0 present: Member of the Board of Directors, FGC UES > > 0 present: Member of the Supervisory Board, Scientific and Technical Council of Unified Energy System Non-profit Partnership > > 0 04: Member of the Board of Directors, Transneft INDEPENDENCE: INDEPENDENCE: not independent representative of the Russian Federation representative of the Russian Federation Shares held in the Company and the Company s SDCs,%: none not independent not independent No transactions to acquire or transfer shares not independent not independent Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares Shares held in the Company and the Company s SDCs,%: none No transactions to acquire or transfer shares 06 07

57 . Management Bodies Competencies and Sectoral Experience of the Board of Directors MEMBERS OF THE BOARD OF DIRECTORS ALEXANDER VALENTINOVICH NOVAK STANISLAV OLEGOVICH ASHIROV BORIS ILYICH AYUYEV OLEG GENNADYEVICH BARKIN VASILY MIKHAILOVICH BELOV OLEG MIKHAILOVICH BUDARGIN ANDREY YURIEVICH IVANOV ALEXANDER SERGEYEVICH KALININ ALEXEI ALEKSANDROVICH MAKAROV DENIS STANISLAVOVICH MOROZOV ANDREY YEVGENYEVICH MUROV OLEG ROMANOVICH FYODOROV ANDREY NIKOLAYEVICH SHISHKIN SERGEY IVANOVICH SHMATKO Conflict of interest LENGTH OF SERVICE ON THE BOARD OF DIRECTORS IN THE REPORTING PERIOD, NONE OF THE MEMBERS OF THE BOARD OF DIRECTORS OF ROSSETI: was a relative of any persons that were members of the management bodies and/or bodies controlling ROSSETI s financial and economic activities; LENGTH OF SERVICE IN THE INDUSTRY KEY COMPETENCIES STRATEGY FINANCE AND AUDIT was subject to any information concerning the imposition of administrative sanctions against the individual for the violations of law in the area of finance, taxes and dues, securities market or criminal sanctions (criminal record) for crimes in the field of economics or offences against the state; was subject to any information concerning the positions in the management bodies of business entities when bankruptcy proceedings were initiated against the above-mentioned entities LAW year years V V V years More than 0 years years More than 5 years years More than 5 years year More than 5 years years More than 5 years CORPORATE GOVERNANCE ACADEMIC DEGREE V V V Candidate of Science (Economics) V V V V Master s Degree V V V MBA V V V Candidate of Science (Economics) years years V V V V years years V V V years More than 45 years V V V Doctor of Science (Economics) years years V V V V Candidate of Science (Economics) years years V V V V Doctor of Science (Economics) year year V V V years 0 years V V V years 0 years V V V V Candidate of Science (Engineering), Professor V and/or one of the bankruptcy procedures provided for by the insolvency (bankruptcy) laws of the Russian Federation was introduced; had any conflict of interest with the Company s executive bodies. Performance Report of the Board of Directors PARTICIPATION OF THE MEMBERS OF THE BOARD OF DIRECTORS IN THE WORK OF THE BOARD OF DIRECTORS AND COMMITTEES IN 05 MEMBERS OF THE BOARD OF DIRECTORS IN 05 INDEPENDENT MEMBER OF THE BOARD OF DIRECTORS BOARD OF DIRECTORS A. V. Novak / STRATEGY COMMITTEE INVESTMENT COMMITTEE NOMINATION AND REMUNERATION COMMITTEE S. O. Ashirov / 4/4 / / B. I. Ayuyev 4/4 7/7 O. G. Barkin + 9/4 9/5 /7 V. M. Belov + / 7/4 4/6 / / O. M. Budargin 4/4 A. F. Dyakov 9/4 5/ A. Yu. Ivanov /4 4/ A. S. Kalinin + 5/4 8/5 5/5 / V. M. Kravchenko 7/0 / A. A. Makarov + 40/4 5/5 / S. N. Mironosetsky /0 /5 /8 0/ 5/8 D. S. Morozov + 9/4 A. Ye. Murov 40/4 S. Remes 4/0 7/ O. R. Fyodorov / /4 / P. O. Shatsky 5/0 A. N. Shishkin 6/4 0/ S. I. Shmatko 8/4 ISSUES CONSIDERED BY MEETINGS OF THE BOARD OF DIRECTORS PERIOD, YEAR IN PERSON IN ABSENTIA TOTAL MEETINGS HELD BY THE BOARD OF DIRECTORS PERIOD, YEAR IN PERSON IN ABSENTIA TOTAL AUDIT COMMITTEE The members of the Board of Directors serving on the Board of Directors during the year only until the Annual General Meeting of Shareholders on June 0, 05; The members of the Board of Directors serving on the Board of Directors during the year only after the Annual General Meeting of Shareholders on June 0, 05; Due to the acquisition of LENENERGO shares performed by the Company on December, 05 pursuant to the Ordinance of the Government of the Russian Federation No. 770r of October 0, 05, A.S. Kalinin ceased to meet independence criteria

58 . Management Bodies Principal Issues Considered by the Board of Directors of ROSSETI: > > Review of the consolidated investment program of PJSC ROSSETI for 04 and for 05 09; > > Approval of the Action Plan (Road Map) to Introduce the Corporate Governance Code; > > Annual analysis of the results of setting up the Common Treasury of the Company and its subsidiaries and dependent companies; > > Annual reduction of at least percent in operating expenses (costs); > > Progress in preparations for the 08 FIFA World Cup in the Russian Federation; > > Proposals for the Extraordinary General Meeting of Shareholders of the Company concerning the issue Increase in the authorized capital of the Company by means of the placement of additional shares ; > > Approval of the Uniform Procurement Standard of PJSC ROSSETI (Procurement Regulations); > > Approval of a restated version of the Risk Management Policy of PJSC ROSSETI; > > Approval of a restated version of the Internal Audit Policy of PJSC ROSSETI; > > Approval of a restated version of the Internal Control Policy of PJSC ROSSETI; Subjects of the Issues Considered by the Board of Directors (%) 9% Strategic planning and development Finance, investment, and R&D 8% INDIVIDUAL EVALUATION OF THE BOARD OF DIRECTORS 4% 9% 6% 7% % 0% 5% As part of development of corporate governance, strengthen the role of members of the Board of Directors in jointstock companies with state participation, included in the special list approved by the decree of the Government of the Russian Federation, in accordance with the decree of the Government of the Russian Federation «On improving the procedure for managing open joint stock companies whose shares are in Federal ownership and Federal state unitary Budget and monitoring of SDCs financial and economic condition enterprises» an individual assessment of the members of the Board of Directors for corporate year was performed. The evaluation was conducted by completing interactive questionnaires in the personal accounts of joint stock companies for inter-agency portal the Agency. The aim of this work was to determine the contribution of each member of the Board of Directors, elected as representative of the interests of the Russian Federation, in the activities of the Company subject to its development strategy. > > Approval of the Schedule of Improving the Operating Efficiency and Reducing Expenses of PJSC ROSSETI; > > Approval of the Regulations for the Quality Management System; > > Implementation of the Smart Grid Construction investment project; > > Approval of the PJSC ROSSETI Budget for 06. Procurement (including the Annual Comprehensive Procurement Program, contracts) Key performance indicators Approval of internal documents Audit, control, and risks Administration of SDCs with respect to key issues of their operations Other The evaluation shows the efficiency of the work of the Board of Directors, and promotes the revitalization of the work of the Board of Directors and identifies areas of activities to be improved. As of January, 00 No. 9 r; As of Committees of the Board of Directors of ROSSETI ROSSETI takes out liability insurance for directors and officers (including members of the Board of Directors, members of the Management Board, and independent directors) to indemnify the Company s shareholders, creditors, and other persons for their damage (losses) caused by the mistakes and unintentional acts (omission to act) on the part of such directors and officers while they perform their managerial activities. The liability insurance contract provides directors and officers with coverage consistent with international insurance standards as to insured risks and indemnity limits. On June 0, 04, the Annual General Meeting of Shareholders of ROSSETI approved the liability insurance contract for directors and officers, which is a related party transaction. THE INSURANCE PREMIUM UNDER THE INSURANCE CONTRACT FOR THE PERIOD FROM DECEMBER 5, 04, TO DECEMBER 4, 05, IS 4. MILLION RUBLES, WHILE THE TOTAL INSURED AMOUNT (AGGREGATE LIMIT OF LIABILITY) IS 00 MILLION US DOLLARS. Remuneration for Members of the Board of Directors The amounts and payment procedure of remuneration and compensation for members of the Board of Directors of ROSSETI are defined by Regulations for Remuneration and Compensation for Members of the Board of Directors of PJSC ROSSETI. No remuneration shall be accrued or paid to the Chairman or members of the Board of Directors of the Company who are persons falling within the purview of such restriction or ban on the receipt of any payments from business entities as imposed by federal law. Remuneration shall be paid from net income to members of the Board of Directors of the Company for their work for the period from their election to the Board of Directors of the Company until the election of new members of the Board of Directors of the Company. Remuneration shall be paid to members of the Board of Directors of the Company as a lump sum in Russian rubles. Each member of the Board of Directors of the Company is paid remuneration in the amount calculated by the formula specified in the Regulations, taking account of the total number of meetings of the Board of Directors of the Company in the previous corporate year and taking account of the number of meetings in which such member of the Board of Directors takes part. The remuneration base amount is based on the revenues calculated in accordance with Russian Accounting Standards and received by the Company in the financial year. REGULATIONS FOR REMUNERATION AND COMPENSATION FOR MEMBERS OF THE BOARD OF DIRECTORS OF ROSSETI On top of the remuneration, the following premiums apply: > > 0% payable to the Chairman of the Board of Directors of the Company; > > 0% payable to the Chairman of a specialized committee of the Board of Directors of the Company; > > 0% payable to a member of a specialized committee of the Board of Directors of the Company. No premium for holding office as chairman and/or a member of a specialized committee is paid if the committee of the Board of Directors holds less than three meetings in the corporate year. No remuneration is paid to any member of the Board of Directors of the Company if such member fails to participate in more than 50% of the meetings held (from the election of such member until the termination of such member s powers). Any member of the Board of Directors of the Company may decline to receive the remuneration provided for in these Regulations, in full or in part, by notice thereof to the sole executive body (Director General) of the Company. No remuneration was accrued or paid to the members of the Board of directors in 05 due to the lack of net profit 0

59 . Management Bodies Committees of the Board of Directors of ROSSETI In order to perform its functions in the most effective manner and preliminarily consider the most important issues falling within its competence, the Board of Directors set up its Committees. The members, competence, and working procedure of the Committees of the Board of Directors of the Company are determined by the Board of Directors and set forth in the Committee Regulations approved by the Board of Directors in accordance with the applicable laws. Decisions made by the Committee are recommendatory. MEMBERS OF THE STRATEGY COMMITTEE Strategy Committee The Strategy Committee analyzes and prepares for the Board of Directors recommendations and proposals regarding the Company s strategic development and the standardization of planning the development of SDCs. ОTHE PRINCIPAL OBJECTIVES OF THE COMMITTEE ARE AS FOLLOWS Analyze proposals and prepare recommendations for the Board of Directors of the Company for the preparation, amendment, supplementation, and implementation of ROSSETI s and its SDCs principal lines of development; Monitor the implementation of ROSSETI s and its SDCs principal lines of development approved by the Board of Directors of the Company; Analyze proposals and develop recommendations for the Board of Directors of the Company for the preparation of standards for formulating development plans for the Group s SDCs and for reviewing specific plans (as needed). The current members of the Committee were appointed by the decision adopted by the Board of Directors on August 5, 05 (Minutes of the Meeting No. 98) : NO. NAME POSITION AS OF THE TIME OF ELECTION. VYACHESLAV MIKHAILOVICH KRAVCHENKO Chairman of the Committee, member of the Board of Directors, ROSSETI, Deputy Minister of Energy of the Russian Federation. STANISLAV OLEGOVICH ASHIROV Member of the Board of Directors, ROSSETI, Director General, Mezhregionenergosbyt. OLEG GENNADYEVICH BARKIN Member of the Board of Directors, ROSSETI, Deputy Chairman of the Board, NP Market Council 4. VASILY MIKHAILOVICH BELOV (INDEPENDENT DIRECTOR) Member of the Board of Directors, ROSSETI, Senior Vice-President for Innovations, Non-Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies 5. ROMAN NIKOLAEVICH BERDNIKOV Member of the Management Board and First Deputy Director General for Technical Policy, ROSSETI 6. ALEXANDER MIKHAILOVICH BORISOV Member of the Presidium, OPORA RUSSIA 7. ANDREY ALEKSANDROVICH DYOMIN Member of the Management Board, ROSSETI 8. ALEXANDER SERGEYEVICH KALININ (INDEPENDENT DIRECTOR) 4 Member of the Board of Directors, ROSSETI, and President, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business 9. VASILY NIKOLAYEVICH KISELYOV Chairman of the Council of Customers of the Government Commission on the Development of the Electric Power Industry Before August 05, 05 6 Committees of the Board of Directors were set up in the Company, including Valuation Committee, Society, Customer, and Government Relations and Information Policy Committee; Acts in accordance with the Committee Regulations approved by the Board of Directors of ROSSETI on October, 0 (Minutes of the Meeting No. 7 as amended by the decisions adopted by the Board of Directors of ROSSETI on September 7, 04 (Minutes of the Meeting No. 65), October 6, 04 (Minutes of the Meeting No. 66), November 5, 04 (Minutes of the Meeting No. 7), and August 5, 05 (Minutes of the Meeting No. 98); The Committee s members served before August 5, 05 are specified in Section 6. of the Appendix to the Annual Report; 4 Due to the acquisition of LENENERGO shares performed by the Company on December, 05 pursuant to the Ordinance of the Government of the Russian Federation No. 770r of October 0, 05, A.S. Kalinin ceased to meet independence criteria. NO. NAME POSITION AS OF THE TIME OF ELECTION 0. VIKTOR VIKTOROVICH MAMIN Director of the of the Department for Corporate Governance, Price Conditions and Auditing in Fuel and Energy Industry Branches, Ministry of Energy of the Russian Federation. SERGEI NIKOLAEVICH MIRONOSETSKY. NATALIA VIKTOROVNA NEVMERZHITSKAYA. VASILY VLADISLAVOVICH NIKONOV Director of the Energy Department, Rosneft 4. YEVGENY ALEKSANDROVICH OLKHOVICH In 05, the Committee s current members adopted decisions on issues documented in 4 meeting minutes, including 6 issues considered at five in-person meetings and nine meeting minutes containing decisions on 6 issues that were addressed at absentee meetings with voting by ballot. It is deserving of note that, for several issues, instructions were given with respect to their refinement with subsequent submission for consideration by the Board of Directors of ROSSETI and deferred to a later date. Member of the Board of Directors, FGC UES, member of the Board of Directors, Siberian Generation Company Chairperson of the Management Board, Noncommercial Partnership Guaranteeing Suppliers and Power Suppliers Deputy Director of the Department for State Regulation of Tariffs, Infrastructural Reforms and Energy Efficiency, Ministry of Economic Development of the Russian Federation 5. NIKOLAY DMITRYEVICH ROGALEV Rector, Moscow Power Engineering Institute (National Research University) 6. PAVEL NIKOLAYEVICH SNIKKARS Director of the Electric Power Industry Development Department, Ministry of Energy of the Russian Federation 7. OLEG ROMANOVICH FYODOROV Member of the Board of Directors, ROSSETI, member of the Supervisory Board, ALROSA 8. ALEXANDER VIKTOROVICH SHEVCHUK Executive Director, Investor Protection Association 9. PAVEL VIKTOROVICH SHPILEVOY Director for Strategic Development and Head of the Strategic Development Department, FGC UES 0. NIKOLAY GRIGORYEVICH SHULGINOV First Deputy Chairman of the Management Board, SO UPS THE COMMITTEE CONSIDERED THE FOLLOWING PRINCIPAL ISSUES RELATED TO THE COMPANY S ACTIVITIES > > Financial and economic condition of subsidiaries and dependent companies of PJSC ROSSETI and high priority objectives of ensuring the financial stability of subsidiaries and dependent companies of PJSC ROSSETI in 05; > > Organization of the ROSSETI Group s work on ensuring payments for electricity distribution services; Types of Issues Considered by the Strategy Committee (%) 9% 8% Prior consideration before a meeting of the Board of Directors Consideration by the Committee only, without submission for consideration by the Board of Directors > > Approval of the Uniform Procurement Standard of PJSC ROSSETI (Procurement Regulations); > > Review of the Schedule of Improving the Operating Efficiency and Reducing Expenses of PJSC ROSSETI. Further information can be found in Section 6.5 of the Appendix to the Annual Report. 7 ISSUES WERE CONSIDERED BY THE STRATEGY COMMITTEE IN 05, DOCUMENTED IN 5 MEETING MINUTES, INCLUDING 48 ISSUES CONSIDERED AT IN-PERSON MEETINGS AND 4 MEETING MINUTES CONTAINING DECISIONS ON 4 ISSUES ADDRESSED AT ABSENTEE MEETINGS WITH VOTING BY BALLOT

60 . Management Bodies Subjects of the Issues Considered by the Strategy Committee (%) ABSENTEE MEETINGS IN-PERSON MEETINGS % % 9% ON THE MEETINGS ATTENDED BY THE MEMBERS OF THE STRATEGY COMMITTEE ABSENTEE MEETINGS NO. NAME OF THE COMMITTEE S MEMBER 7% % 4% 9% 5% NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER Strategic planning and development Finance, investment, and R&D Budget and monitoring of SDCs financial and economic condition Noncore and retail assets Legal aspects Review of internal documents Administration of SDCs with respect to key issues of their operations Others ATTEN- DANCE RATE, % IN-PERSON MEETINGS NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER IN PERSON NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER BY BALLOT ATTENDANCE RATE, %. V. M. Kravchenko S. O. Ashirov O. G. Barkin PARTICI- PATION RATE % NO. NAME OF THE COMMITTEE S MEMBER Audit Committee NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER The goal of the Audit Committee is to assist the Board of Directors in effectively performing its functions with respect to the preliminary consideration of issues related to control over the Company s financial and economic activities. ATTEN- DANCE RATE, % NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER IN PERSON THE PRINCIPAL OBJECTIVES OF THE COMMITTEE ARE AS FOLLOWS Supervise the preparation of the Company s accounting (financial) statements; Control the operating reliability and effectiveness of the internal control, risk management, and corporate governance systems; NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER BY BALLOT ATTENDANCE RATE, % 7. O. R. Fyodorov A. V. Shevchuk P. V. Shpilevoy N. G. Shulginov MEMBERS OF THE AUDIT COMMITTEE PARTICI- PATION RATE % Ensure the independence and objectivity of the internal audit function; Supervise external audit and the selection of the external auditor; Control the operating effectiveness of the system of combating misconduct on the part of the Company s employees and third parties. The current members of the Committee were appointed by the decision adopted by the Board of Directors on August 5, 05 (Minutes of the Meeting No. 98) : 4. V. M. Belov NO. NAME POSITION AS OF THE TIME OF ELECTION 5. R. N. Berdnikov A. M. Borisov A. A. Dyomin A. S. Kalinin V. N. Kiselyov V. V. Mamin S. N. Mironosetsky N. V. Nevmerzhitskaya V. V. Nikonov Ye. A. Olkhovich N. D. Rogalev P. N. Snikkars VASILY MIKHAILOVICH BELOV (INDEPENDENT DIRECTOR) Chairman of the Committee, member of the Board of Directors, ROSSETI, Senior Vice-President for Innovations, Non-Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies. STANISLAV OLEGOVICH ASHIROV Member of the Board of Directors, ROSSETI, Director General, Mezhregionenergosbyt. ALEXANDER SERGEYEVICH KALININ (INDEPENDENT DIRECTOR) 4. ALEXEI ALEKSANDROVICH MAKAROV (INDEPENDENT DIRECTOR) Member of the Board of Directors, ROSSETI, President, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business Member of the Board of Directors, ROSSETI, Academician, Russian Academy of Sciences Acts in accordance with the Committee Regulations approved by the Board of Directors of ROSSETI on December 5, 05 (Minutes of the Meeting No. 7) (the previous version was approved on October, 0 (Minutes of the Meeting No. 7)). In accordance with the Road Map, in order to align the Regulations for the Audit Committee with the recommendations contained in the Corporate Governance Code and the requirements set forth in the Listing Rules, the Board of Directors of ROSSETI resolved on December 5, 05, (Minutes of the Meeting No. 7) to approve a restated version of the Regulations for the Audit Committee of the Board of Directors of ROSSETI; The Committee s members served before August 5, 05 are specified in Section 6. of the Appendix to the Annual Report; Due to the acquisition of LENENERGO shares performed by the Company on December, 05 pursuant to the Ordinance of the Government of the Russian Federation No. 770r of October 0, 05, A.S. Kalinin ceased to meet independence criteria. 4 5

61 . Management Bodies In 05, the Committee s current members adopted decisions on 0 issues documented in three meeting minutes, including eight issues considered at two in-person meetings and one meeting minutes containing decisions on two issues that were addressed at absentee meetings with voting by ballot. Types of Issues Considered by the Audit Committee (%) THE COMMITTEE CONSIDERED THE FOLLOWING PRINCIPAL ISSUES RELATED TO THE COMPANY S ACTIVITIES > > Preliminary review of a restated version of the Internal Audit Policy of PJSC ROSSETI; 46% 54% Prior consideration before a meeting of the Board of Directors Consideration by the Committee only, without submission for consideration by the Board of Directors > > Preliminary review of a restated version of the Risk Management Policy of PJSC ROSSETI; > > Preliminary review of a restated version of the Internal Control Policy of PJSC ROSSETI; > > Review of the annual action plan of the Directorate for Internal Audit of PJSC ROSSETI for ISSUES WERE CONSIDERED BY THE AUDIT COMMITTEE IN 05, DOCUMENTED IN MEETING MINUTES, INCLUDING 9 ISSUES CONSIDERED AT SIX IN-PERSON MEETINGS AND FIVE MEETING MINUTES CONTAINING DECISIONS ON NINE ISSUES ADDRESSED AT ABSENTEE MEETINGS WITH VOTING BY BALLOT ON THE MEETINGS ATTENDED BY THE MEMBERS OF THE AUDIT COMMITTEE ABSENTEE MEETINGS NO. NAME OF THE COMMITTEE S MEMBER Nomination and Remuneration Committee NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER THE PRINCIPAL OBJECTIVES OF THE COMMITTEE ARE AS FOLLOWS Define selection criteria for nominees for the Board of Directors, the Management Board, and the Director General of the Company and preliminarily evaluate such nominees; Develop proposals to define material terms and conditions of contracts with members ATTEN- DANCE RATE, % IN-PERSON MEETINGS NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER IN PERSON of the Board of Directors, members of the Management Board, and the Director General of the Company; Develop principles and criteria of remuneration for members of the Board of Directors, members of the Management Board, the Director General of the Company, the management organization, or the manager; Regularly evaluate the activities of the Director General of the Company (the management organization or the manager) and NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER BY BALLOT ATTENDANCE RATE, %. S. O. Ashirov (out of ) 00 (out of ) (out of ) V. M. Belov (out of ) 00 (out of ) 0 (out of ) A. S. Kalinin 5 (out of 5) 00 4 (out of 6) (out of 6) A. A. Makarov 5 (out of 5) 00 (out of 6) 5 (out of 6) S. N. Mironosetsky (out of 4) 75 0 (out of 4) (out of 4) 0 50 PARTICI- PATION RATE % members of the Management Board and prepare proposals to the Board of Directors of the Company as to whether they can be reappointed; Develop principles and criteria related to remuneration for the Chairman and members of the Internal Audit Commission of the Company; Formulate recommendations for the formation of the personnel reserve of the Company and SDCs. Subjects of the Issues Considered by the Audit Committee (%) 5% 0% 4% 5% 4% % Accounting (financial) statements Operating reliability and effectiveness of the internal control, risk management, and corporate governance systems Internal audit functions External audit and the selection of the external auditor System of combating misconduct on the part of employees and third parties Other Further information can be found in Section 6.5 of the Appendix to the Annual Report. MEMBERS OF THE NOMINATION AND REMUNERATION COMMITTEE The current members of the Committee were appointed by the decision adopted by the Board of Directors on August 5, 05 (Minutes of the Meeting No. 98) : NO. NAME POSITION AS OF THE TIME OF ELECTION. ALEXANDER SERGEYEVICH KALININ (INDEPENDENT DIRECTOR) Chairman of the Committee, member of the Board of Directors, ROSSETI, First Vice President, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business. STANISLAV OLEGOVICH ASHIROV Member of the Board of Directors, ROSSETI, Director General, Mezhregionenergosbyt. VASILY MIKHAILOVICH BELOV (INDEPENDENT DIRECTOR) 4. ALEXEI ALEKSANDROVICH MAKAROV (INDEPENDENT DIRECTOR) Member of the Board of Directors, ROSSETI, Senior Vice-President for Innovations, Non-Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies Member of the Board of Directors, ROSSETI, Academician, Russian Academy of Sciences 5. OLEG ROMANOVICH FYODOROV Member of the Board of Directors, ROSSETI, member of the Supervisory Board, ALROSA Acts in accordance with the Committee Regulations approved by the Board of Directors of ROSSETI on October, 0 (Minutes of the Meeting No. 7). In accordance with the Road Map, in order to align the Regulations for the Nomination and Remuneration Committee with the recommendations contained in the Corporate Governance Code and the requirements set forth in the Listing Rules, the Company formulated and received prior approval from the Moscow Exchange for a restated version of the Regulations for the Nomination and Remuneration Committee of the Board of Directors of ROSSETI, scheduled for approval in 06; The Committee s members served before August 5, 05 are specified in Section 6. of the Appendix to the Annual Report; Due to the acquisition of LENENERGO shares performed by the Company on December, 05 pursuant to the Ordinance of the Government of the Russian Federation No. 770r of October 0, 05, A.S. Kalinin ceased to meet independence criteria. 6 7

62 . Management Bodies n 05, the Committee s current members adopted decisions on nine issues documented in three meeting minutes, including four issues considered at one in-person meeting and two meeting minutes containing decisions on five issues that were addressed at absentee meetings with voting by ballot. THE COMMITTEE CONSIDERED THE FOLLOWING PRINCIPAL ISSUES RELATED TO THE COMPANY S ACTIVITIES > > Approval of the Technique for Calculating and Evaluating the KPI of the Director General of the Company for 05; ON THE MEETINGS ATTENDED BY THE MEMBERS OF THE NOMINATION AND REMUNERATION COMMITTEE ABSENTEE MEETINGS NO. NAME OF THE COMMITTEE S MEMBER NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER ATTEN- DANCE RATE, % IN-PERSON MEETINGS NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER IN PERSON NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER BY BALLOT > > Organizational structure of PJSC ROSSETI s executive arm. Further information can be found in Section 6.5 of the Appendix to the Annual Report. ATTENDANCE RATE, %. A. S. Kalinin (out of ) 00 (out of ) 0 (out of ) S. O. Ashirov (out of ) 00 (out of ) 0 (out of ) V. M. Belov (out of ) 50 0 (out of ) (out of ) 0 00 PARTICI- PATION RATE % Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee of the Company s Board of Directors The goal of the Committee is to assist the Board of Directors of the Company in performing its functions related to ensuring the implementation of the Company s investment and technical policies, reliability assurance, energy efficiency, and innovative development of the Company. THE PRINCIPAL OBJECTIVES OF THE COMMITTEE ARE AS FOLLOWS Analyze proposals and formulate recommendations for the Company s Board of Directors with respect to the implementation of the investment and technical policies, reliability assurance, energy efficiency, and innovative development of the Company; Monitor the implementation of: the consolidated investment program of the Company; the Annual Comprehensive Procurement Program of the Company s SDCs with respect to large investees; the Consolidated Innovative Development Program of the Company; the Consolidated Energy Conservation and Energy Efficiency Enhancement Program of the Company; the Regulations for the Uniform Technical Policy of ROSSETI in the Distribution Grid Sector. Analyze proposals and formulate recommendations for the Company s Board of Directors with respect to the preparation of and amendments to internal corporate documents (standards, codes, regulations, procedures, forms) in relation to the investment and technical activities, reliability assurance, energy efficiency, and innovative development of the Company; Analyze applicable regulatory documents and formulate recommendations for the Company s Board of Directors with respect to the implementation of the investment and technical policies, reliability assurance, energy efficiency, and innovative development of the Company. 4. A. A. Makarov (out of ) 00 (out of ) 0 (out of ) O. R. Fyodorov (out of ) 50 0 (out of ) (out of ) 0 00 Subjects of the Issues Considered by the Nomination and Remuneration Committee in 05 Organizational matters related to the Committee s work KPI reports Incentives for senior managers Implementation of instructions issued by the Board of Directors Organizational structure Reports of the Committee ISSUES WERE CONSIDERED BY THE NOMINATION AND REMUNERATION COMMITTEE IN 05, DOCUMENTED IN FIVE MEETING MINUTES, INCLUDING FOUR ISSUES CONSIDERED AT ONE IN-PERSON MEETING AND FOUR MEETING MINUTES CONTAINING DECISIONS ON EIGHT ISSUES ADDRESSED AT ABSENTEE MEETINGS WITH VOTING BY BALLOT MEMBERS OF THE INVESTMENT, TECHNICAL POLICY, RELIABILITY, ENERGY EFFICIENCY, AND INNOVATION COMMITTEE The current members of the Committee were appointed by the decision adopted by the Board of Directors on August 5, 05 (Minutes of the Meeting No. 98) : NO. NAME POSITION AS OF THE TIME OF ELECTION. BORIS ILYICH AYUYEV Chairman of the Committee, member of the Board of Directors, ROSSETI, Chairman of the Management Board, SO UPS. OLEG GENNADYEVICH BARKIN Member of the Board of Directors, ROSSETI, Deputy Chairman of the Board, NP Market Council. VASILY MIKHAILOVICH BELOV (INDEPENDENT DIRECTOR) Member of the Board of Directors, ROSSETI, Senior Vice-President for Innovations, Non-Profit Organization the Fund for Development of the Center for Elaboration and Commercialization of New Technologies 4. ROMAN NIKOLAEVICH BERDNIKOV Member of the Management Board and First Deputy Director General for Technical Policy, ROSSETI 5. YURI YEFIMOVICH DOLIN Deputy Director General for Capital Construction, Gazprom Energoholding 6. VASILY NIKOLAYEVICH KISELYOV 7. MIKHAIL ALEKSANDROVICH KOLESNIKOV Chairman of the Council of Customers of the Government Commission on the Development of the Electric Power Industry Member of the Presidium and Head of the Electric Power Committee, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business 8. VIKTOR VASILYEVICH KUDRYAVY Advisor to President on Energy and Gas Supply and Long-Term Development, EUROCEMENT Group 9. ALEKSEY VALERYEVICH MOLSKY Deputy Chairman of the Management Board, FGC UES 0. YURI VLADIMIROVICH OSOKIN Member of the Presidium, OPORA RUSSIA. PAVEL NIKOLAYEVICH SNIKKARS Director of the Electric Power Industry Development Department, Ministry of Energy of the Russian Federation. ALEXANDER VIKTOROVICH SHEVCHUK Executive Director, Investor Protection Association The Investment Committee of the Board of Directors of ROSSETI was established pursuant to the decision adopted by the Board of Directors of ROSSETI on October, 00 (Minutes of the Meeting No. 46). As resolved by the Board of Directors of ROSSETI on February 7, 0 (Minutes of the Meeting No. 75), the Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee of the Board of Directors of ROSSETI was established; The Committee s members served before August 5, 05 are specified in Section 6. of the Appendix to the Annual Report. 8 9

63 . Management Bodies ON THE MEETINGS ATTENDED BY THE MEMBERS OF THE COMMITTEE Corporate Secretary of ROSSETI ABSENTEE MEETINGS IN-PERSON MEETINGS NO. NAME OF THE COMMITTEE S MEMBER NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER ATTEN- DANCE RATE, % NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER IN PERSON NUMBER OF MEETINGS ATTENDED BY THE COMMITTEE S MEMBER BY BALLOT ATTENDANCE RATE, %. BORIS ILYICH AYUYEV (out of ) 00 (out of ) (out of ) 00. OLEG GENNADYEVICH BARKIN. VASILY MIKHAILOVICH BELOV 4. ROMAN NIKOLAEVICH BERDNIKOV (out of ) 67 (out of ) (out of ) (out of ) 67 (out of ) (out of ) 67 (out of ) 00 (out of ) (out of ) YURI YEFIMOVICH DOLIN (out of ) 00 (out of ) (out of ) VASILY NIKOLAYEVICH KISELYOV 7. MIKHAIL ALEKSANDROVICH KOLESNIKOV 8. VIKTOR VASILYEVICH KUDRYAVY 9. ALEKSEY VALERYEVICH MOLSKY 0. YURI VLADIMIROVICH OSOKIN. PAVEL NIKOLAYEVICH SNIKKARS. ALEXANDER VIKTOROVICH SHEVCHUK In the period specified above, the Committee s members listed above held six (6) meetings, including three () in absentia and three () in person. KEY ISSUES CONSIDERED BY THE COMMITTEE > > Approval of a restated version of the Investment Policy of PJSC ROSSETI; > > Approval of the Unified Energy Conservation and Energy Efficiency (out of ) 00 (out of ) (out of ) (out of ) 00 (out of ) (out of ) 67 (out of ) 00 (out of ) 0 (out of ) (out of ) (out of ) (out of ) (out of ) 67 (out of ) (out of ) 00 (out of ) 00 (out of ) (out of ) (out of ) 67 (out of ) 0 (out of ) Enhancement Program of PJSC ROSSETI for 05 09; > > Approval of the Regulations for the Procedure for Formulating and Implementing the Innovative Development Program of PJSC ROSSETI. Further information can be found in Section 6.5 of the Appendix to the Annual Report. 7 PARTICI- PATION RATE % MEETINGS WERE HELD BY THE COMMITTEE IN 05, INCLUDING THREE IN-PERSON MEETINGS The Corporate Secretary is accountable and answerable to the Company s Board of Directors, which approves the performance report of the Corporate Secretary and evaluates the Corporate Secretary s performance. The Corporate Secretary acts in close contact and cooperation with all divisions of the Company. THE CORPORATE SECRETARY PERFORMS THE FOLLOWING FUNCTIONS provide organizational support for the work of the Company s Board of Directors; participate in preparing reference information and advising members of the Company s Board of Directors and executive bodies and the Company s shareholders on corporate law and governance; participate in the organization of monitoring compliance with the requirements of corporate laws, the Company s Articles of Association and internal documents and monitor the protection of shareholders rights and interests while the Company s management bodies make decisions; inform the Board of Directors of any identified noncompliance with the provisions of the Company s internal documents if compliance therewith relates to the Corporate Secretary s functions; participate in the organization of preparing and holding the Gene ral Meeting of Shareholders; participate in providing organizational support for the committees of the Board of Directors; provide organizational support for monitoring the implementation of decisions adopted by the General Meeting of Shareholders and the Board of Directors and recommendations provided by the committees of the Board of Directors for executive bodies; participate in the implementation of the Company s policy on the disclosure of information and ensure compliance with legal requirements and the Company s internal documents with respect to the disclosure of information; participate in implementing the procedures prescribed by law and the Company s internal documents to ensure the protection of the rights and legitimate interests of shareholders and in monitoring their implementation; participate in improving the system and practices of the Company s corporate governance, prepare proposals within his or her competence, and organize the implementation of decisions adopted by the Board of Directors with respect to the development of corporate governance practices in the Company; participate in the organization of the Company s interaction with shareholders; participate in the organization of the Company s interaction with regulatory authorities, securities trading institutors, the registrar, and other professional securities market participants within the powers assigned to the Corporate Secretary; decide on other issues as instructed by the Board of Directors of the Company within his or her competence. The Corporate Secretary s activities are governed by the Articles of Association and internal documents of ROSSETI. NATALIA NIKOLAYEVNA BARANYUK WAS ELECTED CORPORATE SECRETARY OF ROSSETI IN NOVEMBER 05 0

64 . Management Bodies Executive bodies Budargin Oleg Mikhailovich Director General, Chairman of the Management Board, ROSSETI Sole Executive Body The Director General of the Company is in charge of the Company s day-to-day activities pursuant to decisions adopted by the General Meeting of Shareholders and the Board of Directors of the Company within their competence. The competence of the Director General of the Company includes all matters related to the management of the Company s day-to-day activities, except for any issues falling within the competence of the General Meeting of Shareholders, the Board of Directors, or the Management Board of the Company. On june 4, 0, the Board of directors of ROSSETI resolved to appoint Oleg Mikhailovich Budargin as the Director General of ROSSETI BUDARGIN Oleg Mikhailovich Director General, Chairman of the Management Board, ROSSETI BORN on November 6, 960. EDUCATION: Oleg Budargin graduated with honors from the Norilsk Industrial Institute, majoring in Industrial and Civil Construction. He started his career in 984 as a foreman of the Construction Directorate of the Shaft Sinking Division of Norilsk Mining-and-Metallurgical Integrated Works; later, he was appointed as the Deputy Head of the Production Department of Norilskstroy; and in 995, he took up his position as Deputy Director General of Norilsk Mining-and- Metallurgical Integrated Works. He was the Head of the Norilsk Municipality from 000 and the Governor of the Taimyr (Dolgano-Nenets) Autonomous District from 00. From 009, he is the Chairman of the Management Board of FGC UES. In June 0, he was appointed as the Director General of ROSSETI. He is a member of the Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security of the Russian Federation. He is Vice Chair, Responsibility for Regional Development, of the World Energy Council (WEC). Collegial Executive Body The Management Board of ROSSETI acts in accordance with the Regulations for the Management Board approved by the Annual General Meeting of Shareholders of ROSSETI on June 0, 05. The Management Board of the Company is a collegial executive body of the Company, acts to the benefit of the Company s shareholders, follows decisions of the General Meeting of Shareholders and the Board of Directors of the Company, and acts in accordance with the laws of the Russian Federation, the Articles of Association of the Company, other internal documents of the Company, and the Regulations. COMPETENCE OF THE MANAGEMENT BOARD Develop the priority areas of the Company s activities and longterm implementation plans and submit them for approval by the Board of Directors; Prepare a report on the Company s financial and economic activities and on the organization, functioning, and effectiveness of the Company s risk management and internal control system; Unless, pursuant to the Procedure for Interaction of ROSSETI with the Economic Entities Whose Shares (Stakes) Are Owned by ROSSETI, the Company s Board of Directors shall decide on such issues. Exercise the powers of general meetings of shareholders (members) of the Company s whollyowned SDCs; Nominate persons as chairmen of boards of directors, sole executive bodies, and the Company s representatives on boards of directors and in internal audit commissions of organizations of any legal form of ownership in which the Company participates (except where the functions of general meetings of shareholders of SDCs are performed by the Company s Management Board and except where (with respect to nominating persons as chairmen of boards of directors and sole executive bodies of SDCs) the size of any stake (interest) held by the Company in SDCs or the number of votes of any nonprofit organizations to which the Company is entitled does not allow the Company to influence the decisions adopted by SDCs or nonprofit organizations management bodies on the election of chairmen of boards of directors and sole executive bodies of SDCs and nonprofit organizations from among the persons nominated by the Company); Define the position of the Company (the Company s representatives), including the instructions to vote or not to vote on any issues on the agendas of general meetings of shareholders and meetings of boards of directors of SDCs Resolve other issues related to the Company s activities pursuant to decisions adopted by the General Meeting of Shareholders or the Board of Directors, and other issues submitted by the Company s Director General for its review. The number of the members of the Management Board is determined by the decision adopted by the Company s Board of Directors at the suggestion of the Company s Director General. The Director General of the Company submits any nomination for a member of the Management Board for review by the Board of Directors, except for his/her own nomination. The members of the Management Board, including the Director General, are elected and their powers are terminated earlier by the Board of Directors of the Company. REGULATIONS FOR THE MANAGEMENT BOARD OF PJSK ROSSETI OLEG BUDARGIN HAS GOVERNMENTAL AND SECTORAL AWARDS.

65 . Management Bodies Members of the Management Board EDUCATION: HIGHER EDUCATION, CANDIDATE OF SCIENCE (ECONOMICS) > > 98 Norilsk Industrial Institute, majoring in Industrial and Civil Construction. POSITIONS HELD OVER THE PAST 5 YEARS: > > Chairman of the Management Board, FGC UES > > 0 present Chairman of the Management Board, ROSSETI > > 0 present Director General, ROSSETI. Oleg Mikhailovich Budargin Chairman of the Management Board, Director General, ROSSETI YEAR OF BIRTH: 960 MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 00 0 Member of the Board of Directors, Energy Forecasting Agency > > 00 present Member of the Board of Directors, FGC UES > > 0 present Member of the Supervisory Board, Russian Regional Development Bank > > 0 05 Member of the Board of Directors, Inter RAO > > 0 present Chairman of the Supervisory Board, Association of Solar Energy Enterprises Nonprofit Partnership > > 0 0 Chairman of the Board of Directors, Kubanenergo > > 0 present Chairman of the Board of Directors, MOESK > > 0 0 Chairman of the Board of Directors, IDGC of Siberia EDUCATION: HIGHER EDUCATION > > 998 Moscow Power Engineering Institute (Technical University), majoring in Power Plants POSITIONS HELD OVER THE PAST 5 YEARS: > > Member of the Management Board, FGC UES > > 00 0 Deputy Chairman of the Management Board, FGC UES > > 0 0 First Deputy Chairman of the Management Board FGC UES > > First Deputy Executive Director, IDGC Holding (from April 4, 0, JSC ROSSETI; from July 7, 05, PJSC ROSSETI) > > 0 present Member of the Management Board, ROSSETI > > 0 05 First Deputy Director General for Technical Policy, ROSSETI > > 05 present First Deputy Director General, ROSSETI > > 05 present Acting Director General and Chairman of the MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > Member of the Supervisory Board, GruzRosenergo > > 00 0 Member of the Board of Directors, ENIN. Roman Nikolaevich Berdnikov Member of the Management Board, First Deputy Director General, ROSSETI YEAR OF BIRTH: 97 > > 0 04 Member of the Supervisory Board, NP Market Council EDUCATION: HIGHER EDUCATION, MASTER OF ECONOMICS > > 996 Institute of Asian and African Studies, Lomonosov Moscow State University > > 000 Finance Academy under the Government of the Russian Federation, majoring in Economics POSITIONS HELD OVER THE PAST 5 YEARS:. Nikolay Nikolayevich Varlamov Member of the Management Board, Deputy General Director Chief of Staff, ROSSETI YEAR OF BIRTH: 974 > > Secretary of State and Deputy Head, Federal Service for Financial Monitoring > > 0 0 Deputy Chairman of the Management Board, FGC UES > > 0 0 Member of the Management Board, FGC UES > > 0 05 Deputy General Director of the Internal Audit and Control, ROSSETI > > 05 present Deputy Director General and Head of the Administrative Office, ROSSETI MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 0 05 Member of the Board of Directors, IDGC of Northern Caucasus > > 0 present Member of the Board of Directors, IDGC of Center and Volga Region Shares held in the Company and the Company s SDCs,%: none EDUCATION: HIGHER EDUCATION > > 996 Zaporozhye State University, majoring in Applied Mathematics > > 999 Zaporozhye Institute of Economics and Information Technologies, majoring in Finance POSITIONS HELD OVER THE PAST 5 YEARS: > > Member of the Management Board, FGC UES > > 00 0 Advisor to the Director General, Mezhregionsbyt > > 0 0 Advisor to the Chairman of the Management Board, FGC UES > > 0 05 First Deputy Director General for Economic Affairs and Finance, ROSSETI > > 0 present Member of the Management Board, ROSSETI MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > 0 05 Member of the Board of Directors, Tyumenenergo > > 0 04 Chairman of the Board of Directors, TDC > > 0 05 Member of the Board of Directors, FEEMC 4. Andrey Aleksandrovich Dyomin Member of the Management YEAR OF BIRTH: 974 > > 04 present Member of the Board of Directors, MOESK > > 04 present Member of the Board of Directors, FGC UES > > 0 present Member of the Supervisory Board, North-Caucasus Federal University > > 0 present Member of the Board of Trustees, member of the Scientific Council, Moscow Power Engineering Institute (National Research University) > > 0 present Member of the Board and Vice President for Environmental Issues, Association of Polar Explorers > > 0 present Member of the Board of Directors, ROSSETI > > 0 present Vice Chair, Responsibility for Regional Development, World Energy Council (WEC) > > 0 present Member of the Board of Trustees, Mariinsky Theatre and Primorsky Opera and Ballet Theater > > 04 present Member of the Board of Trustees, Primorsky Opera and Ballet Theater > > 04 present Chairman of the Board of Directors, FTC > > 0 present Member of the Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security of the Russian Federation Shares held in the Company and the Company s SDCs,%: % of share capital of ( % of ordinary shares) FGC UES > > 0 04 Member of the Board of Directors, EnergoRynok > > 0 0 Member of the Board of Directors, Tyumenenergo > > 0 0 Member of the Board of Directors, IDGC of Urals > > 0 0 Member of the Board of Directors, IDGC of Northern Caucasus > > 0 04 Member of the Board of Directors, IDGC of Siberia > > 0 present Member of the Presidium, Russian National Committee of the Council on Large Electric Systems (CIGRE) > > 0 present Member of the Supervisory Board, Noncommercial Partnership of Territorial Power Grid Organizations > > 0 present Chairman of the Supervisory Board, Scientific and Technical Council of Unified Energy System Non-profit Partnership > > 04 present Member of the Supervisory Board, Engineering Center UES Real Estate > > 04 present Member of the Board of Directors, FTC Shares held in the Company and the Company s SDCs,%: % of share capital of ( % of ordinary shares) FGC UES Shares held in the Company and the Company s SDCs,%: none 4 5

66 . Management Bodies 5. Valentin Yefimovich Mezhevich STATISTICS ON THE MEETINGS HELD BY THE MANAGEMENT BOARD OF THE COMPANY IN 0 05 EDUCATION: HIGHER EDUCATION, CANDIDATE OF SCIENCE (ENGINEERING) > > 970 Irkutsk Polytechnic Institute, majoring in Thermal Power Plant > > 99 Leningrad Polytechnic Institute, Candidate of Science (Engineering) POSITIONS HELD OVER THE PAST 5 YEARS: > > 00 0 Member of the Federation Council, First Deputy Chairman of the Committee on Economic Policy, Federation Council of the Federal Assembly of the Russian Federation > > 0 04 Deputy Director General for Strategic Communications, ROSSETI > > 0 present Member of the Management Board, ROSSETI > > 04 present Chief Advisor, ROSSETI Member of the Management Board, Chief Advisor, PJSC ROSSETI YEAR OF BIRTH: 947 MEMBERSHIP IN MANAGEMENT BODIES OF OTHER CORPORATE ENTITIES: > > Deputy Chairman of the Supervisory Board, NP Market Council > > Member of the Board of Directors, IDGC of Northern Caucasus > > Member of the Board of Directors, IDGC of Siberia > > Member of the Board of Directors, Kubanenergo > > 05 present Member of the Board of Directors, IDGC of Volga > > 05 present Member of the Board of Directors, Tyumenenergo Shares held in the Company and the Company s SDCs,%: none System and Criteria of Remuneration for Members of the Management Board The pay system for ROSSETI s senior managers is governed by the Regulations for Financial Incentives for Senior Managers approved by the Board of Directors of the Company and includes the fixed and variable parts of pay Number of meetings in the period, including: 4 85 in person in absentia Number of issues considered, including: in person in absentia 57 0 REMUNERATION PAID TO MEMBERS OF THE MANAGEMENT BOARD IN 05 (MILLION RUBLES) TYPE OF REMUNERATION Remuneration for participation in the work of the management body/financial and economic control body AMOUNT OF REMUNERATION 6.8 Salary 9.4 Bonuses 8.67 Commission fees 0 Benefits 0 Other remuneration 5. CHANGES IN THE COMPOSITION ON MEETINGS TOTAL.4 OF THE MANAGEMENT BOARD OF THE MANAGEMENT BOARD As resolved by the Board of Directors on August 5, 05 (Minutes of the Meeting No. 98), the powers of Dan Mikhailovich Belenky as a member of the Management Board of ROSSETI were terminated, and Nikolay Nikolayevich Varlamov, Deputy Director General and Head of the Administrative Office of ROSSETI, was elected to the Management Board of ROSSETI. From January 05 to August 05, the Management Board of the Company held 7 meetings, including in person. In 05, the current members the Management Board held 6 meetings, including in absentia. The variable part of remuneration for this category of managers is paid on the basis of performance evaluation for a quarter and year and depends on attained key performance indicators, the composition, calculation technique, and target values of which are approved by the Board of Directors of ROSSETI according to the goals of the Strategy for Development of the Electric Grid Sector of the Russian Federation and the Long- Term Development Program of the Company. 6 7

67 . Control Bodies Control Bodies Internal Audit Commission The Internal Audit Commission is a standing elected body responsible for internal control within the Company, acts to the benefit of the Company s shareholders and is accountable to the General Meeting of Shareholders of the Company. PRINCIPAL OBJECTIVES Conduct audits of the financial and economic activities; Make an independent assessment of reliability of information contained in the Company s annual report and annual accounting statements; Ensure supervision of the compliance of the Company s financial and economic transactions with the laws of the Russian Federation and the Articles of Association of the Company; Inform about any noncompliance of the Company s financial and economic activities with the accounting and financial reporting procedure prescribed by legal regulations of the Russian Federation and with legal regulations of the Russian Federation; Make proposals/recommendations for the improvement of efficiency of the Company s assets management, improvement of the risk management and internal control system; Implement control over the remedying of faults and carrying out of the recommendations set forth in the reports based on the results of previous audits (inspections). MEMBERS OF THE INTERNAL AUDIT COMMISSION The following members were elected by the Annual General Meeting of Shareholders on June 0, 05: NAME POSITION Andrey Nikolayevich Kharin (Chairman) Polina Sergeyevna Tsodikova Vladimir Vasilyevich Khvorov Andrey Ivanovich Yudin Deputy Director, Department for Corporate Governance, Price Conditions and Auditing in Fuel and Energy Industry Branches, Ministry of Energy of the Russian Federation Advisor, Internal Control Division, Federal Agency for State Property Management of the Russian Federation Lead Expert of the Division, Ministry of Economic Development of the Russian Federation Head of the Auditing Unit, Ministry of Energy of the Russian Federation REMUNERATION PAID TO MEMBERS OF THE INTERNAL AUDIT COMMISSION IN 05 (RUB) NAME INTERNAL AUDIT COMMISSIONS OF SDCS The internal audit commissions of the ROSSETI Group s entities act in accordance with the Federal Law On Joint- Stock Companies, the articles of association of SDCs, and the regulations for the internal audit commissions of SDCs in compliance with the Model Regulations for the Internal Audit Commission approved for ROSSETI s subsidiaries and dependent companies by the Management Board of the Company. EXTERNAL AUDITOR The external auditor was selected in accordance with the following procedure: > > the bidding documents for auditor selection were approved by the Board of Directors of the Company ; > > based on the results of a public bidding procedure for the right to enter into the agreement to conduct a mandatory annual audit of the statements of the Company for (IFRS and RAS), RSM RUS was selected as the preferred bidder ; AMOUNT Alan Fyodorovich Khadziev 477,900 Astkhik Artashesovna Bashindzhagyan 8,600 Vladimir Yulianovich Skobarev 8,600 Vladimir Vasilyevich Khvorov 8,600 TOTAL,4,700 > > the Board of Directors of the Company 4 resolved to recommend RSM RUS as the auditor; > > the Annual General Meeting of Shareholders of ROSSETI approved on June 0, 05, RSM RUS as the Company s auditor. RSM RUS is a member of RSM International and ranks among Russia s largest accounting firms. RSM RUS is also a member of a self-regulatory organization of auditors, Auditor Association Sodruzhestvo Non-profit Partnership 5. RSM RUS s fee for the mandatory annual audit of the statements of the Company for 05 (IFRS and RAS) is five million (5,000,000) rubles, inclusive of VAT. RSM RUS has not provided the Company with any services other than audit services. The mandatory annual audit of the statements for 04 (IFRS and RAS) was conducted by Ernst & Young LLC. Ernst & Young LLC was paid a fee of seven million, eighty thousand (7,080,000) rubles, inclusive of VAT. Auditor for the mandatory annual statements for 05 (IFRS and RAS) RSM RUS Minutes of the Meeting No. of March, 04; Minutes of the Meeting No. 76 of February 6, 05; Minutes of the Meeting of the Bidding Commission No of April 7, 05; 4 Minutes of the Meeting No. 89 of May 7, 05; 5 Resolution of the Management Board of Auditor Association Sodruzhestvo of September 5, 0; Certificate of Membership No Igor Vladimirovich Shmakov Head of the Directorate for Internal Audit, ROSSETI The positions specified are as of the time of election. 8 9

68 . Internal Control and Risk Management Systems Internal Control and Risk Management Systems IN 05, THE COMPANY UPDATED THE INTERNAL CONTROL POLICY OF ROSSETI AND THE MODEL INTERNAL Organizing reliable internal control and building up a sound system of risk management is one of the most important conditions for ensuring the stable and efficient operation of the Company and protecting the interests of its shareholders and investors. THE ROSSETI GROUP SET UP AND DEVELOPS THE INTERNAL CONTROL SYSTEM TO ACHIEVE THE FOLLOWING GOALS: CONTROL POLICY FOR ROSSETI SDCS IN ORDER TO BRING THEM INTO LINE WITH OTHER INTERNAL DOCUMENTS FORMULATED PURSUANT TO INSTRUCTIONS OF THE PRESIDENT OF THE RUSSIAN FEDERATION, DIRECTIVES OF THE GOVERNMENT OF THE RUSSIAN FEDERATION AND ENSURE COMPLIANCE WITH THE PROVISIONS OF THE CORPORATE GOVERNANCE CODE RECOMMENDED BY THE BANK Ensure efficiency and productivity of organizing the Company s and its SDCs activities; safeguard assets Ensure compliance with the applicable legal requirements and local regulatory documents, including in economic events and business accounting THE IMPROVEMENT OF INTERNAL CONTROL SYSTEM IS REALIZED ON ALL LEVELS AND CONTROL DIRECTIONS: PREVENTIVE (PROACTIVE) CONTROL Building effective internal control system, including: verifying the adequacy of control procedures to prevent or reduce the impact of risks and achieve the objectives of business processes, development and implementation of control procedures ROUTINE CONTROL Implementation of embedded in business processes internal control procedures, aimed at achieving the goals of business processes Ensure the reliability and timeliness of accounting (financial) and other reporting FOLLOW-UP CONTROL Internal audit, the auditing control of reliability of reporting, safeguarding of assets, compliance monitoring, external audit, self-assessment Internal Control System In accordance with the COSO internal control integrated framework, the ROSSETI Group builds the control environment, operates the risk assessment system, carries out control procedures applied continuously to all processes (areas of activities) at all management levels, and monitors internal control The internal control system is part of the general management system and covers all areas of the Group s activities. The effectiveness of the internal control system relies on the interrelationship of the following constituent management processes: > > Organization of effective internal control over business processes; > > Risk management; > > Internal audit and independent evaluation; OF RUSSIA In order to prevent abuses and misconduct, the ROSSETI Group requires that counterparties unconditionally disclose their entire owner chain and launched an online whistleblower reporting channel via its corporate website and a whistleblower hotline for allegations of corruption. The Company also formulated and updated standard documents relating to personnel recruitment, evaluation, rotation, promotion, and motivation. Further information is contained in Section 6. of the Appendix to the Annual Report. No. Pr 0 of December 7, 04; No. 984p P of June 4, 05; > > Auditorial control. No. 06 5/46 of April 0, 04. 0

69 . Internal Control and Risk Management Systems Internal control system participants; their authority and responsibilities The roles of participants in the internal control system SUBORDINATE INTERNAL AUDIT COMMISSION APPROVING LOCAL REGULATORY DOCUMENTS ENSURING THE FUNCTIONING OF THE INTERNAL CONTROL SYSTEM INFORMING APPROVING POLICY AND INTERNAL DOCUMENTS INSPECT THE INTERNAL CONTROL SYSTEM PROPOSALS FOR THE INTERNAL CONTROL SYSTEM IMPROVEMENT RECOMMENDATIONS FOR THE INTERNAL CONTROL SYSTEM IMPROVEMENT DIVISIONS SHAREHOLDERS SUBORDINATE BOARD OF DIRECTORS (COMMITTEES) EXECUTIVE BODIES INTERNAL CONTROL DIVISION METHODOLOGY SDCS REPORTS SUBORDINATE SUGGESTIONS FOR THE INTERNAL CONTROL SYSTEM IMPROVEMENT INFORMING RECOMMENDATIONS FOR THE INTERNAL CONTROL SYSTEM IMPROVEMENT INTERNAL AUDIT DIVISION INTERACTION BETWEEN THE COMPANY AND ITS SDCS UNDER SHAREHOLDERS REGULATION PARTICIPANT IN THE INTERNAL CONTROL SYSTEM Internal Audit Commission Board of Directors Audit Committee of the Board of Directors Other committees of the Board of Directors Executive bodies Divisions Internal control division THE COMPETENCE > Exercise control of financial and economic activities; > Prepare proposals/recommendations to improve the internal control system; > Make an independent assessment of the reliability of information contained in the annual report and annual accounting statements. > Approve internal documents defining the organization and the development and improvement strategy of the internal control system; > Approve the Internal Control Policy containing the principles of and approaches to the organization of the internal control system; > Control the activities of executive bodies in the principal (high-priority) areas; > Review the results of the evaluation of internal control system effectiveness on an annual basis. > Carry out a preliminary review of internal documents defining the organization and the development and improvement strategy of the internal control system, the Internal Control Policy, and subsequent amendments thereto; > Carry out a preliminary review of the results of the evaluation of internal control system effectiveness based on the internal auditor s report on internal control system effectiveness and based on reports on the findings of external independent evaluation and prepare proposals and recommendations to improve the internal control system; > Oversee the reliability and effectiveness of the internal control system as related to supervising the reliability of accounting (financial) statements, selecting the external auditor and conducting the external audit, and ensuring compliance with regulatory and legal requirements and as related to analyzing and assessing the implementation of the Internal Control Policy. Oversee the attainment of prescribed financial and operational indicators, compliance with the applicable laws, compliance with the rules and procedures set forth in local regulatory documents, and the reliability and timeliness of reporting within their competence specified by the Board of Directors Ensure the effective internal control system is created and kept in working order, including: > defining the areas and plans of developing and improving the internal control system; > approving regulatory and methodological documents relating to the organization and functioning of the internal control system within their competence; > ensuring the implementation of action plans; > preparing and submitting for consideration by the Board of Directors reports on financial and economic activities and on the organization, functioning, and effectiveness of the risk management and internal control systems. > Implement the principles of the internal control system; > Organize and regulate the building of effective processes (areas of activities), including using identified risks to develop and implement new control procedures or change existing control procedures; > Carry out control procedures; > Perform self-assessment in relation to supervised processes (areas of activities) and initiate the improvement of control procedures; > Correct discovered deficiencies in control procedures and processes (areas of activities). > Develop basic and methodological documents and ensure their implementation in relation to building up and improving the internal control system; > Assist management in building the control environment and formulate recommendations for the description of control procedures and their introduction into processes (areas of activities) and for the assignment of responsibilities to officers; > Coordinate measures to maintain and monitor the intended state of the internal control system; > Prepare information on the state of the internal control system for stakeholders. PRINCIPAL INTERNAL DOCUMENTS SPECIFYING THE FUNCTIONS Articles of Association, Internal Control Policy, Regulations for the Internal Audit Commission Articles of Association, Internal Control Policy Internal Control Policy, Regulations for the Audit Committee Internal Control Policy, committee regulations Articles of Association, Internal Control Policy Internal Control Policy, division regulations Internal Control Policy, regulations for the internal control division Internal audit division > Prepare recommendations based on the internal audit results to improve control procedures, specific components (elements) of internal control and the internal control system; > Make the internal evaluation of internal control system effectiveness and provide recommendations to improve the efficiency and effectiveness of the internal control system. Internal Control Policy, Internal Audit Policy, regulations for the internal audit division

70 . Internal Control and Risk Management Systems Report on the Evaluation of Internal Control System Effectiveness The internal independent evaluation of internal control system effectiveness is made by: > > the internal audit division on an annual basis; > > the external independent consultants at least once every three years, depending on changes in the organizational activities and on the general level of the internal control system s development, reliability, and effectiveness. The Articles of Association of the Company and SDCs were amended in 05 to make the Board of Directors responsible for the annual review of the evaluation of internal control system effectiveness. The Directorate for Internal Audit of ROSSETI evaluated the effectiveness of ROSSETI s and SDCs internal control and risk management system for 04. As noted by the Audit Committee of the Board of Directors of ROSSETI, there were improvements in the development (maturity) level of internal control in 04, and the current maturity was Risk Management Pursuant to instructions of the Russian President and Government and the recommended guidelines issued by the Federal Agency for State Property Management, a restated version of the Risk Management Policy of ROSSETI was approved in 05 ROSSETI s risk management measures are aimed at ensuring that the Company achieves the goals set out in the Strategy for Development of the Electric found to be partially in conformity with the Moderate level (in accordance with the criteria established by the Strategy ). The Board of Directors reviewed the results of the evaluation. The internal auditor s report on the effectiveness evaluation of the internal control and risk management system and corporate governance of ROSSETI and ROSSETI SDCs for 05 was submitted for consideration by the Board of Directors of ROSSETI upon preliminary review by the Audit Committee of the Company s Board of Directors (Minutes of the Meeting No. 69 of May 4, 06). The external independent evaluation of the ROSSETI Group s internal control system in 04 and 05 was not made On June, 05, the Board of Directors of ROSSETI reviewed the report on the performance results for the schedule (road map) for implementing the Strategy for Developing and Improving the Internal Control System of ROSSETI and Subsidiaries and Dependent Companies of ROSSETI for 04; the similar report for 05 is submitted for review by the Board of Directors of ROSSETI in May 06. Grid Sector of the Russian Federation and the Long-Term Development Program and the Articles of Association of the Company and increasing the Company s enterprise value while keeping a balance between the interests of all stakeholders. Risk management measures apply to the level of ROSSETI and SDCs. TO EVALUATE THE STATE (MATURITY LEVEL) OF THE INTERNAL CONTROL SYSTEM IN ACCORDANCE WITH THE COSO CONCEPT, THE COMPANY USES THE CRITERIA ESTABLISHED BY THE STRATEGY 4 : SIX DEVELOPMENT (MATURITY) LEVELS OF THE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM FROM ZERO TO HIGH Detailed information about the measures carried out in 05 to improve the internal control and risk management system can be found in the Appendix to the Annual Report. In accordance with the Corporate Government Code, recommended by the Bank of Russia; Minutes of the Meeting of the Audit Committee No. 60 of June 5, 05; Minutes of the Meeting of the Board of Directors No. 9 of June 5, 05; 4 Strategy for Developing and Improving the Internal Control System of ROSSETI and Subsidiaries and Dependent Companies of ROSSETI, approved by the decision of the Board of Directors on the Management s initiative (Minutes of the Meeting No. 4 of February 0, 04). OBJECTIVES OF THE RISK MANAGEMENT SYSTEM Develop a Riskoriented Corporate culture Key Roles and Responsibilities of the Risk Management System Board of directors Board of directors authorized committee of the board of directors Internal audit commission Executive bodies: Management board director general Risk owners Officers responsible for risk management measures Risk management division Internal audit division Keep an optimal balance between the Preferred risk and the Development strategy Improve the Decisionmaking process for Risk response The basic principles of the risk management system are as follows > > Protect the Company s values and creation the conditions for the Company s development; > > Integrate the risk management process into the Company s overall management system. Risk management is part of the obligations of management and is incorporated into all organizational processes and into project and change management processes, including the Company s strategic development planning; > > Ensure the unity of risk management and decision making; > > Ensure that processes are systematic, structured, and timely; > > Ensure the continuity of information flows and the availability and completeness information; > > Ensure the adaptability of the system and its continuous development with due consideration to the necessity of meeting the new challenges arising from changes in the internal and external conditions of the Company s operations; > > Ensure the transparency of activities and protect the interests of stakeholders; Improve the Decisionmaking process for Risk response Identify and Manage the totality of risks in Economic activities > > Ensure that processes are dynamic, iterative (recurrent), and prompt (immediate response to changes in the situation); > > Ensure the adaptiveness of the system, enabling risk management to be improved at the same time as improving other management processes in the Company; > > Cause all participants to be responsible for risk management; > > Optimize the structure of the system, ensuring that decision making related to risk response is based on the comprehensive consideration of factors; > > Ensure the unity of the methodological framework for all of the Company s divisions, using unified approaches and standards developed and approved for the ROSSETI Group. The direct implementation of risk management procedures and the organization of the effective control environment of supervised processes (areas of activities) are entrusted to process owners, namely the managers of the Company s units and divisions. The Company periodically evaluates the current status of the risk management system: self-assessment; internal independent evaluation; external independent evaluation. In accordance with the approved Risk Management Policy, job descriptions, and applicable regulatory documents. 4 5

71 . Internal Control and Risk Management Systems Key Stages of the Risk Management Process Levels of Significance of risks MODERATE SIGNIFICANT CRITICAL GOAL SETTING RISK ASSESSMENT The ROSSETI Group s risk management measures are carried out in accordance with the Technique for Evaluating Operational Risks, which makes it possible to ensure the unity of approaches to their structuring, including their classification, risk assessment, and reporting on performance results. In order to improve the effectiveness of measures at all risk management stages, the ROSSETI Group introduced the technique for preparing comprehensive risk planning and management measures, the system of risk management system evaluation using a unified, systematic, and consistent approach, and the procedure and criteria for evaluation. Risk Management Map STRATEGIC RISKS > > Risks affecting the achievement of the goals set out in the Strategy for Development of the Electric Grid Sector of the Russian Federation and the Long- Term Development Program of ROSSETI; > > Risks of the most significant business planning processes. RISK IDENTIFICATION RISK TREATMENT (RESPONSE) OPERATIONAL RISKS > > Risks of the operational management of ROSSETI SDCs, having a significant impact on the attainment of the business plan targets, i.e. on the achievement of the goals of SDCs operations; > > Business process risks inherent in the basic and other business processes of ROSSETI SDCs engaged in electricity distribution. MACROECONOMIC AND OTHER RISKS Risks affecting the ROSSETI Group s general operating process and the Company s share value as defined by the Regulations for the Disclosure of Information by Issuers of Issue- Grade Securities approved by the Bank of Russia 4 : > > industry-specific risks; > > country and regional risks; > > financial risks; > > legal risks; > > reputational risks; > > strategic risks; > > risks associated with the issuer s activities; > > other risks. Risk Management Matrix Timely risk identification and assessment, management method selection, the timely development and organization of risk management measures, and the regular monitoring and timely communication of risk management results to the Company s executive bodies are entrusted to risk owners. Approved by Ordinance of ROSSETI No. 8r of July 0, 05; In accordance with Ordinance of ROSSETI No. 555r of November 0, 05; In accordance with Ordinance of ROSSETI No. 64r of December, 05; 4 No. 454 P of December 0, 04. Main Risks of the ROSSETI Group in 05 RISKS DESCRIPTION RISK MITIGATION MEASURES Financial Risks Risks associated with exchange rate changes Risks associated with interest rate changes Risks associated with the effects of inflation Risks associated with the possible liability of the issuer for third-party debts, including the issuer s Industry-Specific Risks Risk associated with the decreased volume of electricity distribution services Risk associated with failure to pay for provided electricity distribution services Tariff regulation risks Risks associated with taking on and subsequently transferring the supplier of last resort status These risks are involved in a possible rise in the Company s costs or a possible decrease in its revenues in the event of growth of the Russian ruble foreign exchange rates, including due to the purchase of foreign-made equipment, its repayment and maintenance. These risks are involved in a possible rise in SDCs costs if they need to borrow to finance capital investment programs. These risks are associated with the effect of a rise in the consumer price index on SDCs interest costs, profitability, and, consequently, the financial condition of the Company and SDCs and their ability to perform obligations. These risks are associated with the possible liability of the Company for third-party debts. This risk is associated with a reduction in industrial production and the optimization of customers expenses related to electricity distribution. This risk arises from imperfect operation mechanisms of the retail electricity market and from the unavailability of effective mechanisms for encouraging customers to make timely payments for electricity distribution services and also results from macroeconomic factors. These risks are associated with restrictions imposed by tariff regulators on the tariff growth rate of electricity distribution services and with a possibility that grid companies expenses are only partially recognized for the formation of minimum regulated revenue. Simplified procedure of deprivation certain retail companies of the supplier of last resort (SOLR) status according to the Order issued by the Government of the Russian Federation causes additional risks of failure in performance its obligations for reliable electric power transmission by these TGC. Measures are taken to maximize its operating and investment efficiency, to enhance import substitution. This allowed to reduce the impact of these risks on the Company s performance. SDCs took measures to minimize the loan portfolio, including by means of optimizing their operating expenses and capital investment programs and by means of using their own funds to partially repay debts. Regulations for operating efficiency increase and cost cutting are developed by SDCs of ROSSETI and adopted by the Boards of Directors. Measures are taken to maintain financial stability of SDCs. The monitoring of electricity and capacity demand is organized and measures to enhance the reliability of the predicted volume of electricity distribution services for pricing and business planning purposes are carried out. Measures are taken to reduce electricity losses. ROSSETI carries out measures under the Program for Improving the Efficiency of Measures to Reduce Receivables for Electricity Distribution Services. Claims work. Documents are made available to regulatory authorities in a timely manner. If necessary, applications for the pre-trial resolution of disagreements with regional regulatory authorities are submitted to the federal executive authority in charge of governmental tariff regulation. Claims work. Measures are taken to cooperate with federal and regional governmental authorities, the mass media, infrastructural organizations of the wholesale electricity market, law enforcement agencies, and organizations deprived of the supplier of last resort status in the performance of the SOLR functions and the settlement of debts. Initiatives are promoted to streamline the procedure for changing the SOLR, enhance ROSSETI SDCs competencies in collecting bad debts and participating effectively in bankruptcy procedures against debtors, etc. 6 7

72 . Internal Control and Risk Management Systems RISKS DESCRIPTION RISK MITIGATION MEASURES Risks Associated with the Issuer s Activities Risk associated with failure to achieve the reliability level set in tariff regulation for electricity distribution services Legal risks MAIN AREAS OF IMPROVING RISK MANAGEMENT MEASURES IN 06: > > Provide practical regulations and methodological support for the Company s and ROSSETI SDCs risk management process; > > Improve the interaction between the Company and SDCs in the planning and implementation of measures to reduce Internal Audit The goal of internal audit is to assist the Board of Directors and executive bodies in increasing the Company s management efficiency and improving the Company s financial and economic activities, including by taking a systematic and consistent approach to the analysis and evaluation of the risk management, internal control, and corporate governance systems as instruments for reasonable assurance regarding the achievement of the Company s goals. These risks are associated with changes of the tariff growth rate of electricity distribution services in subsequent period. These risks are associated with changes to legislation and judicial practice relating to the Company s activities and with changes to the balance between the interests of the Company and other electricity sector entities. the impact of risks on the accomplishment of the principal goal (mission) of the electric grid sector; > > Ensure the further development of regulations governing the procedure for the interaction of the Company s divisions in risk management, including methodological documents on risk assessment, and in the preparation of proposals The Company s internal audit functions are performed by the Directorate for Internal Audit. The forecast of hydrometeorological situation is being monitored. Measures are being taken to reduce recovery time of power supply, including an emergency reserve. Preliminary legal review of planned corporate procedures, conducted transactions, and other aspects of financial and economic activities provided for by the applicable laws and/or Articles of Association of the Company. Updating of local regulatory documents with respect to claim-related work. Participation in governmental authorities regulatory and legislative activities and constantly monitors changes to legislation and judicial practice. on these issues as part the corporate administration of such processes. Basic Principles of Internal Audit INDEPENDENCE INTEGRITY OBJECTIVITY The independence of internal audit is achieved by separating its subordination: internal audit is functionally subordinate to the Board of Directors and administratively subordinate to the Director General. Key events in 05: > > Subject to the recommendations of the Corporate Governance Code, the Company s Articles of Association were amended to define the competence of the Board of Directors in the area of internal audit; > > The Board of Directors approved a restated version of the Internal Audit Policy ROSSETI, taking into account the provisions of the Corporate Governance Code, the Listing Rules of the stock exchange, the guidelines and recommendations of the Federal Agency for State Property Management of the Russian Federation, and the International Professional Practices Framework (IPPF) released by The Institute of Internal Auditors (IIA); > > Basic regulatory documents were formulated and approved in relation to internal audit (Code of Ethics for Internal Auditors of the ROSSETI Group, Regulations for the Internal Audit Division, Model Internal Audit Policy for SDCs, and model manuals, methodologies, and programs for internal audits); > > A system was created for the continuous quality monitoring of internal audit activities and for periodic internal (at least once a year) and external (at least every five years) quality evaluations of ROSSETI s and subsidiaries internal audit; > > Report of the Internal Audit Directorate PJSC ROSSETI on the implementation of the work plan for 05, including on the results through audits reviewed and approved at meeting of Audit Committee of the Board of Directors (Minutes ); > > As part of the evaluation of the internal control system in the course of the audit of the accounting (financial) statements of ROSSETI in accordance with Russian Accounting Standards for 05, the external auditor evaluated the efficiency and effectiveness of the internal audit division s activities. The external auditor made similar evaluations while preparing opinions about the reliability of the accounting (financial) statements of SDCs for 05. In 05, the Directorate for Internal Audit coordinated SDCs measures to introduce regulatory documents on internal audit and conducted end-toend focused audits at electric grid SDCs (the number of focused audits increased by.5% compared with 04). THE UNITS RESPONSIBLE FOR INTERNAL CONTROL AND INTERNAL AUDIT CONDUCTED 5 INSPECTIONS IN 05, INCLUDING 0 INTERNAL AUDITS OF SDCS (INTERNAL AUDITS COVERED 0 ENTITIES OF THE ROSSETI GROUP) Follow-up Control of Corrective Measures,6 corrective measures were prescribed for the ROSSETI Group s entities in 05 as a result of internal inspections, including internal audits. Out of the,405 corrective measures to be implemented in the reporting year,,8 were completed. CONFIDENTIALITY COMPETENCY 8 9

73 . Information Policy Information Policy Approaches to Disclosure 4.5 THOUSAND PUBLICATIONS ABOUT THE COMPANY IN THE NATIONWIDE MEDIA The Information Policy of the Company is aimed at ensuring the maximal exercise of the rights of shareholders and their representatives, potential investors, and other stakeholders to obtain information in order to make informed investment decisions, improving corporate governance, and increasing the value of the Company s assets.. MILLION SITE VISITORS Principles of the Company s Disclosure System AVAILABILITY TIMELINESS CORPORATE WEBSITE OF THE COMPANY The information policy of ROSSETI meets the highest Russian and International standards of disclosure COMPLETENESS ACCURACY Channels of Disclosure The Company realizes the importance of different sources of information disclosed to investors. In this connection, in addition to the mandatory and formal channels of disclosure (Interfax newswire, LSE Regulatory News Service (RNS), corporate website, and media releases), the Company makes extensive use of alternative methods for 7.5 THOUSAND USERS OF THE INTERNAL CORPORATE PORTAL Information is the main resource for investment decisions Regulations for Disclosing Material Information of ROSSETI Under Shareholder Laws and Securities Market Laws dissemination (corporate pages on social networks, electronic and telephone communication, and personal meetings). The Company avoids discrimination in disclosure and provides access to information for the general public. In order for the Сompany to have a good business reputation and a positive image in Russia and abroad, the schedule of implementing the uniform communications policy of the ROSSETI Group was approved in 05 Corporate Website The main channel of communication with the external audience is the corporate website in English and Russian. The Company s website is an online resource updated on a daily basis and equipped with tools for obtaining feedback from media outlets and the general public. On its corporate website, the Company publishes complete information about its activities, including statements of material facts, issue-related and internal documents, and other information subject to mandatory disclosure. The Media page at / press/news/ publishes news and information messages, management statements, interviews with senior managers, and photographs and videos about the Company s activities and contains the archive of the corporate newspaper. The number of site visitors is regularly on the increase: for instance, the previous year saw an increase of 0% on 04 to more than. million. Nationwide Media Receiving the regular media coverage of the ROSSETI Group s activities is also a key instrument of the communications policy. Leading nationwide media outlets (Kommersant, Vedomosti, RBC, TASS, RIA Novosti, VGTRK, etc.) published more than 4,500 news items, including interviews with top managers and videos about the Company s operations. Corporate Newspaper To provide internal communications among many thousands of the Company s employees, ROSSETI publishes the Rossiyskie Seti corporate newspaper. The main purpose of the publication is to inform personnel about the implementation of the Company s strategy and about industry events, increase employee loyalty, and develop intracompany communication channels. Internal Corporate Portal Another important instrument of internal communications is ROSSETI s internal corporate portal. Access to the portal is granted to all employees of the Company and the executive arms of its SDCs. The number of portal users exceeded 7,500 in 05. THE CORPORATE PORTAL IS PART OF A COMMON INFOR- MATION SPACE AND IS DE- SIGNED TO OPTIMIZE DAY-TO- DAY OPERATIONS AND RAISE EMPLOYEES AWARENESS Social Actions Much attention is paid to social actions. Extensive media coverage was given to the patriotic event marking the 70 th anniversary of Victory Day with voluntary cleanup campaigns in all of the regions of the ROSSETI Group s operations, including Moscow. In 05, the successful implementation of ROSSETI s uniform communications policy related to the management of the electric grid sector received an award in the first contest among media outlets, energy companies media relations services, and regional administrations, MediaTEK, organized with the support of the Russian Ministry of Energy. BASED ON THE PERFORMANCE RESULTS IN 05, THE MEDIA RELATIONS SERVICE OF THE COMPANY WAS RECOGNIZED AS THE BEST IN THE ELECTRICI- TY INDUSTRY IN THE KONTEKST CONTEST ORGANIZED BY THE RUSSIAN MINISTRY OF ENERGY Future Plans The Company plans to continue to improve its standards of disclosure in accordance with amendments to the Corporate Gover nance Code and the restated version of the Regulations for the Disclosure of Infor mation by Issuers of Issue-Grade Securities, effective from March 4, 06 (both documents were approved by the Bank of Russia). 40 4

74 . Information Policy Insider Information Security Regulations for Insider Information ROSSETI is a publicly traded company whose shares are listed on Russian and international stock exchanges. The Company gives special attention to insider information security. The Company uses the world s best practices in this area to provide all stock market participants with equal conditions, working to combat insider information misuse. THE COMPANY S BOARD OF DIRECTORS APPROVED THE REGULATIONS FOR INSIDER OF ROSSETI, COMPLYING WITH THE LAWS OF THE RUSSIAN FEDERATION AND ENGLISH LAW THE REGULATIONS FOR INSIDER OF ROSSETI The regulations unambiguously define the terms insider and insider information, specify the procedure for providing access to insider information, and lay down the rules for keeping it confidential and checking whether legal requirements are fulfilled. The Company maintains and updates the insider list applying to the persons subject to the special procedure for transactions involving the Company s financial instruments, along with the list of insider information. THE REGULATIONS FOR INSIDER : > > Establish the rules for making the Company s insider list; > > Define the Company s list of insider information; > > Establish the rules for spreading insider information; > > Establish the rules for conducting transactions involving insider-related financial instruments of the Company and its SDCs; > > Define insider information confidentiality agreements and addenda to employment contracts with the Company s employees qualifying as insiders. COMPLIANCE CONTROL RELATED TO INSIDER : > > Maintaining the insider list; > > Sending the Company s insider list to the securities trading institutor upon request; > > Notifying insiders of the inclusion on or exclusion from the insider list; > > Recording notices of the inclusion on or exclusion from the insider list and of insider transactions involving the Company s securities; > > Monitoring compliance with the rules for conducting transactions involving insider-related financial instruments of the Company and its SDCs according to information on (notices of) insider transactions. The Company provides information security in accordance with the laws of the Russian Federation. Code of Corporate Ethics Additionally, the Company approved the Code of Corporate Ethics, governing the corporate accountability and behavior ethics of the Company s employees qualifying as insiders. The Company decided in the reporting year to analyze the completeness, adequacy, and relevance of the current Code and formulate the Corporate Code of Ethics and Business Conduct of ROSSETI. The Company for Shareholders and Investors: Securities; Dividend Policy Information on Securities The registered share capital of ROSSETI is 6,54,00,694 rubles and consists of 6,54,00,694 shares, each with a par value of ruble, including 6,078,85,0 ordinary shares and,075,49,84 preference shares. On November, 05, the Company began the placement of 4,796,99,468 additional ordinary shares QUANTITY OF FEDERALLY OWNED SHARES IN ROSSETI SHAREHOLDER QUANTITY OF SHARES PERCENTAGE OF SHARES, % PERCENTAGE OF SHARE CAPITAL, Federal Agency for State Property Management ORDINARY SHARES PREFE- RENCE SHARES ORDINARY SHARES BEFORE THE ISSUE ACTUALLY PLACED AS OF DECEMBER, 05, INCLUDING LY ISSUED SHARES PREFE- RENCE SHARES BEFORE EMISSION 7,50,447,6 45,5, SHAREHOLDERS WITH A SHARE OF MORE THAN % AS OF DECEMBER, 05 SHARES PLACED AFTER EMISSION, AS OF..05 NAME SHAREHOLDER TYPE* PERCENTAGE OF SHARE CAPITAL, % Federal Agency for State Property Management O 85. National Settlement Depository NS 9.5 Depository and Corporate Technologies NS.78 FURTHER CAN BE FOUND ON THE CORPORATE WEBSITE doc/polojenie_ob_insaide_ot_ pdf. TOTAL 98.6 * NS means a nominee shareholder; O means an owner 4 4

75 . The Company for Shareholders and Investors SHAREHOLDING STRUCTURE (SHAREHOLDERS WITH A SHARE OF MORE THAN %) AS OF SEPTEMBER 4, 05 STOCK MARKET INDICES INCLUDING THE COMPANY S SHARES AT THE END OF 05 SHAREHOLDERS The Russian Federation represented by the Federal Agency for State Property Management USA.0% 0.0% CAYMAN ISLANDS 0.0% BRITAIN VIRGIN ISLANDS LUXEMBURG 0.% PERCENTAGE, % OF ORDINARY SHARES Gazprom Finance B.V Gazprom Energoholding..0 VTB Bank.0.8 Neft-Aktiv Other TOTAL SHAREHOLDERS BY COUNTRY AS OF SEPTEMBER 4, 05 GREAT BRITAIN 0.6% IRELAND 0.05% FRANCE 0.0% NORWAY DENMARK SWEDEN 0.0% SWITZERLAND 0.8% GERMANY 0.0%.58% NETHERLANDS AUSTRIA 0.07% СYPRUS.4% 0.0% ESTONIA LATVIA LITHUANIA UAE 0.07% OF SHARE CAPITAL RUSSIAN FEDERATION 95.% INDEX WEIGHT, % INDEX CURRENCY MICEX Index 0. OS RUB MICEX Power Index THE COMPANY S SHARES ARE ALSO INCLUDED IN GLOBAL PROVIDERS INDICES SUCH AS THE S&P GLOBAL BMI USD INDEX, THE FTSE GLOBAL CORE INFRASTRUCTURE 50/50 INDEX, AND THE FTSE EASTERN EUROPE ALL CAP INDEX. EUROPE ALL CAP INDEX 7.96 OS RUB 0.88 PS RUB MICEX SMID Index.6 OS RUB Second-Tier Index 0.8 PS USD RTS Index 0. OS USD Moscow Exchange Broad Market Index Changes in ROSSETI Share Prices (Ordinary and Preference Shares) and the MICEX PWR Index in 05 (%) Ordinary shares Preference shares MICEX PWR Index 60% 50% 40% 0% 0% 0% 0% 0. OS RUB 0.0 PS RUB Stock Market Quotes for the Company s Shares in 05 Despite negative macroeconomic factors, including the economic slowdown, lower electricity consumption, the weaker ruble, and inflation, ROSSETI s ordinary and preference shares showed increases of 8.5% and 5.8% respectively in 05 after decreases in prior periods. FURTHER ABOUT THE COMPANY S SHARES CAN BE FOUND ON THE CORPORATE WEBSITE 0% Percentage of Share Capital, % OTHER (9 COUNTRIES) 0.0% Residents of the Russian Federation 0% hold 95% of shares, while the remaining 5% of shares are distributed among corporate entities and individuals from 4 countries. According to Bloomberg. 0% january february march april may june july august september october november december 44 45

76 . The Company for Shareholders and Investors Depositary Receipts Bonds Financial Calendar ROSSETI s global depositary receipts began trading on the London Stock Exchange s Main Market on December 8, 0, and were admitted to trading as interbank repos on the MICEX Stock Exchange on May 8, 04. Since the depositary receipts that represent ownership of ROSSETI s shares are traded in the Standard Listing segment of the London Stock Exchange s Main Market, the Company should comply with the requirements for depositary receipts under the Listing Rules and the Disclosure and Transparency Rules. ROSSETI raised a total of billion rubles in bonds in 05, including 6 billion rubles invested by Vnesheconombank. The proceeds from the placement of exchangetraded bonds in 05 were used to replace SDCs expensive current loans as part of intragroup financing. ROSSETI SDCs raised a total of 8 billion rubles in bonds in 05, including billion rubles coming from intragroup financing and 40 billion rubles invested by Vnesheconombank. The ROSSETI Group s principal investors in 05 were management companies, pension funds, and large banks. ROSSETI PLACED 4 BOND ISSUES IN 05, TOTALING BILLION RUBLES FURTHER ABOUT THE COMPANY S BONDS CAN BE FOUND ON THE CORPORATE WEBSITE DISCLOSURE OF FINANCIAL RESULTS 04 RAS financial results March 0, IFRS financial results April 4, 05 Q05 RAS financial results April 8, 05 H05 RAS financial results July 7, 05 H05 IFRS financial results August 8, 05 9M05 RAS financial results October 6, 05 GENERAL MEETINGS OF SHAREHOLDERS Annual June 0, 05 Extraordinary October 6, 05. ROSSETI works to gain entry into new capital markets in the Asian region. This means that it is necessary for the Company to operate in a new regulatory environment and adapt to a new corporate and communication culture. ROSSETI makes itself more attractive to investors by enhancing transparency and increasing the liquidity of its securities Shareholder/Investor Relations Dividend Policy and History One of ROSSETI s most important priorities is to provide stakeholders with information reflecting not only the current state of the Company but also its prospects. In its shareholder/investor relations, ROSSETI acts in accordance with the annually approved plan of IR events and efforts to raise the liquidity of securities issued by the Company and SDCs. 8.48% TOTAL SHAREHOLDER RETURN (TSR) Investor Events ST QUARTER OF 05 > > 6th annual seminar for shareholder/ investor relations departments of Russian electric grid companies/ ROSSETI/Moscow ND QUARTER OF 05 > > Management Report prepared under English law and submitted to the London Stock Exchange > > Investor conference/raiffeisen Bank/ Zürs 4 TH QUARTER OF 05 > > 7 th annual investment forum/vtb Capital/Moscow > > Investor conference/moscow Exchange, Shanghai Stock Exchange, Gazprombank/Shanghai, China Special attention is given to changes in legislation in relation to the protection of shareholder rights. At meetings held by the Share Issuers Committee of the MICEX Stock Exchange in 05, the Company took part in lively discussions about the Bank of Russia s Report on the Improvement of Corporate Governance by Public Joint-Stock Companies. The rights and interests of the Company s shareholders and investors before the financial market regulators were represented by ROSSETI s Deputy Director General for Corporate Governance Yuri Goncharov, a member of the Committee. DETAILED ABOUT THE LIST OF EVENTS SCHEDULED FOR 06 CAN BE FOUND ON THE COMPANY S WEBSITE The Annual General Meetings of Shareholders in 04 and 05 resolved to pay no dividends for 0 and 04. The Annual General Meeting of Shareholders scheduled for June 06 will decide whether dividends will be paid for 05 subject to the Regulations for Dividend Policy of ROSSETI. ROSSETI SDCs DIVIDEND HISTORY OF SDCS FOR (THOUSAND RUBLES) Dividends payable by SDCs to the Company IN 04 FOR 0 As of January, 06, there were no overdue dividends payable to the Federal Budget. Due to the absence of the Company s net profit for 04, the net profit was not distributed, and the reserve and other funds were not established by the Company. IN 05 FOR 04,064,7,6,50 Since the inception of the Company, SDCs have generally shown an upward change in dividend payment and a trend toward an increase in aggregate dividend payouts The Regulations for Dividend Policy were approved by the Board of Directors of ROSSETI (Minutes of the Meeting No. 69 of November, 04) in accordance with Ordinance of the Government of the Russian Federation No. 774 r of May 9, 006. > > Power Industry Day/BCS/Moscow > > Meeting with Singapore Exchange management/singapore 46 47

77 CORPORATE SOCIAL % GROWTH LABOUR PRODUCTIVITY.% DURING THE YEAR OCCUPATIONAL INJURIES DECREASED BY ALMOST A THIRD TAKING CARE OF PERSONNEL AND THE ENVIRONMENT We value people who work with us, striving to provide safe working conditions and social protection. We take all possible measures to protect the Environment.

78 4. Human Resource Management and Personnel Policy Human Resource Management and Personnel Policy Commitment to Sustainable Development Personnel and Social Policy 4 Nikolay Varlamov Deputy Director General Head of the Administrative Office One of ROSSETI s key assets is a highly professional team. The Company s employees are engaged in managing electric grid facilities in 76 Russian regions, are involved in the improvement of the regulatory and legal framework in the energy industry, build up and expand international cooperation with leading equipment manufacturers and electric utilities around the world. IN THE DIFFICULT MACROECONOMIC ENVIRONMENT IN 05, ROSSETI PAID CONSIDERABLE ATTENTION TO PERSONNEL RETENTION AND HUMAN RESOURCE DEVELOPMENT WITHIN THE COMPANY AND ITS SUBSIDIARIES A basic element of the personnel and social policy is the human resource development system built on the principles of continuity, practicability, and feasibility. We employ a variety of training methods: corporate education programs, webinars, knowledge days, and target-oriented projects aimed at enabling employees to realize their potential in research and innovation. To ensure that the professional competencies of the electric grid sector s workforce conform to international standards, ROSSETI has taken an active part in WorldSkills events 05. The nd National Competition of Cross- Industry Blue-Collar Occupations of High- Technology Industries based on the WorldSkills methodology included the presentation Maintenance and Repair of Relay Protection Devices related to the electric grid sector s professional competencies. Personnel reserves were established at all management levels, from electric grid districts to the electric grid sector as a whole. In meeting electric grid companies staffing needs, preference is given to current employees: internal candidates accounted for more than 50% of appointments to managerial positions in 05. We actively develop the internal portal where employees are able not only to find information about the latest developments in the Company and the industry or the necessary documents but also to share their personal experiences in the forum. To inform employees of the most significant events and unite staff members in order to reach common goals, we continued to publish the Rossiyskie Seti corporate newspaper. ROSSETI traditionally pays special attention to the implementation of youth programs and projects aiming to satisfy tomorrow s staffing needs of the Company. In collaborating with leading universities in all regions where the Company has a presence, we focus on providing training for engineers and technicians: in 05, ROSSETI signed a memorandum of cooperation with the Consortium of Higher Education Institutions of Power Engineering chaired by the Moscow Power Engineering Institute (National Research University). With the aim of ensuring practice-oriented training, we carry out target-oriented training programs for bachelor s and master s degrees, hold contests among qualification graduation papers to attract young talent to the Group s companies, and organize the work of student labor brigades In 05, the St. Petersburg International Economic Forum included the 4th Annual Youth Energy Forum attended by foreign partners and organized on the initiative of ROSSETI. The participants were young professionals of leading European and Asian electric grid companies. The event discussed prospects for growth and cross-border integration in the energy sector and dealt with the Very truly yours, NikolayVarlamv Deputy Director General Head of the Administrative Office The ROSSETI Group pursues the Personnel and Social Policy approved by the Board of Directors in 04 and aimed at employing personnel sufficient to achieve the current and long-range goals contained in the Strategy for Development of the Electric Grid Sector of the Russian Federation and the Long- Term Development Program of ROSSETI. KEY GOALS OF THE PERSONNEL AND SOCIAL POLICY Plan personnel requirements by obtaining reliable information about the current and forecasted quantitative and qualitative workforce requirements THE ROSSETI GROUP THE COUNTRY S LARGEST EMPLOYER Provide the group in a timely manner with required personnel having necessary qualifications KEY INDICATORS OF PERSONNEL POLICY IMPLEMENTATION 6 THOUSAND EMPLOYEES NUMBER OF EMPLOYEES RESPONSIBLE FOR THE MAINTENANCE AND OPERABILITY OF THE COUNTRY S ELECTRIC GRID ASSETS 4 YEARS AVERAGE AGE OF THE ROSSETI GROUP S EMPLOYEES Ensure high personnel efficiency and workforce productivity growth 5% SHARE OF EMPLOYEES ATTENDING TRAINING EVENTS 50 5

79 4. Human Resource Management and Personnel Policy 4 Production personnel accounted for 87% of trainees; training was mainly provided for production personnel at corporate training centers (60% of off-the-job training in 05) Personnel of the ROSSETI Group by Occupational Category 6.0% Executives Staff on the Payroll of the ROSSETI Group in 05 (people ) TDC YANTARENERGO LENENERGO TYUMENENERGO KUBANENERGO IDGC OF NORTHERN CAUCASUS IDGC OF SOUTH IDGC OF NORTH-WEST IDGC OF URALS MOESK IDGC OF SIBERIA IDGC OF VOLGA,54,950 6,00 7,448 8,6,480 4,80 4,8 5,058 5,797 0,45,8 5.%.9% Specialists Workers 0.8% 5.% Administrative and Managerial Production Auxiliary 5 years ONE-THIRD OF THE WORKFORCE IS YOUNG PROFESSIONALS AGED UNDER 5 IDGC OF CENTER AND VOLGA REGION,70 FGC UES,58 IDGC OF CENTRE 9,48 Including SDCs and subsidiary SDCs engaged in the grid business under management THE PURSUED PERSONNEL POLICY AND HIGH STANDARDS OF SOCIAL ENABLE THE COMPANY TO STABLY RETAIN A HIGHLY QUALIFIED TEAM 84.% Personnel of the ROSSETI Group by Age 97% STAFFING LEVEL to 4.9% AVERAGE PERSONNEL TURNOVER DECREASED IN 05 (04 6%) 8% under 5 % 4% 5% 5 to to retirement age employed retirees The uniform youth policy and targeted measures aimed at attracting young professionals and promoting their professional development allow the company to maintain the average age of the group s employees at 4 5 5

80 4. Human Resource Management and Personnel Policy 4 00 MORE THAN 00 EMPLOYEES OF THE ROSSETI GROUP HAVE ACADEMIC DEGREES OF DOCTORS OR CANDIDATES OF SCIENCE Measures to enable employees to fulfill their potential and continuous personnel training make it possible to maintain a high educational level of employees. Personnel of the ROSSETI Group by Educational Level 9.9% 4.% 8.0% higher education basic/general secondary education undergraduate/secondary, elementary professional education Stakeholder Relations Keeping a balance between the interests of different key stakeholders is one of the principal objectives of the Long- Term Development Program of ROSSETI. Principles of Stakeholder Relations: > > comply with legal requirements; > > fulfill additional obligations assumed by the Company; > > take into account the interests and expectations of stakeholders; > > ensure transparency; > > assess effectiveness and improve activities on a constant basis. Key stakeholder groups of the Company: Customers Employees Shareholders and investors (see the section For Shareholders and Investors for more detailed information) Contractors Business community The Company has established certain practices and channels of communication with each stakeholder, including feedback methods (hotline, website, monitoring of media publications, personal meetings). This enables the Company to be aware of the opinions, interests, and desires of all stakeholders and identify the areas that need special attention. 7.5 THOUSAND PEOPLE VISITED THE CORPORATE WEBSITE FROM MARCH TO DECEMBER 05 THE EMPLOYEE COMPENSATION SYSTEM INCLUDES A FIXED PART (SALARIES, EXTRA PAYMENTS, AND PERKS) AND A VARIABLE PART (BONUSES). EMPLOYEES RECEIVE BONUSES FOR ATTAINING KEY PERFORMANCE INDICATORS AND FOR OBTAINING AN EFFECT OF ACHIEVING HIGH- PRIORITY GOALS Organizational Structure The organizational structure of ROSSETI includes the executive arm and the Technical Supervision Center, a branch established in 0 for independent technical supervision over electric grid facilities. Employee Benefits The ROSSETI Group s employee compensation system is built on the uniform principles taking account of regional particularities and ensures competitive income for comparable positions in the regions. The basic provisions of the employee compensation system are specified in the Sectoral Wage Rate Agreement in the Electric Power Industry and the collective bargaining agreements of electric grid companies. The organizational structures of subsidiaries are built on linear functional lines, with functional verticals maintained from the management company to the production units of subsidiaries. The ROSSETI Group s entities regularly increase pay for production personnel in accordance with the agreements with labor unions. Additional instruments of employee motivation are to recognize employees achievements (corporate awards) and hold professional contests. Dialog with Personnel Internal Communications The main internal communications of ROSSETI are as follows: > > Rossiyskie Seti corporate newspaper; > > internal corporate portal (for communication both within ROSSETI and between ROSSETI and SDCs). ROSSIYSKIE SETI CORPORATE NEWSPAPER The Rossiyskie Seti newspaper is one of Russia s largest corporate industry publications. The newspaper is an official media outlet published from 0 on a monthly basis. Its circulation is more than 40,000 distributed in all of the regions where ROSSETI and SDCs operate, including electric grid districts and production units. The electronic version of the publication is posted on ROSSETI s corporate website and on the internal corporate portal. The principal goal of the newspaper is to inform the electric grid sector s employees of the priority areas of operations of the Company and its SDCs. The publication creates a common information space between the Company s management and staff and also allows each employee to identify himself or herself as an integral part of the united professional community in the electric grid industry. THE ELECTRONIC VERSION THE ROSSIYSKIE SETI CORPORATE NEWSPAPER INTERNAL CORPORATE PORTAL The internal corporate portal is an information system designed to: organize teamwork on projects and tasks; improve the efficiency of corporate communications; optimize day-to-day professional activities; enhance the awareness of the Company s and SDCs awareness. Access to the internal corporate portal is granted to employees of ROSSETI s and SDCs executive arms. The portal was put into test operation in 04 and into regular operation in 05. The portal was put into test operation in 04 and into regular operation in

81 4. Stakeholder Relations 4 Dialog with Customers ROSSETI s Portal of Electric Grid Services Extensive work was done in 05 to upgrade and redesign the portal of electric grid services (Портал-ТП.рф) as part of implementing ROSSETI s customer-oriented policy. The work involved changing the concept of the portal and expanding the functionality as related to ROSSETI SDCs services in accordance with the Uniform Customer Service Quality Standards for Grid Organizations. The redesigned portal makes it possible to monitor grid organizations operations, including network connection, both on the part of authorized agencies and on the part of customers. MAIN AREAS OF REDESIGNING THE PORTAL: Сreated uniform showcase for information disclosed by ROS- SETI SDCs (enabling regulators to monitor and analyze grid organizations operations); Expanded functionality of personal login pages (enabling requesting entities to monitor compliance by grid organizations with the prescribed deadlines for providing regulated services). SERVICES ON THE PORTAL: Transparency of operations for customers > > Calculator for network connection prices (to calculate estimated network connection prices at the approved fee rates with the assumptions related to the scope of a grid organization s connection activities); > > Scientific calculator for network connection prices (to calculate network connection prices at the approved fee rates for the current year, taking account of a grid organization s activities provided for in the Specifications); ПОРТАЛ ТП > > To assess the capacity available for network connection, it is planned to launch on the portal the uniform map of utilization for main substations rated 5 kv and above for all of the regions of the ROSSETI Group s operations in the st half of 06. The convenient interface of the service will make it possible to find power facilities on the map and obtain information about their location and technical characteristics, including the utilization rates of electrical installations Accessibility of services for customers: > > The functionality of personal login pages was expanded in accordance with the Uniform Quality Standards of Electricity Distribution and Metering; > > For ease of navigation, all services are cataloged by activity type, and each service is furnished with a data sheet and visual reference describing the service performance procedure; > > The refined functionality will decrease the number of visits to a grid organization, reduce the time of considering and processing requests, and ensure high customer service quality in all of the regions where the ROSSETI Group operates. 97 THOUSAND ONLINE INQUIRIES IN 05, OR MORE THAN TWICE AS MANY AS IN THE PREVIOUS YEAR Customer feedback To raise the ROSSETI Group s customer service quality, the portal is equipped with online inquiry forms enabling customers to send inquiries about services or make complaints about customer service quality. In order to monitor the quality and accessibility of network connection, the portal is equipped with an online questionnaire to conduct customer surveys on a regular basis. The redesigned version of the portal with enhanced functionalities has already been put into test operation, and the beginning of its regular operation is scheduled for the st half of 06. Corporate websites of SDCs and their branches are well equipped for online customer service. The main tools of online customer service are online inquiry forms and personal login pages..8 MILLION PEOPLE NUMBER OF VISITORS TO THE ROSSETI GROUP S CUSTOMER SERVICE OFFICES Customer Care ROSSETI approved the Model Customer Service Quality Standards for SDCs, which are the main mechanism for implementing the Policy on Society, Customer, and Government Relations. The Policy defines the principal goals of customer relations: applying a customer-oriented approach to grid organizations operations and raising customer confidence. The basic objective of the Policy is to achieve customer loyalty by providing affordable services, offering high-quality customer service, and ensuring customer satisfaction in the short and long term. 0% OR 0% MORE THAN IN 04 Principles of the Policy on Society, Customer, and Government Relations: > > High-quality and affordable services provided by the ROSSETI Group in accordance with Russian laws; > > Customers sufficient awareness of the Company and the ROSSETI Group s services; > > Territorial accessibility and convenient conditions of the ROSSETI Group s faceto-face customer service; > > Accessibility and promptness of remote and online customer service; > > Qualified customer service; > > Transparent business processes of customer service and unbiased processing of customer complaints. ROSSETI gives much attention to increasing the accessibility of network connection and providing convenient conditions for customers. To this end, customer service offices are upgraded and fitted with modern equipment such as electronic queue management systems, payment terminals, and self-service information kiosks. The ROSSETI Group audited face-to-face customer service for compliance with the Uniform Customer Service Quality Standards for Grid Organizations approved by Order of the Ministry of Energy of the Russian Federation No. 86 of April 5, 04; and measures are taken to cause customer service offices to meet the approved requirements. Ministry of Energy directive

82 4. Stakeholder Relations 4 Customer service offices were set up and opened after upgrading in Omsk, Troitsk, Argoyash, Ust-Labinsk, Kaliningrad, Guryevsk, and Stavropol in 05. Visitors to customer service centers can submit requests for services, obtain reference information and consultations regarding network connection, electricity distribution, and electricity billing metering. Customers can also make a claim (complaint) and become familiar with Changes in the Opening of Customer Service Offices and the Number of Face-to- Face Inquiries in 0 05 (pcs.) Customer service offices, pcs. Face-to-face inquiries, thousand pcs information about other local electric utilities. The increase was largely due to the higher territorial accessibility and quality of face-to-face services provided for households., 74, CUSTOMER SERVICE OFFICES (9 CUSTOMER SERVICE CENTERS AND 8 CUSTOMER SERVICE POINTS) OPERATED AT THE END OF 05, Subjects of Inquiries from Customers 7% 9% 4% % Changes in Inquiries in 0 05 (thousand pcs.) Total inquiries, thousand pcs. Quality complaints, thousand pcs. 59% % 8% Network connection Electricity distribution Power outages Maintenance of electric grid facilities Electricity billing metering Ancillary services Other (service quality, contact information, etc.) 4,59 54, , Via all channels of communication with customers, the ROSSETI Group received 4. million inquiries in 05, or 4% more than in 04 Remote customer service primarily uses call center hotlines and numbers of the operational dispatching units of SDCs. The principal goals of a call center is to receive and handle customers incoming calls about all issues related to SDCs activities and provide a customer with necessary information. SDCs created hotlines to mitigate the consequences of process failures and promptly provide households with information on the duration of accident recovery work, especially during the heat deficit period. Following current trends, the ROSSETI Group pays considerable attention to expanding the use of its uniform portal for electric grid services and electronic customer service on SDCs websites THE NUMBER OF NETWORK CONNECTION REQUESTS RECEIVED OVER THE INTERNET IN 05 WAS 40,000, WITH MOSCOW AND THE MOSCOW REGION ACCOUNTING FOR MORE THAN 70% OF REQUESTS

83 4. Stakeholder Relations % TOTAL SHARE OF PURCHASES FROM SMALL AND MEDIUM-SIZED BUSINESSES % AFTER PROCUREMENT PROCEDURES THAT MAY APPLY ONLY TO SMALL AND MEDIUM-SIZED BUSINESSES Dialog with Contractors Procurement ROSSETI procurement procedures are in accordance with the requirements set forth in Russian laws and the Uniform Procurement Standard (Procurement Regulations) implemented in 05. In its procurement management system, ROSSETI adheres to the following principles: > > transparency; > > equality; > > fairness; > > nondiscrimination; > > proper and cost-effective use of funds. Information on all planned and current procurement procedures is mandatorily posted on the official website of the Uniform Information System, the Company s website, and the Company s electronic trading floor. To provide potential suppliers with more opportunities for participation in procurement procedures, the Company systematically works to increase the proportion of purchases through electronic trading floors. In the reporting year, the share of competitive purchases through electronic trading floors remained at 98%. UNIFORM PROCUREMENT STANDARD ROSSETI.RU At the same time, the Company works to reduce the share of sole source purchases. Compared with 009, this indicator is down from.4% to.% of the actual volume of purchases. In 05, the ROSSETI Group completed,500 procurement procedures, totaling 0 billion rubles, exclusive of VAT, while the total economic effect was 8.%, or. billion rubles, inclusive of VAT. Reduction of Sole Source Purchases in 0 05 (%) 4,5 4,0,5,0,5,0 HIGHEST AWARD, GUARANTEED TRANSPARENCY, IN THE NATIONAL PROCUREMENT TRANSPARENCY RATING OF CONTRACTING PUBLIC ENTITIES 4..7.,5,0 0, Regulated Procurement Procedure Breakdown by Purchasing Method Regulated Procurement Procedure Breakdown by Purchasing Method % % % 6% 66% % Public competitive bidding Public requests for quotations Public requests for proposals Public competitive negotiations Public auctions Sole source purchases 4% % % 8% 4% New construction and expansion of electric grid facilities Rehabilitation and technical upgrading of electric grid facilities Power equipment repair, general repair, and maintenance operations IT purchases Other purchases (financial services, leases, insurance, security guard services, etc.). BILLION RUBLES OR 8.% THE TOTAL ECONOMIC EFFECT WITH SAVINGS ARISING FROM PROCUREMENT PLANNING REACHED 60 6

84 4. Stakeholder Relations 4 The Company continued its work on entering into long-term (three-year) contracts and framework agreements with manufacturers of basic electrical equipment. As at the end of 05, the ROSSETI Group had about,000 suppliers of electric grid equipment and contractors in all Russian regions. The Company continued in 05 its work started in 04 to provide small and medium-sized businesses with increased access to purchases. Share of Purchases from Small and Medium-Sized Businesses (%) Total share of purchases from small and medium-sized businesses after procurement procedures that may apply only to small and medium-sized businesses Total share of purchases from small and mediumsized businesses, inclusive of subcontracts The Company approved the action plan to popularize the program of partnership between ROSSETI and small and medium-sized businesses, and more than 500 suppliers joined the program in the reporting year. In 05, the Company attained the indicator of the share of purchases from small and medium-sized businesses as prescribed by Resolution of the Government of the Russian Federation No. 5 of December, 04. 9% Import Substitution ROSSETI GROUP, AVERAGE 4% To pursue the government policy on import substitution in the electric grid sector of the Russian Federation, ROSSETI formulated and carries out the Action Plan to Reduce Dependence on Imported Products. The Company took additional measures in the reporting year to evaluate the electric grid sector s potential for import substitution and mapped out the principal areas of activities. 5 BILLION RUBLES OR % IS THE SHARE OF PURCHASES FROM SMALL AND MEDIUM-SIZED BUSINESSES AFTER PROCUREMENT PROCEDURES THAT MAY APPLY ONLY TO SMALL AND MEDIUM-SIZED BUSINESSES % 50% SHARE OF PUR- CHASES FROM SMALL AND MEDIUM-SIZED BUSINESSES FOR 05 AS PRESCRIBED BY THE RESOLU- TION OF THE RUSSIAN GOVERNMENT % 9% Work was organized on minimizing the use of imported equipment and materials in the course of preparing design solutions and terms of reference, and changes were made to design and estimate documents under construction, rehabilitation, and repair projects for electric grid facilities. An area of the import substitution policy was the design standardization of equipment used in the electric grid sector. 94 BILLION RUBLES WHEN IMPLEMENTED, THE IMPORT SUBSTITUTION POLICY WILL ENABLE ROSSETI TO PLACE ORDERS WITH DOMESTIC MANUFACTURERES WITHIN 5 YEARS In 05, ROSSETI developed standards for electrical products in order to eliminate excessive equipment requirements making it necessary to purchase imported products. Additionally, ROSSETI implement measures to unify technical requirements for equipment as part of centralizing equipment purchases for SDCs at the management company s level. For instance, procurement procedures were conducted in the reporting year to select the agent for the centralized supply of supply transformers rated 5 0 kv for ROSSETI SDCs. ROSSETI continued extensive work in 05 to set up the Federal Testing Center in Saint Petersburg, which will make it possible to conduct a full range of tests on electrical equipment inside Russia. This will have a positive impact on the Russian electrical industry s technological independence from foreign testing laboratories and will form a uniform nationwide system of comprehensive equipment testing. With a view to developing the localization of the production of high-technology equipment and component parts in Russia, ROSSETI entered into several agreements with global leaders in the manufacture of electrical equipment: General Electric on June 9, 05; China XD Group on June 8, 05; ABB on June, 05. 5% COMPREHENSIVE IMPORT SUBSTITUTION MEASURES ALLOWED SDCS TO SUBSTANTIALLY REDUCE THE SHARE OF IMPORTED PRODUCTS IN THEIR PURCHASES, WHICH ACCOUNTED FOR LESS THAN 5% IN 05 Anti-Corruption Policy ROSSETI WAS INCLUDED ON THE REGISTER OF RELIABLE PARTNERS OF THE CHAMBER OF COMMERCE AND INDUSTRY OF THE RUSSIAN FEDERATION IN 05 A priority for the ROSSETI Group s activities is systematic work on avoiding and combating corruption as specified in the Strategy for Development of the Electric Grid Sector of the Russian Federation. In accordance with the Strategy, ROSSETI should coordinate anti-corruption measures of all grid organizations. ROSSETI s absolute priority in this area is to cooperate with governmental authorities in order to improve the legal regulation of anti-corruption activities. THE COMPANY BUILDS RELA- TIONSHIPS WITH PARTNERS, COUNTERPARTIES, AND THIRD PARTIES ON THE ANTI-COR- RUPTION PRINCIPLES AND STANDARDS, AND CARRIES OUT AWARENESS-RAISING ACTIVITIES IN THIS AREA ON MEASURES TAKEN BY ROSSETI TO AVOID AND COMBAT CORRUPTION IS POSTED ON THE COMPANY S WEBSITE AT Changes in legislation and the electric grid sector s organizational structure are reflected in ROSSETI s and ROSSETI SDCs Anti-Corruption Policy defining electric grid companies unified approach to implementing Article. of Federal Law No. 7 FZ of December 5, 008, On Combating Corruption. 6 6

85 4. Stakeholder Relations 4 The Company applies: anti-corruption obligations of purchasing participants, anti-corruption clause, uniform mechanism for processing information on the owner chain of purchasing participants and counterparties of ROSSETI and ROSSETI SDCs. The company created the automated analysis and collection system for information on beneficiaries Executives of the Company s executive arm and SDCs senior managers are caused to declare their income, expense, and property obligations, extending these practices to their close relatives. This work involves collecting, analyzing, and processing information and submitting it to controlling authorities. Dialog with the Business Community ROSSETI attaches great importance to maintaining an ongoing dialog with the business community both in Russia and abroad. Main conferences and Exhibitions attended by ROSSETI in 05 ST. PETERSBURG INTERNATIONAL ECONOMIC FORUM At the St. Petersburg International Economic Forum, ROSSETI organized a roundtable discussion on Energy Integration of Europe, Russia, and Asia Endless Possibilities, bringing together global energy leaders to discuss the main aspects and issues of energy system integration. The discussion was attended by the Russian Minister of Energy, the Minister for the Development of the Russian Far East, ROSSETI s Director General, the Bulgarian Minister of Energy, and Enel s Chief Executive Officer and General At the 05 Forum, ROSSETI held several meetings and entered into mutually beneficial cooperation agreements with Russian and foreign companies: > > Cooperation agreement between ROSSETI and E.ON Russia (Yantarenergo); > > Cooperation agreement between ROSSETI and General Electric; > > Cooperation agreement between ROSSETI and the Ministry of North Caucasus Affairs of the Russian Federation; > > Cooperation agreement between ROSSETI and China XD Group Corporation; > > Cooperation agreement between ROSSETI and the Chamber of Commerce and Industry of the Russian Federation; > > Cooperation agreement between ROSSETI and Renault Russia; The Company worked in 05 to avoid corruption, provide legal education for the electric grid sector s employees, and form the basis for their law-abiding conduct. Measures were taken to enable whistleblowers to report possible corruption via the corporate website, a hotline, electronic mail, Russian Post, personal meetings, and otherwise. > > Cooperation agreement between ROSSETI and the National Union of Vegetable Producers; > > Cooperation agreement between ROSSETI and the Tomsk Region Administration; > > Memorandum of cooperation between the ROSSETI Group and the Consortium of Higher Education Institutions of Power Engineering; > > Agreement between ROSSETI and the Republic of Tatarstan Administration; > > Agreement between ROSSETI and the Republic of Karelia; > > Agreement between ROSSETI and Mezhregionsoyuzenergo. RUGRIDS-ELECTRO INTERNATIONAL ELECTRIC POWER FORUM From October 0 to, 05, Expocentre hosted the annual Rugrids- Electro International Electric Power Forum organized by ROSSETI. The main components of the Forum were an exhibition, an extensive business program, a podium of innovative solutions, a business contact exchange, a youth policy area, and an electric car area. The program of the Forum covered topical issues of the industry facing geoeconomic challenges and creating new models of international partnerships. The discussion involved the heads of ministries and departments, legislators, and the chief executives of corporations and energy companies. The business program of the Forum covered key macroeconomic trends such as the launch of priority development areas, the improvement of mechanisms for special economic regimes, import substitution, the intensification of interaction between small and medium-sized businesses and large corporations, along with factors that encourage the innovative development of the industry: energy efficiency and resource conservation, the promotion of electric vehicles, and the development of charging infrastructure. During the Forum, the EnergyNet was signed by parties, namely ROSSETI, the Agency for Strategic Initiatives, Russian Venture Company, the Center for Strategic Research Foundation, the Russian Technology Agency, the Russian Energy, the Skolkovo Foundation, Tavrida Electric, QIWI, Bright Capital, and T-System. ROSSETI signed cooperation agreements with SAP, Grid Company, C, Elektrosetizolyatsiya, and Panasonic CIS. INNOPROM 05 INTERNATIONAL INDUSTRIAL EXHIBITION IDGC of Urals, a subsidiary of ROSSETI, was an exhibitor displaying state-ofthe-art innovative inventions and technologies for a reliable and high-quality electricity supply. THE KEY EVENT OF ROSSETI S PARTICIPATION IN THE EXHIBITION WAS A STRATEGIC COOPERATION AGREEMENT SIGNED WITH ABB Developing Intersystem links and Implementing integration projects RUSSIA KOREA At a meeting of the Russia Korea Committee on Cooperation in Energy and Natural Resources in 06, ROSSETI and Korea Electric Power Corporation (Kepco) signed two strategic cooperation agreements. ROSSETI and Inter RAO, on the Russian side, and Kepco, on the Korean side, agreed to jointly explore the possibilities of using high voltage transmission lines to connect the Russian and Korean energy systems for the exportation of electricity from the Russian Federation to the Republic of Korea. The project to develop the interstate energy links between Korea and Russia can increase the volume of electricity exported from Russia by 5 GW. The Russia Korea energy bridge is part of the Asian super ring project to create links between the energy systems of Russia, Mongolia, China, North Korea, South Korea, and Japan. The implementation of the project to create the Asian super ring may mean reaching a totally new level of interstate energy integration in Northeast Asia. The potential volume of intersystem flows in the Asian super ring may exceed 5 GW

86 4. Stakeholder Relations 4 5 GW THE POTENTIAL VOLUME OF INTERSYSTEM FLOWS IN THE ASIAN SUPER RING MAY EXCEED 5 GW ROSSETI and Kepco also signed a bilateral memorandum of cooperation in sharing experience in the introduction of innovative equipment and turnkey design solutions and of best practices in the operation of electric grid facilities to improve and raise the efficiency, reliability, and safety of the Russian and Korean electric grid infrastructures. RUSSIA FINLAND On November, 05, ROSSETI and Fingrid Oyj signed a strategic cooperation agreement. The agreement focuses on expanding possibilities for mutually ensuring energy security, conducting joint research on the modeling of energy systems, and continuing to coordinate the energy system development plans for Russia s Northwestern and Central Federal Districts and Finland. RUSSIA CHINA At a meeting between Russian President Vladimir Putin and President of the People s Republic of China Xi Jinping in Moscow on May 8, 05, the JV agreement to implement electric grid projects was signed. DURING A VISIT OF RUSSIAN PRESIDENT VLADIMIR PUTIN TO BEIJING ON SEPTEMBER, 05, THE MEMORANDUM ON THE JOINT IMPLEMENTATION OF THE PROJECT FOR THE CONSTRUCTION OF 500 KV TRANSIT IN THE TOMSK REGION WAS SIGNED And the parties agreed to build up cooperation in considering options of the Russia China energy routes and their technical and economic parameters. At the Rugrids-Electro 05 exhibition on October 0, 05, Yantarenergo and China Electric Power Equipment and Technology signed a memorandum of understanding and cooperation for the joint implementation of wind power projects in the Kaliningrad Region. The subject matter of the memorandum is to implement Yantarenergo s wind power projects in the Kaliningrad Region by replacing the existing generation capacity (5. MW) of the wind power plant and investigating the possibility of additionally increasing the capacity of wind turbines to about 45 MW. RUSSIA BELARUS The reporting year witnessed the successful implementation of the action plan to perform the strategic cooperation agreement between ROSSETI and Belenergo to develop both countries electric grid sectors, provide personnel training, share experience in operating electric grid facilities, apply new technology, and develop smart grids and the approval of the joint action plan for 06. RUSSIA IRAN During a visit of Russian Minister of Energy Alexander Novak in December 05, ROSSETI met with Tavanir. During the meeting, they discussed the possibility of mutually beneficial cooperation between the companies and the possibility of joint research on the connection of the Russian and Iranian energy systems through the energy systems of Georgia, Azerbaijan, and Armenia. ROSSETI takes an active part in setting up the Coordinating Council and drafting the agreement to conduct a feasibility study for the construction of the North South energy corridor (Russia Georgia Armenia Iran). Membership in Interstate associations ADVISORY COMMITTEE ON ENERGY OF THE BOARD OF THE EURASIAN ECONOMIC COMMISSION In 05, the Supreme Eurasian Economic Council approved the Concept of Forming the Common Electricity Market of the Eurasian Economic Union, which was formulated with the participation of ROSSETI. In accordance with the approved Concept, the Advisory Committee on Energy prepared the draft of the Program of Forming the Common Energy Market of the Eurasian Economic Union with the involvement of ROSSETI. EXECUTIVE COMMITTEE OF THE ELECTRIC POWER COUNCIL OF THE COMMONWEALTH OF INDEPENDENT STATES In the reporting year, ROSSETI took an active part in the Commission for Operational and Technical Coordination of Joint Operation of Energy Systems in the CIS and Baltic Countries and working groups of the Executive Committee of the CIS Electric Power Council (CIS EPC). The CIS EPC was established in accordance with the Agreement for the Coordination of Interstate Relations in the CIS Electric Power Industries. The most important area of its activities is to create the common legal framework of the CIS member states for the electric power industry and take joint measures to secure a stable and reliable electricity supply for the member states. BRELL COMMITTEE ON ENERGY SYSTEMS As part of simultaneous cooperation with the energy systems of the countries of the BRELL (Belarus, Russia, Estonia, Latvia, and Lithuania) Energy Ring, ROSSETI continued work on formulating and agreeing upon the new regulations for planning interstate electricity flows with due consideration to trading in the Baltic countries markets in order to secure electricity supply reliability for Russian customers. WORLD ENERGY COUNCIL In 05, ROSSETI s senior executives took part in several events organized by the World Energy Council (WEC), for instance, the Strategic Forum on the Energy Industry in Seoul, Republic of Korea. The event focused on discussing energy security and strengthening cooperation among Eurasian countries to create an integrated energy grid, which would ensure the stable supply of energy for countries in the region and would be a major step forward in building up multilateral cooperation. In April 05, the Republic of Armenia established its National Committee of the World Energy Council, which resulted from successful measures to expand Eurasian countries membership in the WEC. INTERSTATE COUNCIL FOR STANDARDIZATION, METROLOGY AND CERTIFICATION OF THE COMMONWEALTH OF INDEPENDENCE STATES Cooperation with the Interstate Council for Standardization, Metrology and Certification of the Commonwealth of Independence States is part of the activities of the Subcommittee on Electric Grids (Transmission and Distribution), resources for which are provided by ROSSETI

87 Occupational Safety 4. Occupational Safety Charity and Social Programs 4 0% IN ACCORDANCE WITH THE LONG-TERM DEVELOPMENT PROGRAM OF ROSSETI, OCCUPATIONAL INJURY RISKS WILL BE REDUCED BEFORE 09 To attain these indicators, the Company developed measures and issued regulations and orders in 05. In 05, the Occupational Safety Commission was established to prepare coordinated recommendatory decisions with respect to improving the occupational safety management system, ensuring that occupational safety requirements are fulfilled, and preventing occupational injuries and diseases for employees of ROSSETI and ROSSETI SDCs. In order to increase the safety of elevated jobs at ROSSETI SDCs facilities, the Company drew up the Recommended Guidelines for Complying with the Occupational Safety Rules for Performing Elevated Jobs and Reducing Injuries Caused by Falling from a Height in Operating Electrical Installations. SDCs prepared and caused to be approved by their boards of directors the schedules for eliminating injury-risk equipment, places, and mechanisms and eliminating injury risks for All necessary measures resulted in reducing the occupational injury rate in 05 compared with 04. Number of Occupationally Injured Persons In the reporting period, the Company achieved a substantial reduction in injuries caused to SDCs personnel by the main injury factors: electric shocks (from in 04 to 9 in 05), falling from a height (from 5 to 5), and traffic accidents (form 9 to 9). Additionally, ROSSETI managed to almost halve the number of outsiders injured by the Company s electrical installations in 05, from 4 to 66. The detailed list of implemented occupational safety measures is contained in Section 6. of the Appendix to the Annual Report. Types of Accidents EXTERNAL MECHANICAL IMPACTS Affecting SDCs Personnel ELECTRIC SHOCKS (injured persons) 9 from January to December, 04 from January to December, 05 TRAFFIC ACCIDENTS FALLING ON AN EVEN SURFACE FALLING OF OBJECTS FALLING FROM A HEIGHT FALLING FROM A POWER LINE TOWER INSECT AND ANIMAL BITES PEDESTRIAN ACCIDENTS DROWNING The ROSSETI gives much attention to charity and sponsorship activities. The Company supports the initiatives of charitable foundations and nonprofit organizations. Main areas of charity and social programs AREA Promoting Russia s cultural and spiritual heritage: projects in culture and the arts; programs to create, protect, and restore historic and architectural monuments; Shaping a favorable social environment and settle pressing social issues; CHARITABLE ACTIVITIES OF ROSSETI AND SDCS IN 05 Providing support for sports and a healthy lifestyle; Preserving and increasing the intellectual potential and providing support for initiatives in science, education, and instruction; Providing target-oriented social support for people in difficult situations, including veterans. Culture 9.86 Healthcare 5.75 Education and science 85.9 Physical culture and popular sport 55.5 Low-income, disabled, and other people unable to independently exercise their rights and legitimate interests CONTRIBUTION, MILLION RUBLES 8.47 Environmental and animal protection 5.5 Restoration of buildings, facilities, and areas of historic, spiritual, and cultural importance 54.7 Other socially important areas 6.00 TOTAL, SPONSORSHIP OF ROSSETI AND SDCS IN 05 The Company gives preference to the projects with clearly defined objectives and measurable results FALLING WITH A POWER LINE TOWER PHYSICAL OVERLOADS AND OVERVOLTAGES IMPACTS OF SMOKE, FIRE, AND FLAME AREA Regional socioeconomic development.95 CONTRIBUTION, MILLION RUBLES Exclusive of the advertising services agreement with PFC CSKA

88 4. Implementation of Environmental Programs 4 Implementation of Environmental Programs 4.8 MILLION RUBLES IN THE REPORTING YEAR, ENVIRONMENTAL PROTECTION EXPENSES Environmental Safety The activities of ROSSETI and its SDCs do not involve a significant impact on the environment; however, the Company takes all possible environmental protection measures. In the reporting period, the Company developed 74 draft standards for maximum permissible air pollutant emissions and took an inventory of air pollutants and hazardous emissions. The Company systematically takes measures to reduce air emissions. For 4 years, ROSSETI SDCs reduced air contaminant emissions by 4.9%. ROSSETI s gross air contaminant emissions were,46. tonnes in 05. Measures to Reduce Toxic Vehicle Exhaust Emissions in 05: > > Regulation of fuel equipment and internal combustion engine carburetors in the course of the maintenance and repair of motor vehicles; > > Regulation of fuel equipment and internal combustion engine carburetors in the course of the maintenance and repair of motor vehicles; > > Re-equipment of motor vehicles in order for them to run on LPG. EXPENSES ASSOCIATED WITH ENVIRONMENTAL PROTECTION IN 05 EXPENSE TYPE EXPENSES, THOUSAND RUBLES water protection and conservation expenses 55, air protection expenses 6, Measures taken by ROSSETI SDCs to minimize an adverse environmental impact Installation of bird protection equipment on overhead power lines and outdoor switchgear devices of substations; Work on arranging places for the accumulation of production waste; Analytical production control of pollutant emissions from stationary sources, the results of which were not found to exceed the prescribed standards. Additionally, instrumental verification of the efficiency of dust and gas cleaners; Laboratory quality control of potable water; Recording of underground water intake; Installation of meters for potable water intake; Drafting of standards for waste formation and waste disposal; Certification of waste of I IV hazard classes; Training provided for persons admitted to the treatment of waste of I IV hazard classes. land protection from production waste and consumption 5,4.70 land rehabilitation expenses 50,000 TOTAL 4,785.6 THE COMPANY CARRIES OUT ALL APPROPRIATE MEASURES IN ACCORDANCE WITH THE APPLICABLE ENVIRONMENTAL LAWS OF THE RUSSIAN FEDERATION Breakdown of Environmental Payments by Adverse Impact in 05 (thousand rubles) 9,65. 9,80.5 payment for emissions to water bodies and water collection areas, thousand rubles payment for air emissions, thousand rubles payment for waste disposal, thousand rubles The adverse impact on the environment is subject to payment ; in the reporting year, payment for contamination not exceeding the standards was 4,87 thousand rubles and for contamination exceeding the standards was 5,55 thousand rubles.,554.9 In accordance with Article 6 of Federal Law No. 7 FZ of January 0, 00, On Environmental Protection. 70 7