ANNUAL REPORT on the financial results of the year 2010 The present report was prepared in accordance with requirements stipulated by the Decree of the Federal Service on Financial Markets of October 10, 2006 (as amended on June 2, 2009) № 06-117/pz-n “On approval of Provisions for disclosure of information by issuers of issuable securities” and contains necessary information that allows shareholders to evaluate results of activities of the Open Joint Stock Company “The Second Generating Company of the Wholesale Power Market” (JSC OGK-2, hereafter – Company) for the year. In accordance with requirements of cl.3 art.88 of the Federal Law of December 26, 1995 (as amended on February 7, 2003) № 208-FZ “On Joint Stock Companies”, cl.3.2 of the Resolution of the Federal Commission for the Securities Market of May 31, 2002 (as amended on February 7, 2003) №17/ps “On approval of Provisions for additional requirements as to the procedure of preparation, calling and holding of the general meeting of shareholders” reliability of information appearing in the present report has been Approved by the Company’s Audit Commission in the form of a final statement. General Director A.A. Mityushov Deputy General Director on Economics and Finance N.V. Vaytulenis Chief Accountant L.V. Klisch ОGK-2 Table of contents Address to shareholders by the Chairman of the Board of Directors ................................................4 Address to shareholders by the General Director of the Company ..................................................5 1. General information, Company position in the industry .........................................................9 1.1. General information about the Company, foundation history, structure ..................................9 1.2. Calendar of events ........................................................................................11 1.3. Company position in the industry ........................................................................12 1.4. Risk management ................,,......................................................................15 1.5. Business priorities and development prospects .........................................................23 2. Key results of Company activities ...............................................................................25 2.1. Company operating results ..............................................................................25 2.1.1. Key figures and technical characteristics ........................................................25 2.1.2. Electricity output ...................................................................................26 2.1.3. Heat production ....................................................................................27 2.1.4. Fuel balance. Consumption of fuel ................................................................28 2.1.5. Improvement of reliability of the stations operations ............................................29 2.2. Results of Company sales activities ......................................................................32 2.2.1. Electricity and capacity sales ......................................................................32 2.2.2. Heat sales ..........................................................................................34 2.2.3. Tariff information ..................................................................................35 2.3. Company financial results .................................................................................36 2.3.1. Structure of Company assets .....................................................................36 2.3.2. Structure of Company liabilities ..................................................................38 2.3.3. Company net assets ...............................................................................39 2.3.4. Revenue structure .................................................................................40 2.3.5. Cost structure ......................................................................................40 2.3.6. Key financial and economic indicators ............................................................42 2.3.7. Fundamentals of the Company accounting policy ................................................46 2.4. Results of investment activities ...........................................................................49 2.4.1. Implementation of programmes on modernisation, reconstruction and technical upgrade ......49 2.4.2. Implementation of programmes on construction of new power units .............................51 3. Corporate governance ............................................................................................55 3.1. Principles of corporate governance ......................................................................55 3.2. Information on managing and controlling bodies ........................................................56 3.2.1. Board of Directors .................................................................................56 3.2.2. Committees of the Board of Directors ............................................................64 3.2.3. Management Board ................................................................................67 3.2.4. General Director ...................................................................................70 3.2.5. Audit Commission ................................................................................71 3.2.6. Internal audit service ..............................................................................73 3.3. Subsidiaries and affiliates of the Company ...............................................................74 2 ANNUAL REPORT ’10 3.4. Auditor and registrar......................................................................................75 4. Shareholders’ equity and securities of the Company ...........................................................77 4.1. Equity capital and issuing activity ........................................................................77 4.2. Securities ..................................................................................................78 4.3. Dividend history ...........................................................................................82 5. Social responsibility and environmental protection .............................................................85 5.1. Environmental protection .................................................................................85 5.2. Personnel and social policies .............................................................................88 Reference information ..............................................................................................90 Execution of the Corporate Code of Conduct ......................................................................93 List of transactions made by the Company in 2010 ..............................................................109 Equipment specifications ..........................................................................................126 Annual Accounting Statements ...................................................................................131 Auditor’s Report ...................................................................................................141 3 ОGK-2 Address to shareholders by the Chairman of the Board of Directors Dear Shareholders! In 2010 a number of events that are significant for Russia’s entire power industry took place: the Government of the Russian Federation adopted key decisions on parameters of the long-term capacity market, on the list of generating facilities to be launched within Capacity Supply Agreements (CSA) and furthermore these documents were signed by all parties. As a result of actions by the Board of Directors and support by JSC Gazprom the CSA terms of JSC OGK-2 meet the interests of the Company and its shareholders: they guarantee a payback of investment and provide for the rate of return that is necessary for improvement of economic efficiency and investment prospects of the Company. In accordance with OGK-2 obligations under the Capacity Supply Agreements, the Company will put into operation five new generating units with 1,860 MW of total capacity by the end of 2016. This includes the Adler TES, which will significantly reduce the deficit for heat and electric energy in the generation system of Sochi, and will become one of the key power facilities of the XXII Olympic Winter Games of 2014. It needs to be mentioned that in August the Board of Directors adopted a decision on formation of JSC OGK-2 branch – the Adler TES. At the Troitsk GRES an active phase of work related to implementation of a large investment project on construction of a powerful coal unit began. Generally the Board’s activities were focused on the issues of improvement of the Company’s operating efficiency, implementation of the investment programme, technical re-equipment and reconstruction of production facilities. At the end it needs to be mentioned that the Company secured sustainable output of electricity given one of the highest installed capacity utilisation rates in the industry and achieved fairly good operating and financial results. Last year fundamental efforts to move all generation companies of the Gazprom Group to common standards and regulations for financial statements were made. Dividend policy decisions aimed at balancing the Company’s and shareholders’ short-term and long-term interests