PRELIMINARY APPROVED BY the Decision of the Board of Directors of the Joint-Stock Company «Federal Grid Company of the Unified Energy System » Minutes #_____ dated 15th of May, 2008 ANNUAL REPORT 2007 Open Joint-Stock Company «Federal Grid Company of the Unified Energy System » Chairman of the Management Board Andrei N. Rappoport _____________________ (signature) Head of the Accounting and Reporting Department – Chief Accountant Vladimir V. Schukin _____________________ (signature) Moscow – 2008 CONTENTS 1.1. Creation of the Company and Main Areas of Operations...............................................................8 1.2. Main events of the year 2007 ........................................................................................................................9 1.3. Key operational indicators.............................................................................................................................11 1.4. Organizational structure.................................................................................................................................11 2. COMPANY’S REFORM.................................................................................................13 2.1. Reform of the backbone electric grid infrastructure .....................................................................13 2.2. Reform of the distribution grids.................................................................................................................13 3. OPERATIONS................................................................................................................16 3.1. Major characteristics of substation equipment and high-voltage lines operated by the Company as of the 31st of December, 2007..........................................................................................16 3.2. Maintenance management ............................................................................................................................19 3.3. JSC “FGC UES” equipment diagnostics in 2007.................................................................................23 3.4. Operational Dispatch Management ..........................................................................................................26 3.4.1. Summary..............................................................................................................................................................26 3.4.2. Main events ........................................................................................................................................................26 3.4.3. Main goals and objectives for 2008 .....................................................................................................28 3.5. Electricity losses in electric grids..............................................................................................................28 3.6. Operations of IT and Communication Systems .................................................................................29 3.7. Technical Condition of Electric Grid Facilities Supervision and Reform of Company’s Technical Inspection...................................................................................................................................................31 3.7.1. Summary..............................................................................................................................................................31 3.7.2. Labor Safety.......................................................................................................................................................32 4. DEVELOPMENT OF THE CORPORATE INFORMATION MANAGEMENT SYSTEM (CIMS) AND TELECOMMUNICATION NETWORK .................................33 4.1. Automated Business Management Systems .......................................................................................33 4.2. Main Goals of the CIMS Project for 2008..............................................................................................34 5. INVESTMENTS .............................................................................................................35 Execution of Capital Investments Funding Plans ......................................................................................35 2 5. 2. Execution of the Capacities Commissioning Program for 2007 .............................................44 Execution of Capacity Commissioning Program for 2007.....................................................................45 5.3. Investment Goals and Objectives for the Nearest Future (2008-2012) ............................47 6. ALLOCATION OF PROFITS AND DIVIDENDS POLICY....................................49 7. PURCHASE/PROCUREMENT....................................................................................50 7.1. Purchase/Procurement management.....................................................................................................50 7.2. Competitive Purchase/Procurement .......................................................................................................51 7.3. Objectives of the procurement function for 2008 are as follows:.....................................52 8. ECONOMICS AND FINANCE OF THE COMPANY................................................53 8.1. Financial management.....................................................................................................................................53 8.2. Tariff ...........................................................................................................................................................................53 8.3. Investment of money resources ................................................................................................................54 8.4. Electric energy transmission services ....................................................................................................55 8.5. Company business under competitive relations on the wholesale energy (capacity) market within transitional period .......................................................................................................................56 8.6. Main financial results of the Company ...................................................................................................58 8.7. Investment of money resources ................................................................................................................61 8.8. Fund raising / Credit policy ..........................................................................................................................61 8.9. Credit ratings.........................................................................................................................................................63 8.10. Audit report and financial statements of the Company.............................................................63 9. SECURITIES AND AUTHORIZED CAPITAL .........................................................64 9.1. Authorized capital...............................................................................................................................................64 9.2. Data on shareholders having no less than 5 percent in the Company authorized capital ..................................................................................................................................................................................65 9.3. History of issuing activity and dividend history of the Company...........................................65 9.4. Data on rights carried by shares of each category (type)..........................................................66 9.5. Subsidiaries............................................................................................................................................................66 10. STRUCTURES AND PRINCIPLES OF CORPORATE GOVERNANCE ............68 10.1. General information about corporate governance .......................................................................68 3 10.2. Principles and documents ...........................................................................................................................68 10.3. Enhancement of corporate governance level ..................................................................................69 10.4. Data on observance of FCSM Code of corporate governance in the Company.............69 10.5. Data on management bodies.....................................................................................................................70 10.5.1. General meeting of the Company shareholders.........................................................................70 10.5.2. Board of directors........................................................................................................................................75 10.5.3. Committees attached to the Company Board of Directors ..................................................81 10.5.4. Management Board.....................................................................................................................................82 10.5.5. Audit commission .......................................................................................................................................88 10.6. Data on nominating procedure for the Company Board of Directors, convene procedures, submission procedures for items on agenda of annual and extraordinary general meetings of shareholders,