ANNUAL REPORT 2013 OPERATING INDICATORS TRANSFORMER CAPACITY 743.6 GVA LENGTH OF POWER LINES 2,262 thousand kilometers ELECTRICITY DELIVERY ANNUAL 706 billion kWh NUMBER OF SUBSTATIONS REPORT 2013 REPORT 473 thousand units NUMBER OF EMPLOYEES 221.6 thousand people FINANCIAL INDICATORS REVENUE RUB 759.8 bln NET PROFIT (ADJUSTED*) RUB 74 bln * Adjusted net profit is calculated as net profit not taking into account impairment of available-for-sale investments, impairment of promissory notes, provision for impairment receivables and deferred income tax liabilities referred to them. www.rosseti.ru/eng ANNUAL REPORT 2013 OPERATING INDICATORS TRANSFORMER CAPACITY 743.6 GVA LENGTH OF POWER LINES 2,262 thousand kilometers ELECTRICITY DELIVERY ANNUAL 706 billion kWh NUMBER OF SUBSTATIONS REPORT 2013 REPORT 473 thousand units NUMBER OF EMPLOYEES 221.6 thousand people FINANCIAL INDICATORS REVENUE RUB 759.8 bln NET PROFIT (ADJUSTED*) RUB 74 bln * Adjusted net profit is calculated as net profit not taking into account impairment of available-for-sale investments, impairment of promissory notes, provision for impairment receivables and deferred income tax liabilities referred to them. www.rosseti.ru/eng ANNUAL REPORT 2013 ROSSETI ANNUAL REPORT 2013 CONTENT On-line version r13.rosseti.ru/en I. MAJOR INDICATORS 4 1.1. Company Overview 5 1.2. Russian Grids Mission 7 1.3. Message from the Chairman of the Russian Grids Board of Directors 8 1.4. Message from the General Director of the Russian Grids 10 2. RUSSIAN GRIDS IN ENERGY INDUSTRY 14 2.1. Russian Energy Industry 15 2.2. Electricity Tariffs 17 2.3. Our Achievements for the Industry and the Country. Corporate Highlights 21 2.4. Our strategic Goals 28 2.5. Internal Control System 29 2.6. Anti-Corruption Policy 31 2.7. Key Performance Indicators 33 3. OUR BUSINESS 34 3.1. Electricity Distribution 35 3.2. Network Connection 43 3.3. Customer Care 50 4. OUR CAPITAL INVESTMENT 52 4.1. Investment Program of Russian Grids 53 4.2. Our Major Projects 55 5. MANAGEMENT REPORT WITH FINANCIAL OVERVIEW 60 5.1. Management Report with Financial Overview 61 5.2. Procurement Activities 70 6. CORPORATE GOVERNANCE 72 6.1. Corporate Governance Role in Company’s Strategy Realization 73 6.2. Management Bodies 77 7. OUR SUSTAINED DEVELOPMENT 108 7.1. Personnel Policy 109 7.2. Occupational and Environmental Safety 116 8. SHAREHOLDERS’ INFORMATION 120 8.1. Shareholding Structure 121 8.2. Trading in Our Shares and Receipts 122 8.3. Dividend Policy 125 8.4. Bonds 126 8.5. Our Investor/Shareholder Relations Policy 128 9. APPENDICES 130 ROSSETI ANNUAL REPORT 2013 MAJOR 01004 INDICATORS MAJOR RUSSIAN GRIDS IN OUR BUSINESS OUR CAPITAL MANAGEMENT REPORT WITH CORPORATE OUR SUSTAINED SHAREHOLDERS’ APPENDICES INDICATORS ENERGY INDUSTRY INVESTMENT FINANCIAL OVERVIEW GOVERNANCE DEVELOPMENT INFORMATION 1.1. Company Overview Russian Grids is an electric grid holding company whose subsidiaries are engaged in electricity transmission and distribution across most regions of Russia. Our Company is the world’s largest electric grid company in terms of the length of networks, capacity, and serviced territory. OPERATING INDICATORS The formation of Russian Grids was completed in June 2013 as part of the restructuring of the Transformer Length of power lines, electric grid sector’s management. As ordered capacity, GVA thousand kilometers by the Russian President2, MRSK Holding was renamed Russian Grids, and the stake held by the Russian Federation in FGC UES was transferred 2,262 into the Company’s share capital. The goals of the 743.6 restructuring are to facilitate the implementation of uniform government policy in the electric grid sector, improve efficiency by consolidating electric grid assets, and achieve high financial stability in this significant segment of the Russian economy. Number of substations, Electricity delivery, The key characteristics of the transaction are as thousand units billion kWh follows: • On June 14, 2013, the Russian Federation 005 transferred a federally owned 79.64% stake in 473 706 FGC UES less 7 shares as payment for addition- ally issued shares in Russian Grids; the effective share exchange ratio was 9.84. • The share exchange resulted in the Russian Federation’s increasing its stake in Russian Number of employees, Grids to 85.31%, while Russian Grids acquired thousand people a controlling stake of 80.6% in FGC UES. • Third party-owned shares in FGC UES were also used as payment for additional shares in 221.6 Russian Grids. 1 Adjusted net profit is calculated as net profit not taking into account impairment of available-for-sale investments, impairment of promis- sory notes, provision for impairment receivables and deferred income FINANCIAL INDICATORS tax liabilities referred to them. 2 Decree of the President of the Russian Federation No. 1567 of November 22, 2012, “On Joint Stock Company Russian Grids”. Revenue, RUB bln Net profit (adjusted1), RUB bln Digital version of annual report is available – 759.8 74 http://www.rosseti.ru/eng/about/history/ ROSSETI ANNUAL REPORT 2013 Russian Grids Shareholding Structure, % MINORITY SHAREHOLDERS 85.31 14.69 MINORITY SHAREHOLDERS RUSSIAN GRIDS MINORITY SHAREHOLDERS 19.4 80.6 > 50 < 50 FGC UES REGIONAL IDGCS The Russian Grids Group includes three main kinds of subsidiaries and dependent companies (SDCs) by activity type. GRID COMPANIES WITH OPERATIONS IN THE RETAIL ELECTRICITY (CAPACITY) MARKETS 006 • Chechenenergo • Kubanenergo • NURENERGO • TDC • Yantarenergo • LENENERGO • MOESK • IDGC of Northern Caucasus • IDGC of North-West • IDGC of Siberia • IDGC of Urals • IDGC of Centre • IDGC of South • IDGC of Center and Volga Region • Tyumenenergo • IDGC of Volga THE RUSSIAN GRIDS GROUP INCLUDES THREE MAIN KINDS OF SUBSIDIARIES AND DEPENDENT COMPANIES (SDCs) BY ACTIVITY TYPE • FGC UES OTHER COMPANIES • Tyvaenergosbyt • Kabbalkenergo • Ingushenergo • Kalmenergosbyt • Sevkavkazenergo • Dagestan Energy Supply Company • ­Karachaevo- Cherkesskenergo • REC IDGC • VNIPIENERGOPROM • SKB VTI • ENIN • Urals Power • Engineering Company • SevZap NTC • VPEC • Power Grid Optical Networks • Engineering • VNIPIENERGOPROM Real Estate • Engineering Center UES Real Estate • North-West Power Engineering Center Real Estate • Volga Power Engineering Center Real Estate • South Center of Power Engineering Real Estate • Urals Power Engineering Company Real Estate • Siberian Energy Scientific and Technical Center Real Estate • NWEMC • Grozenergo • IT Energy Service • ZES 1 NURENERGO was simultaneously engaged in electricity distribution and energy retail operations in 2013. http://www.rosseti.ru/eng/about/sites/ MAJOR RUSSIAN GRIDS IN OUR BUSINESS OUR CAPITAL MANAGEMENT REPORT WITH CORPORATE OUR SUSTAINED SHAREHOLDERS’ APPENDICES INDICATORS ENERGY INDUSTRY INVESTMENT FINANCIAL OVERVIEW GOVERNANCE DEVELOPMENT INFORMATION 1.2. Russian Grids Mission The Strategy for Development of the Electric Grid Sector of the Russian Federation approved by Ordinance of the Government of the Russian Federation No. 511-r of April 3, 2013, provides for the formation of a single electric grid management company based on Russian Grids to coordinate the activities of Russian grid organizations in the areas of tariffs, technical policy, investment planning, transparent financial and economic operations, and anti-corruption policy. IN ORDER TO ACHIEVE THE GOALS, IT IS PLANNED THAT RUSSIAN GRIDS WILL PERFORM THE FOLLOWING PRINCIPAL FUNCTIONS: • strategic functions (planning, methodology, etc.); • coordinating functions (coordination of investment, technical, financial, and procurement policies; coordination of capital investment programs; etc.); • controlling functions (financial reporting, benchmarking, audit, setting of key performance indicators, monitoring of KPI attainment, etc.); • accomplishment of institutional goals faced by the entire industry; • participation in the consolidation of territorial grid organizations with the aim of ensuring the necessary reliability and quality of the power supply for customers. 007 Our basic values are our commitment to the goals and objectives of the Russian electric grid sector, continuity of experience, the upgrading of professional knowledge and skills, all-out determination and high concentration on job duties, goal-oriented work, and absolute compliance with operation safety rules for electrical installations. ROSSETI ANNUAL REPORT 2013 Sergey Shmatko Chairman of the Board of Directors 1.3. Message from the Chairman of the Russian Grids Board of Directors Dear Shareholders! 008 In accordance with Decree of the Russian President No. 1567 of November 22, 2012, “On Joint Stock Company Russian Grids”, electricity transmission and distribution grids merged in 2013 to form a nationwide grid company based on Russian Grids. This was an important step toward shaping the future of the Russian electric power industry. Pursuant to the Decree, federally owned shares in FGC UES were transferred to the Company. In this connection, in order for the government to retain the ability to participate in control of FGC UES, the Federal Agency for State Property Management and Rus- sian Grids signed the Agreement for the Procedure for Controlling and Voting Shares in FGC UES. The united Company’s abilities were first put to the test by the XXII Olympic Winter Games. The uninterrupted operation of local elec- tric grid facilities is noticeable evidence of our impressive work on improving the system reliability of the Sochi power district. We would have failed to meet these challenges but for unity,