JSC “TGC−1” ANNUAL REPORT 2007 Mission: CONTENTS 1. LETTER TO SHAREHOLDERS ............................................................................................................................................................... 4 We are committed to becoming leaders of the energy market, being reliable partners for our investors, protecting shareholders’ 2. COMPANY OVERVIEW ........................................................................................................................................................................... 7 interests and meeting our customers’ highest expectations. 3. PERFORMANCE HIGHLIGHTS ............................................................................................................................................................. 11 By adhering to global standards for transparency in business practices, an environmentally−responsible method of operating our 4. SIGNIFICANT EVENTS ......................................................................................................................................................................... 15 facilities and an innovative social policy, the Company should become 5. COMPANY RESULTS ............................................................................................................................................................................ 19 the standard−bearer for other players in Russia’s power−generating industry. 6. DEVELOPMENT OUTLOOK .................................................................................................................................................................. 23 7. ENERGY INDUSTRY OVERVIEW ......................................................................................................................................................... 27 8. BUSINESS ACTIVITY ............................................................................................................................................................................ 33 9. CORPORATE SOCIAL RESPONSIBILITY ............................................................................................................................................ 55 10. CORPORATE GOVERNANCE ............................................................................................................................................................. 63 11. AUDIT COMMISSION REPORT ............................................................................................................................................................ 73 12. PERFORMANCE AND FINANCIAL ANALYSIS .................................................................................................................................... 77 13. SECURITIES ......................................................................................................................................................................................... 87 14. INFORMATION FOR SHAREHOLDERS AND INVESTORS ................................................................................................................ 91 - IMPORTANT EVENTS AND THE ASSUMPTIONS USED IN PREPARING THE ANNUAL REPORT ...................................................... 94 - SOCIAL CALENDAR ................................................................................................................................................................................. 97 - GLOSSARY ............................................................................................................................................................................................. 102 - COMPANY FINANCIAL STATEMENTS ................................................................................................................................................. 106 JSC “TGC−1” ANNUAL REPORT 2007 3 1. LETTER TO SHAREHOLDERS Dear Shareholders, Dear Partners, Colleagues, The year 2007 has not only been a period of successful and effective operations at TGC-1, but also a signifi cant It is a great honour for me to address you on behalf of Fortum Power and Heat Oy, the second major shareholder of TGC-1. Dear Shareholders, benchmark for creating a strong foundation for future development of the power system. Last year we took part in the additional issue of TGC-1’s shares and If you asked me today to summarize the results of the previous year in one word, it would be “construction”. In May 2007, Murmanskaya CHPP became a subsidiary of TGC-1, thus fi nalizing the Company’s target managed to keep our stake at slightly over 25%. It is very important for us to And that relates not only to the commissioning of specifi c objects. The year 2007 will go down in TGC-1’s structure, as TGC-1 has truly become the largest power generation complex in the North-West Region participate in TGC-1 on an equity capital basis and to continue our partnership history as the year the Company started to establish a new, effi cient and up-to-date power infrastructure in of Russia. In June, the Chairman of the Board of RAO UES, Anatoly Chubais, and the Governor of with it. Fortum’s representatives are active members of the Company’s Board the region. Leningrad Oblast, Valery Serdyukov, signed an Agreement on Developing Leningrad Oblast Power of Directors and productively cooperate with its management, and we have System. A similar agreement was signed between RAO UES and the government of high esteem for the development of TGC-1’s corporate Construction of the new power unit at Pervomayskaya CHPP-14 has begun. Murmansk Oblast in November, and later in December, Anatoly Chubais and Valentina governance and its general performance. Contracts have been signed for the full replacement of hydroelectric units at Vuoksinskiye HEPP Cascade, Matvienko, the Governor of St. Petersburg, signed a Protocol for Increasing Investments The year 2007 enabled us to extend our cooperation the construction of the new power unit at Yuzhnaya CHPP-22, and project design of the new power unit at in the Development of the Power System of the Northern Capital, supplementing to the area of environmental protection. It is Severnaya CHPP-21. the Agreement that RAO UES and the government of St. Petersburg entered into important for every country in the world to protect the The fi rst stage of the reconstruction of HEPP-3 of Nivskiye HEPP Cascade, and construction of a steam in July 2006. Each of these documents is a guarantee from the regional authorities environment. Unfortunately, climate change is among boiler house at Pravoberezhnaya CHPP-5, a power boiler for Vasileostrovskaya CHPP-7, and a diesel of their interest in developing and modernizing power capacities. And this means that the most urgent issues on the global agenda and, power plant on Valaam Island have all been completed. the Investment Programme estimated at more than 150 billion rubles will be due to the fact that most greenhouse gases carried out. are emitted in the course of power generation The new turbine unit at Avtovskaya CHPP-15 has been commissioned. and utilisation, the power industry must As a fi ne tradition I should state that TGC-1’s management was able to play a vital role in the process of improving Over 50 km of heating grids have been laid, which is twice as much as during the two previous implement shareholder objectives for the previous year in terms of achieving environmental conditions. years of the Company’s operation. the desired production and fi nancial results. Corporate governance level The Board of Directors of TGC-1 approved remains high, which is proved, in particular, by the Company’s high ratings as The Company has reached agreements with the authorities of the Republic of Karelia and the Company’s environmental policy, Murmansk Oblast to expand Petrozavodskaya CHPP and construct Murmanskaya CHPP-2. issued by authorized rating agencies. According to Standard & Poor’s, TGC-1 and we agreed to cooperate with the holds fi rst place among Russian power companies in terms of its information In order to improve the new construction’s effi ciency, transparency and consistency, implementation of the Kyoto Protocol transparency rating, having increased its corporate governance rating the Company’s structure was signifi cantly altered in 2007 in order to optimize investment mechanisms in Russia. The massive up to 5+ (5.5 according to the Russian National Scale) in 2007. management processes. preparations made in 2007 allowed us to But the main event for TGC-1 in 2007 was surely the successful sale of sign the largest agreement in Russia on Indubitably, having issued additional TGC-1’s shares during the previous year was one of the the purchase of CO emission reduction additional shares. The price of TGC-1’s securities, considering net debts, 2 key factors that allowed us to realize our plans and created a favourable environment for the units (ERUs) in the beginning of 2008. amounted to $710 per 1 kW of installed electric capacity, which exceeds implementation of shareholder objectives. I would like to extend our deep appreciation to the The ERUs Fortum is buying from similar fi gures of other territorial generating companies that issued additional management of RAO UES for their support in the preparation and for handling the issue, as well as TGC-1 will be received by carrying out shares in the past. Thus, the Company not only received the funds required for to Fortum Power and Heat Oy for their confi dence, which resulted in keeping up the scope of their joint implementation projects, including