“A crucial year in the development of the main grid complex”

We discuss 2010 results and the Company’s future development with Oleg Budargin, Chairman of the Management Board.

- What were the Company’s 2010 results?

- 2010 was a complex, but intense and productive year for both our Company and the Russian power sector in general. Taking into account the impact of post-crisis economic development, Federal Grid Company continued to adhere to reducing expenses, as well as on optimizing resources and decreasing production costs. Our priority, with regard to corporate activities, was to provide for the reliable operation of the backbone grid complex and the stable work of Russia's energy system, as well as steady and uninterrupted electricity supply to our customers. To achieve this, special attention was given to implementing investment, repair and target programs, upgrading the qualifications of operating personnel and providing for increased preparedness to prevent emergency situations. Measures taken by the Company allowed it to successfully cope with the 2010-2011 autumn-winter maximum load, to prevent emergency situations in electric power facilities even during unusual weather conditions, and to avoid mass limits on electricity supply to its consumers.

Moreover, 2010 was a year of modernization and construction of new facilities, as well as adopting fundamental tariff decisions. In fact, 2010 marked a transition to a new level of the Unified National Electric Grid (UNEG) development. This year will surely go down in the Company’s history as crucial for the development of main electric grid complex. For the first time, the Company adopted a five-year investment program that called for constructing seventythree 220-550-kV substations and more than one hundred and twenty 220-750-kV transmission lines with a total length of 21 thousand kilometers. We also took numerous measures related to innovative projects, achieved agreements with leading international electrical equipment producers, with regard to constructing plants in Russia which will be manufacturing the newest equipment for the UNEG. I would also like to point out one more very important event for the Company. The event occurred in 2011, but the foundation was primarily laid in 2010. In March 2011, the Company's Global Depository Receipts (GDRs) were listed on the London Stock Exchange; this will certainly improve the Company's investment attractiveness.

- What were the principal financial and economic results during the reporting year?

- During the reporting year, the Company implemented a broad range of measures to provide for the stable operation of the backbone grid complex and the UNEG development. In 2010 actual electric supply by Federal Grid Company grids exceeded the 2009 figure by 4% and in balanced terms totaled 470.65 billion kWh. In neighboring states’ grids the Company transmitted 15.72 billion kWh, which is 15% more than in 2009. The 2010 increase in electric supply was principally due to increased UNEG grid consumption by large consumers (including industrial enterprises).

During the reporting period, tasks aimed at decreasing the UNEG energy losses were fully accomplished. The total energy saving effect in 2010 from optimizing operating modes and managing electric grids, decreasing electricity consumption for the substations’ own use, as well as measures aimed at developing electric grids and introducing energy-saving equipment, was 291,640 million kWh.

Net income growth in 2010 confirmed the Company’s production success. This indicator stood at RUR58.1 billion, according to Russian Accounting Standards (RAS). Income growth is due to higher revenues from electricity transmission, as well as increased profit from other activities as a result of the revaluation of financial investments (based on current market value). The increase in earnings before interest, taxes, depreciation and amortization (EBITDA) was 69.1% year-on-year. The principal factors driving EBITDA growth were increased operational efficiency for corporate activities due to transitioning to the new tariff regulation system, effective cost management activities and increased amortization payments, due to introducing new capacity as a result of implementing the corporate investment program, as well as the revaluation of fixed assets.

As of the end of the year, the Company’s credit portfolio stood at RUR56 billion and consists of bond issues, most of which were successfully attracted in 2010 (RUR50 billion). These bond issues were aimed at financing the investment program.

On the whole, the Company sees its fincial and economic results under the new tariff regulation system during the reporting period as positive. We maintained a high level of liquidity and financial stability.

- What does modernization mean to Federal Grid Company? How does it shape corporate activities?

- Modernization can be very broadly interpreted and in each company or economic branch it can be understood and realized in a completely different manner. Federal Grid Company defines modernization as a concrete set of measures to bring the main electric grid complex up to a new operating level in the medium-term, via the use of the latest scientific achievements and technologies. In other words, this is not a general call for renovation, but a transparent step-by-step program with certain objectives related to all directions of the Company's operations: technical policy, design, HR issues and cooperation with specialized higher educational institutions, etc.One of the Company’s long-term development priorities is to create smart grids, which will be the foundation of the future electric power industry. These grids will decrease electricity transmission losses and industry risks and prevent accidents in substations and overhead transmission lines. In 2010 the Company started practical work on creating a smart electric grid in Russia. We carried out work to create territorial smart grid clusters in the Amur, Primorsk and Khabarovsk Regions, as well as in Russia's North-Western Region.

- What are the basic directions of Federal Grid Company’s five-year investment program, which was approved in 2010? How is construction of electric grid facilities at the most important construction sites moving forward, including at major governmental projects such as Sochi-2014, ESPO and others?

- Core directions of Federal Grid Company's investment program include developing backbone electric grids in Russian regions, providing capacity at new power units of the generation facilities, upgrading the reliability of regions with the highest power consumption levels (Moscow, St. Petersburg and the Tyumen Region) and providing electricity supply to facilities within the framework of implementing priority State programs: the Sochi Winter Olympic Games-2014, the APEC Summit in Vladivostok (which will be held in 2012) and the Eastern Siberia – Pacific Ocean pipeline (ESPO).

In particular, during new construction, expansion and reconstruction of energy facilities, we completed and switched on production capacity at 33 substations and put more than 3,000 kilometers of transmission lines into operation. The largest completed projects included putting into operation new transmission lines for providing production capacity to the Volgodonskaya Nuclear Power Plant in the Rostov Region and completing 220-kV grids for providing production capacity to the Boguchanskaya Hydro-Power Plant (HPP).

During the reporting period our preparation for the Sochi Winter Olympics consisted of completing the first stage of constructing the 10-kV transformer and distribution substation in the Sochi Region, as well as constructing new cable transmission lines to supply Olympic objects and wrap up the first stage of constructing the Dagomys and Psou substations. In the Primorsk Region to supply the APEC Summit objects with electricity, the Company launched the Aeroport substation and started building substations and four transmission lines with a total length of more than 150 kilometers. The Company continued constructing and reconstructing principal energy objects for electric grid connections for objects of the Eastern Siberia – Pacific Ocean pipeline, concluding capital repairs of the 220/110/35/6-kV auto-connected transformer with a capacity of 125 MVA at the reconstructed Shirokaya substation in the Primorsk Region and launching the second Neryungrinskaya GRES-Nizhny Kuranakh transmission line in Yakutia.

In 2011 we plan to fully complete work to prepare electric grid facilities for the APEC Summit – ensuring capacity output of the Kalininskaya NPP and implementing a significant portion of energy efficiency measures at the Skolkovo Innovation Center, the Sochi Olympics and the ESPO.

- What tasks will Federal Grid Company address in 2011?

- The Company’s main task was and will continue to be uninterrupted consumer power supply. In the years to come, in regard to the UNEG development, the Company faces the priority task of upgrading operating system reliability and its modernization and ensuring the economic and rational usage of fuel and energy resources by upgrading the energy efficiency of Federal Grid Company’s objects and equipment. In the sphere of technological connection services, the Company will significantly increase the volume of connected capacities. We will also continue to work on cutting electricity losses in the UNEG. Furthermore, based on results of the planned analysis of the main electric grid complex, we will develop numerous additional measures to improve the effectiveness and reliability of the UNEG.

As part of the corporate innovative development program, in 2011, the Company plans to continue creating smart grid and to increase the share of domestically produced equipment used by the Company.

Another important subject for the Company is investment program fulfillment. This will allow the Company to increase the reliability of its services for existing consumers and to connect thousands of new consumers to the electric grid, as well as to create necessary economic development conditions in Russian regions, and the country as a whole, and to provide power supply to objects constructed under the auspices of important state projects. In total, in 2011 the Company plans to put into operation more than three thousand kilometers of electricity transmission lines and 26.6 thousand MVA of transformer capacity. At the same time, the Company will carry out technical rehabilitation and reconstruction on one thousand five hundred energy objects. To ensure stable financing of this large-scale investment, the Company will attract borrowed funds – taking into account adopted tariff decisions using a flexible and diversified approach to debt structure, which will depend on the market situation as well.

Another major direction is working with personnel. We fully understand that without highly qualified specialists capable of working with modern equipment and technologies all corporate efforts in innovative development will be completely ineffective. We cooperate with a wide range of universities to prepare needed personnel. To enable a clear training system and permanent career enhancement for employees, last year we created a specialized personnel training center. We also declared 2011 the Year of the Young Specialist.

- And lastly, what would you like to say to the Company’s shareholders and investors?

- I would like to express gratitude to all of the Company’s shareholders and investors for investing in Federal Grid Company and their continuing support. We also definitely appreciate the significant attention and support we have received from our major shareholder – the Russian Federation.

Currently, Federal Grid Company is one of the most progressive companies in the power industry. We care about adequately maintaining and developing our electric grid network, paying significant attention to renovating existing assets and implementing new technologies. We actively develop both material assets and new energy transmission technologies and consistently work to decrease costs and improve effectiveness. We continually upgrade corporate governance in line with international best practice, increasing share liquidity and attracting experienced governance managers. All of this is aimed at increasing the Company’s investor attractiveness and maximizing shareholder value.

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