Analytical Summary of Management

Vladimir Evgenyevich FARAFONOV – First Deputy Director General – Technical Director

Enhancement of technological management of networks:

• Development of the target program of modernization and development of system of data collection and transmission of JSC "Lenenergo";
• Development of the program of tele-mechanization of substations of JSC "Lenenergo";
• Increase in quantity of controllable points in SCADA-system of JSC "Lenenergo" NDC;
• Commissioning of modern control offices of branches of JSC "Lenenergo": Tikhvin PDN and Cable network;
• Introduction of the system on SMS informing about technological infringements in electric networks.

Application of the modern planning methods of networks development:

• In the long-term investment program for 2011-2015 costs for purchase and introduction of DMS, EMS, GIS systems are provided.

Creation of conditions for applications of new technical decisions and technologies:

• Development of modern telecommunication infrastructure on the basis of FOCL, which allows applying of the following digital systems: RPAE and ESC, and APCS of SS.

One of the major directions of the Company production is still the search of effective ways and methods of overcoming of the tendency of ageing of power network equipment.

For this purpose in 2010 target programs for 2011-2015 have been developed and agreed with the Committee on Reliability of the Board of Directors of JSC "Lenenergo" on:

• replacement of non-isolated wire with SSIW on OTL 6-10 kV;
• replacement of non-isolated wire with SSIW on OTL 35 kV;
• replacement of overloaded transformers and reconstruction of one-transformer substations;
• equipment of substations of JSC "Lenenergo" by digital registrars of emergency processes "Parma" and EMF connections of OTL 110 kV;
• installation of reclosers on OTL 6-10 kV;
• replacement of separators and shortings on switches in 35-110 kV network;
• renovation of fireproof automatics equipment for the purpose of provision of the necessary level of fire safety.

The given programs provide renovation of power network equipment of 6-110 kV with accomplishment of a complex of works on designing and building and assembly work.

For replacement of the physically depreciated cables of 6-110 kV by insulated cables made of sewed polyethylene, the Program of renovation of cable lines, agreed with JSC "IDGC Holding" and the Government of St. Petersburg was implemented.

In 2010, the Program implementation on working off of sparing and non-destroying quality monitoring and diagnostics of 6-110 kV cable lines was preceded. By means of the given methods diagnostics of 88 cable lines was performed.

In high temperatures period laser aero-scanning of 110 kV overhead lines of 184 km for the purpose of determination of distances from wires to the surface of earth, various constructions, bushes and vegetation was conducted.

The Company preceded with works on certification of OTL 35-110 kV. Termination of works in 2011 will allow completing the development of geo-information system of OTL 35-110 kV of JSC "Lenenergo".

Complex inspection of buildings and constructions with term of operation over 25 years on 29 substations of 35-110 kV, 41 CTS of 6-10 kV, and buildings of masterful sites, garages, etc. was performed. With a view of enhancement of process of operation of power network facilities of JSC "Lenenergo" the procedure of works on maintenance service of gas-insulated equipment of various types and voltage classes has been specified, and lists of works on maintenance service of the given equipment were installed.

Besides, there were developed and approved the Methodical instructions on technical survey of the equipment of 6-110 kV substations and 0.4-110 kV transmission lines.

The next priority direction was application of new technologies and technical decisions at operation of production equipment, including, creation of ATMS and AIMSPB.

With a view of development of operation methods with the use of modern diagnostic tools, as well as technical and information-measuring systems, JSC "Lenenergo" performed developing of non-destroying and sparing methods of diagnostics of 6-11 kV cable lines.

For 2010, in electric networks of JSC "Lenenergo there has occurred 4,849 technological infringements, including:

The increase in technological infringements in 2010 (without adverse weather conditions in 3 quarter, 2010) in comparison with 2009 constituted 76%. The increase in quantity of technological infringements occurred owing to:

1. More detailed investigation of technological infringements according to requirements of the Rules of investigation of the reasons of accidents in electric power industry, approved by Governmental order of the Russian Federation on 28.10.2009 No.846.
2. Billing reliability of technological infringements.

Average duration of liquidation of technological infringements increased by 1.2%.

With a view of increase in efficiency of servicing of electric networks in the centre of St. Petersburg from CSS-18 "Krasny Treugolnik" 4ВВР, JSC "Lenenergo" allocated a new group of substations with a basing place on SS-104 "Vasileostrovskaya".

The following substations were included in CSS-104 "Vasileostrovskaya": SS 35/6 kV No.13 "Volkhov- Vasileostrovskaya", SS 110/35/6 kV No.14 "Baltiyskaya", SS 110/35/10 kV No.104 "Vasileostrovskaya", and SS 110/10 kV No.321 "Sverdlovskaya".

The operatively-exit crew with basing on SS 110/35/10 kV No.104 "Vasileostrovskaya" was formed and generated for operatively-operational servicing of the substations included in the newly formed CSS-104.

Sergey Valeryevich NIKOLAEV – Deputy Director General on Economy and Finance

In the reporting year the management of JSC "Lenenergo" undertook all steps to direct the Company's potential for implementation of planned activities in the adverse economic conditions.

As well as in the previous reporting year, in 2010 factors of world financial crisis which caused deterioration of economic situation both in the country as a whole, and in the regions of servicing of the Company, in particular, continued to render negative influence on JSC "Lenenergo" activity. In comparison with the pre-crisis period, there was a delay of rates of economic development of St. Petersburg and the Leningrad region, and regional macroeconomic indicators have worsened.

Implementation by the city and regional Government of anti-recessionary events has allowed avoiding deep crisis phenomena and promoted the revival in the economy of the region in 2010. Concerning 2009, a considerable part of regional macroeconomic indicators (industrial production index, volume of investments into fixed capital) showed positive dynamics. Forecasts of development of economy of the region of servicing of JSC "Lenenergo" were regarded as favorable enough.

In view of the economic tendencies, it is possible to assert that the crisis phenomena will further influence economic development of the Company, however in process of stabilization of economic situations degree of their influence will decrease.

Taking into account the negative influence of external factors, the system of strategic targets of JSC "Lenenergo" is basically focused on effective implementation of production-economic activities in the conditions of economic recession, and the most possible balanced use of available resources. The essential factor, making positive impact on the company financial position in medium-term, becomes transition to long-term tariff regulation from 01.01.2011.

Thanks to effective administrative decisions of management of the Company, and adequate economic conditions, throughout last three years net profit indicators showed a steady tendency of growth that was caused by the increase in revenues of JSC "Lenenergo" from its primary activity. The Company net profit was at high level that promoted provision of stability of its financial condition.

In 2010, implementation of events for costs management that provided non-admission of unreasonable increase in costs of the Company proceeded. The majority of indicators of profitability reached maximum for the last three years– so, return on equity for the reporting year constituted 7.80%. Dynamics of values of indicators of business activity testified to increase in efficiency of use by the Company of resources, and acceleration of their turnover.

The level of financial solvency of the Company remain high enough, and throughout the three-year period practically did not change – sources of forming of corporate property on 58.4% were generated at the expense of own funds. In 2010, JSC "Lenenergo" involved credit resources for financing its operational and investment activity regarding accomplishment of overdue obligations of applicants in St. Petersburg, and refinancing of the previously borrowed credits. Growth of credit portfolio occurred only at the expense of new investment borrowings, i.e. credits for development.

In 2010, the Company performed optimization of receivables and payables on a continuous basis – including decreasing in the level of accounts receivable by strengthening of the control of given out advances that led to essential decrease in their size concerning the beginnings of the year.

Positive dynamics of some key financial and economic indicators allowed positioning JSC "Lenenergo" as reliable, perspective and investment-appeal Company.

Nevertheless, as a whole, the financial condition of the Company on the end of 2010 on formal signs cannot be characterized as financially stable.

In the conditions of reduction in the size of current assets, liquidity indicators, and the indicator reflecting the ratio debit and accounts payable have worsened.

Essential negative influence on a number of the indicators characterizing the financial condition of the Company, in 2010, as well as earlier, there rendered a great sum of liabilities on the advances received from subscribers under contracts on technological connection.

In the long term, as a result of a decrease in the sum of the advances received by accomplishment by the Company of the obligations to subscribers, i.e. increase in revenues from rendering of services in technological connection, weak financial indicators of JSC "Lenenergo" (liquidity, ratios of payables and receivables) will be corrected towards increase, and the financial condition of the Company will essentially improve.

Accomplishment of events regarding transition to RAB

In 2010, as well as in previous years, tariffs for services in electric power transmission for JSC "Lenenergo" were established on the method of economically reasonable expenses ("costs +"), transition to regulation on the method of return on investment capital (RAB-regulation) was performed from 01.01.2011 (the given term is regulated by the Order of the Government of the Russian Federation No.30-r as of 19.01.2010).

Forming of long-term tariffs and transition to the new method of regulation will allow the Company:

• to perform more exact planning of activity for 5 years;
• to raise guarantees and to provide credit organizations and foreign investors with estimation of risks of financial relations with JSC "Lenenergo";
• To implement in full the necessary long-term investment program at the expense of capital borrowing.

Forming of tariffs on RAB method has the features proceeding from which JSC "Lenenergo" activity shall change:

1. to perform more exact planning of activity for 5 years;
2. to raise guarantees and to provide credit organizations and foreign investors with estimation of risks of financial relations with JSC "Lenenergo";
3. To implement in full the necessary long-term investment program at the expense of capital borrowing.

Forming of tariffs on RAB method has the features proceeding from which JSC "Lenenergo" activity shall change:

1) Regulators fix for 5 years size of operational expenses of the Company, i.e. expenses which depend on decisions and the Company internal policy. Their change is possible only at difference of actual rates of inflation from estimated ones and deviations of implementation of the investment program from the plan. Therefore, it is necessary for JSC "Lenenergo" to perform the strict control of use of the given means since in case of their excess over the approved ones, the Company will receive losses which will not be compensated.

2) Implementation of investments should be produced only at constant interaction with regulators. Approved by Administrations of St. Petersburg and the Leningrad Region in 2010, long-term investment programs for 2011-2015 have been considered at calculation of tariffs. The deviation of actual implementation of the program from the plan not agreed by regulators will not be considered in the capital base and at adjustment of a tariff projection the investment constituting and tariff revenue will be lowered.

3) Compensation of investments should be produced only after their implementation. Besides, application of the mechanism of "smoothing" leads to necessity of attraction of extra means for implementation of the investment program. Accepting of positive investment or credit decisions is probable only provided that investors and creditors see the real picture of development of the Company for the whole perspective period during which return of investments to the Company is expected. In this connection transition to RAB considerably facilitates the process of borrowing and improves its conditions.

4) The Company has additional obligations on increase of reliability level and quality of rendering of services, and also implementations in full of investment obligations. For a deviation of the given indicators from approved ones, regulators provide penalties which will lower revenue and tariffs during the subsequent periods.

5) The Company has a stimulus to decrease in costs: the economy (regarding operational expenses and electric power losses in company networks) remains at the Company within 5 years, directions of its use should be defined by JSC "Lenenergo" management.

Credit policy (characteristics of current credit portfolio, and basic partners with which interaction is performed)

The order of estimation of financial stability and credit status of the Company is determined by the Regulations on the credit policy of JSC "Lenenergo". Within 2010, the Company on the indicators calculated according to given Regulations, is related to the category of financially steady groups - group of "A" credit status.

Credit rating of the Company and short excerpts from Moody's Report

In November, 2009, Moody's Investor Service Agency appropriated JSC "Lenenergo" a corporate rating at Ba2 level with the stable forecast. On March 04, 2011, the rating was confirmed.

"The rating outlook is stable, as Moody’s believes that the Company has sound and prudent plans to develop and adjust its business in close interaction with its shareholders taking into account the availability of funding, tariff evolution and the wider economic environment. Moody’s expects JSC "Lenenergo" to manage its financial profile and liquidity in line with the current rating category based on support from its large shareholders".

Simultaneously Moody's Interfax Rating Agency, which major shareholder is Moody’s, confirmed JSC "Lenenergo" a rating on the national scale at Aa2.ru level.

Maxim Sergeevich ARTEMYEV - Deputy Director General on Delivery of Services

In 2010, within the limits of implementation of the investment program, JSC "Lenenergo" executed obligations under contracts on technological connection of 645.28 MW, the value of subscribers' contracts amounted to RUR 10,163.69 mln (net of VAT). The largest ones are as follows:

• JSC "First container terminal" — connected object: terminal, volume of connected capacity: 10 MW, value of the subscriber's contract amounts to RUR 142.19 mln (including VAT).
• JSC "Adamant" — the enterprise with the volume of connected capacity of 31 MW and the value of the subscriber's contract of RUR 515.06 mln (including VAT).
• JSC "Cement" — connected object: factory, volume of the connected capacity: 50 MW, the value of the subscriber's contract of RUR 812.48 mln (including VAT).

For 2009 JSC "Lenenergo" executed obligations under contracts on technological connection on general capacity of 352.9 MW, value of subscribers' contracts of RUR 6,326.1 mln (net of VAT), in 2010 increase in the given indicator constituted 82% on the volume of capacity, and 60% on the value of the subscribers' contracts. The increase in the given indicator became possible thanks to execution of the investment program of the Company, development and starting of implementation of the concept on execution of the overdue and accumulated obligations, and optimization of business processes in the Company.

Key directions of strategic development of the Company

JSC "Lenenergo" is the leading enterprise of electric power industry in the Northwest of the Russian Federation on electric power transmission and connection of new consumers to power networks.

The primary goals of activity of JSC "Lenenergo" on economic development as a whole are as follows:

• Provision of break-even activity and maximization of profit of the Company;
• Provision of uninterrupted and qualitative power supply of consumers;
• Exception of restrictions on connection of new consumers and new capacities to power networks of the Company;
• Increase in market cost of the Company (that is, increase of level of capitalization of the Company);
• Increase in overall performance of the Company;
• Observance of all rights and legitimate interests of shareholders of the Company;
• Observance of interests of the Company at long-term regulation of tariffs for electric power transmission.

JSC "Lenenergo" intends to perform further the activity proceeding from the following main principles:

• Obligations of the Company to consumers and subscribers will be carried out in full.
• Achievement of equation of interests of the Company and consumers in the territory of all served subjects (the city of St. Petersburg and the Leningrad region) should become the basis of forward development.
• Problems existing for today and negative influence of financial and economic crisis are not an occasion to refuse long-term priorities of modernization of depreciated assets and development of new fixed assets. The technical potential and reliability of network structure should be kept and strengthened.
• The basis of development of the Company is, first, own funds, including net profit and depreciation charges. Aspiration to easing of dependence of economic development of the Company from external factors, and the most effective involvement of internal resources are key tasks of the management of the Company in prospect. However the expanded reproduction will demand attraction of additional sources, including, bank borrowings and stock market means. Therefore at the choice of sources of financing of activity the special attention should be given to the cost of borrowing of means, terms of their possible use, as well as the speed of accepting and implementation of decisions.
• Management and proprietors of the Company will implement the responsible administrative policy directed both on maintenance of technical efficiency, and on growth of financial results, increase of financial stability and investment appeal of the Company. It assumes the weighed financial and economic policy, maintenance of conformity of incomes and company expenses, the multi factorial analysis of influence of accepted administrative decisions.

Necessity of development of events for increase of efficiency of financial and economic activity of the Company is obvious to the decision of tasks in view of economic development, including, from the point of view of more rational use of resources.

With a view of provision of break-even activity and maximization of profit of the Company, and in view of negative influence of the world financial crisis on activity of the Russian enterprises, a special urgency for JSC "Lenenergo" development and implementation by management of the Company of the events focused on decrease of costs and growth of incomes acquires. Already in modern conditions the Company implements the events directed on reception of positive net profit and profitability, which cover various types of expenses, and strategic development of the Company provides orientation to the minimum economically reasonable costs.

Within the limits of economic development of JSC "Lenenergo" the further decrease in costs on a number of directions is planned. Thus the protected clauses of the budget which are not subject to sequestering, there are expenses on a salary with deductions on social needs, depreciation, repair, and taxes.

Events aimed at decrease in costs are real to implementation and do not influence volumes of rendered services, and reliability of electrical supply. Accordingly, risks at implementation of the given events are minimal.

In connection with the annual revision of tariffs within the limits of the long-term period there should be performed a tariff projection on the basis of RAB method proceeding from compromise conditions for regulation authorities, JSC "Lenenergo" and consumers which assume:

• Break-even activity of the Company in the long-term period of regulation;
• Implementation of the investment program in necessary volume, accounting of changes in structure, volumes and sources of funding;
• Admissible level of growth of tariffs for electric power transmission;
• Decision of current problem questions associated with tariff regulation.

¹ - "Smoothing" - the operation applied by a regulator for the purpose of adjustment of a gain of revenue in the period for a non-admission of a considerable gain of the tariff for transfer. The maximum specification on the module cannot exceed 12% from the revenue sum. A principle: revenue decrease in the first years of the period is compensated in the last year.