Annual report 2014

RU Go to Lenenergo

Address of the director general

On the photo: V.V. Nikonov

Dear shareholders!

The past year was difficult for Lenenergo but the Company, once again, has confirmed its ability to implement consistently and effectively the development strategy aimed at enhancing the reliability of electricity supply of St. Petersburg and the Leningrad Region and performing the large-scale investment program.

Due to the coordinated work of Lenenergo employees in the reporting year, it was possible to successfully pass the autumn-winter period, breaking the climate anomalies and to implement a serious investment program providing advanced development of the grid complex, despite tariff restrictions.

In 2014, Lenenergo continued to make earnest steps to improve the reliability of electricity supply: over 4,400 km of transmission lines were renovated, more than 3,700 hectares of glades for overhead power lines’ routing were cleared and a comprehensive renovation of 16 power sources and 1,762 transformer substations was completed.Over the past year, Lenenergo has reduced the number of technological failures by 42% down to 3,941 and the average time for restoration of supply by 32.5% to 3 hours 23 minutes. Over the last four years, we have managed to reduce by ten-fold the number of damaged cable lines in St. Petersburg to 197 units. The Company employees are ready and able to do the most effective work in case of emergencies.

Within the implementation of the investment program in 2014, 1,450 MVA of capacity was commissioned, the breakdown of which is 753 MVA in St. Petersburg and 697 MVA in the Leningrad Region. The Company has reconstructed substation 35 kV #40 in St. Petersburg to ensure a reliable power supply to consumers in the Admiralty District of the city. Moreover, Lenenergo has completed modernization of substation 110 kV #514 Krasnoselskiy Paper Plant to ensure technological connection of consumers in the Krasnoselskiy District. As part of the reconstruction of substation #18 Red Triangle the transformer 40 MVA was commissioned to improve the reliability of St. Petersburg Subway, plants, medical institutions and socially significant consumers.

In the Leningrad Region, two transformers were commissioned on the reconstructed substation 110/35/10 kV #48 Luga. The site of a 110 kV high-voltage line for connection of new 110 kV substations Kamennogorsk-Tyagovaya, 12 km, 29 km and 46 km was put into operation. Implementation of the large-scale project will allow the allocating of 158.6 MVA for the new branch railway line, Losevo — Kamennogorsk, in addition to a new railway station. The Company commissioned two transformers with the total capacity of 126 MVA at substation 110/10 kV #526 Ford, providing the Ford plant with an electricity supply to the Vsevolozhsk district within the Leningrad Region. The Modernization of substation 110/10 kV #318 Vozrozhdenie in the Vyborg district was completed and as a result, the capacity of substation has increased by 2.5 times.

Throughout the reporting year, Lenenergo continued to improve its corporate governance and to actively develop interaction with all stakeholders. The Company proceeded with implementation of its projects within the social sphere. We are consistently improving the systems of labor protection and industrial safety.

Understanding clearly that the Company’s success is the wellbeing of our employees, we deliver the programs to support employees and their families, providing social benefits and compensation, organizing actions for health protection and developing the programs of non-state pension provision. We actively work with youths and universities of St. Petersburg and support unemployed pensioners-veterans of the Company.

However, at the end of 2014 Lenenergo faced the cessation of payments of the Bank Tavrichesky on which the Company’s accounts had considerable funds. Lenenergo was compelled to create reserves for impairment of investments for the end of last year, which significantly affected the Company’s financial results. By the end of 2014, the Company recognized net loss of RUB 7,968 mln.

Currently, the group of companies Agency for Deposits Insurance and OJSC JSCB International Financial Club carry out complex measures for the financial restructuring of the Bank Tavrichesky. Within the bank sanation, a part of Lenenergo funds was placed as a subordinated deposit for a period of 20 years to the amount of RUB 10.6 bn and other funds were returned to the Company.

Another negative factor affecting the Company’s financial performance was the formation of lost income from its core activity — electricity transmission, resulting from the tariff and balance decisions for St. Petersburg and the Leningrad Region which are limiting the required tariff growth. As a result, in 2011-2014, Lenenergo sustained a loss of revenue for electricity transmission services totaling RUB 21.8 bn.

Apart from Lenenergo, more than 40 territorial grid organizations operate in St. Petersburg and the Leningrad Region that causes undue competition for distribution of gross revenue in the joint-operations tariff and, as a consequence, additional costs for Lenenergo and the necessity of tariff growth for consumers. In this regard, the Company will continue to implement the development Strategy of the electric grid complex of the Russian Federation, approved by the Government of the Russian Federation in part of the consolidation of power grid assets.

At the beginning of 2015, Lenenergo conducted some major personnel changes. The Company has a new management team whose main task is to improve the Company’s financial state. A serious audit of financial and business activities was held and the plan of priority measures for ensuring financial sustainability of Lenenergo was developed and considered by the Board of Directors in March 2015. Within implementation of the plan of priority measures to ensure financial sustainability the investment program of Lenenergo for 2015-2019 will be adjusted proceeding from its actual financial capacity, thus, the Company will continue to implement its priority projects for the electric grid complex. The Company also carries out serious work to cut its costs.

Summing up, I would say that the past year enabled us to become more responsible and far-sighted. We are ready to overcome these challenges and we know in which direction we need to move. Efficiency, professionalism and team spirit are the values which we shall achieve new successes in behalf of our shareholders, consumers and partners.

Signature: V.V. Nikonov

V.V. Nikonov