2014 Annual report

Letter of the Company’s General Director

Dear Shareholders,

In 2014, JSC IDGC of the North-West celebrated 10 years since its launch.

This anniversary year was a landmark in the life of the Company; it was a year full of both victories and achievements and new challenges, despite the fact that, as previously, the Company ensured the stable development of the regional power grid infrastructure and the reliable supply of power to the Company’s end consumers.

The successful completion of the Company’s repair program made it possible to cut power outages experienced by customers by more than half and to reduce the number of technical failures by 21%. Power shortages due to technical failure fell by 17%. This is almost 1 million kW•h, which is comparable to the monthly power consumption of a municipal district with a population of over 10,000.

In spite of the limited tariff growth rate applying to natural monopolies, cooperation with the relevant regional authorities enabled the Company to develop and introduce a balanced investment program, aimed at the scheduled development of regional infrastructure.

Capital investment amounted to RUB 5.2 billion in 2014. The Company commissioned 389.2 MVA of transformer capacity and 1,600 km of power lines. This, respectively, is 20% and 42% more than the targets, partly due to completed customer connection to power grids.

Major investment projects were implemented in the Arkhangelsk, Vologda and Murmansk Regions, in the Komi and Karelia Republics. The reconstruction and retrofitting of the existing power facilities and the construction of new power plants, allowed us to increase the reliability and quality of our power supply and to reduce any shortage of power in the supply distribution centers.

In 2014, IDGC of the North-West completed its operations as guaranteed supplier of power in the Novogorod Region, with this status transferred to LLC Garantenergoservis. In February 2015, GP operations in the Murmansk Region were transferred to JC AtomEnergoSbyt.

In general, as regards the eighteen months’ past performance of the GP in the North-Western Federal District, we successfully ensured a continuous supply of power, transparency of payments with all contractors, increased customer access to services, and prevented debt accumulation on the wholesale electricity market.

In 2014, Company revenue in line with Russian Accounting Standards surged by RUB 2.2 billion, reaching RUB 44.2 billion. This surge was driven by RUB 1.6 billion increase in revenue from power transmission, thus exceeding the figures stated in the business plan by RUB 373 million and equaling 106% of last year’s figure.

The increase in revenue from the Company’s power transmission services is the result of a series of measures, which included establishing fair and balanced tariff decisions in 2014, introduced by the Company’s management together with the public authorities of Russian constituent entities and the Federal Tariffs Service.

JSC IDGC of the North-West successfully managed to cut its operating costs in 2014. Given that 5% was the target value for 2014, the Company achieved 13.1%.

In 2014, IDGC of the North-West completed the establishment of a full range of customer services as part of the Road Map to Increase Customer Access to the Power Infrastructure. In addition to exisiting internet services, the Company launched a pilot project to complete customer connection to power grids via telephone in the Komi Republic. As of April 01, 2015, this projet will be rolled out across the relevant regions, thereby reducing the number of required applicant procedures to secure Company services.

As one of the largest infrastructure companies in the North-Western Federal District, we are also involved in comprehensive socio-economic projects, designed to support key sectors of the Russian economy. In 2014, priority access to power grids was provided by JSC IDGC of the North-West to businesses and companies from the agricultural and food industries in all the relevant regions. Over 170 Company employees were engaged in the setting up and maintenance of the power supply facilities for the Sochi Olympic and Paralympic Games, and their efforts were recognized in the form of high state awards.

IDGC of the North-West committment to corporate governance high standards remains unchanged. In 2014, Expert RA rating agency (RAEX) awarded IDGC of the North-West an A++ rating for management quality (the highest rating of management quality).

However, the Company is operating under the conditions of constantly growing accounts receivable for the provision of power transmission services. IDGC of the North-West customer outstanding debt exceeds RUB 10 billion, 5 times higher than the Company’s figure for its annual repair programme. The biggest debtors are electricity sales companies, guaranteed suppliers of electricity.

As of January 2015, on the initiative of the head of JSC Russian Grids, Oleg Budargin, special commissions to monitor payments for energy and power supply services are up and running in IDGC of the North-West regions of operation. A range of Company internal measures has been developed to recover outstanding debt. As a result of claims-related work in 2014, IDGC of the North-West recovered RUB 6.4 billion of customer debt, which had built up in previous years.

A professional and responsible approach remains the Company’s priority in our work with our customers, shareholders, potential investors, and other stakeholders. I am confident that by adhering to this approach, we will ensure IDGC of the North-West successful and sustainable development for years to come.

Yours faithfully,

General Director

JSC IDGC of the North-West Alexander Letyagin