Shareholder letter

DEAR SHAREHOLDERS!

The General Director, V.N. Rodin The General Director
V.N. Rodin

Another year has come to an end and brought a lot of significant changes, like it was in previous years. During the year the Company has demonstrated its control flexibility, its ability for a quick response to changing market scenarios and considerable gains in so doing. Unprecedented net profit and capital expenditures speak volumes for this.

During the year the Board of Directors worked hard over shareholder interests, increase of management quality and KPI achievement. In 2011 there were 16 BoD sessions (including one in-praesentia session) that reviewed 286 various operating issues.

In particular, the Board of Directors has determined measures on the improvement of grids acquisition procedure, implementation of control system on the construction of large facilities and provision of reliable and quality services at the level set forth by local regulators as the Company’s priorities. Our operations have been determined by the business plan and target annual and quarter KPIs approved by the BoD. Our Innovative Development Program has also been approved in 2011.

The BoD has paid attention to issues related to risk management and approved the Regulations on Control Environment and Risks of Key Business Processes as well as the Regulations on Insider Information in a new version.

In 2011 our 2011-2015 ESEI program began to work. We also approved a plan on a compulsory energy audit of production and grid facilities in 2011-2012. Under the Count-Save-Pay federal program IDGC of Urals, OAO has commenced a Smart Metering pilot project in Perm aimed at finding a typical metering solution to be further duplicated in other Russian regions. This proves that Holding’s branches occupy leading positions in strategic issues related to the roll-out of energy-saving technologies and innovative solutions, to finding a solution to increase energy efficiency of the Russian economy and to stimulate energy efficient household consumption.

The BoD Chairperson, M.Y. Kurbatov The BoD Chairperson
M.Y. Kurbatov

Well-coordinated and efficient cooperation between shareholder representatives and senior management enabled the Company to successfully overcome the impact done by negative factors, the most protuberant ones being keeping tariffs down and transition of large consumers to direct contracts with FSK, and to end the year with boosting net profit. 2011 net profit totaled RUR 2 548 050 thous. (+ RUR 863 mln on the previous year).

Overall revenues have grown by 10% on the previous year and totaled RUR 54 572 mln. At the same time overall expenses showed outstripping growth rate. Its 12% growth is mainly caused by the increase of major expenses (loss compensation fees, fees to FSK and other local grids) and other non-controlled costs. Pre-tax profit totaled RUR 3 040 mln (+RUR 649 mln on 2010) due to additional revenues from participation in other companies, bad debt allowance and reduction of interest payable as credit portfolio decreased.

IDGC of Urals, OAO demonstrates positive capex dynamics. Overall investments in 2011 have grown by RUR 1 850 mln on 2010 and totaled RUR 6 412 mln, being the historically largest figures for the Company. This increase was determined by the necessity to implement Holding’s strategy on network upgrade with a view to ensure reliable, uninterrupted supply and transmission quality by replacing worn-out equipment.

Several large substations have been constructed and commissioned in 2011:
In the Chelyabinsk region we completed 110/10 kV substation Karat.

Its launch ensured reliable supply to housing and public utilities, satisfaction of growing requirements of newly constructed social infrastructure in Kusa.

Until recently the sole power source for the Kusa district was substation Kusa, located on the territory of KLMZ, OOO and designed to cover production needs of the plant.

In the Sverdlovsk region we initiated 110/6 kV substation Prirechnaya.

As a result there will be a new enclosed-type substation enabling to unload existing substations, ensuring 12 MVA connections for additional consumers as well as increasing reliability of supply in the center of Nizhnyi Tagil.

The substation will be commissioned in December, 2012.

110/35/6 kV substation Iva and 110/10/6 kV substation Plekhanova were commissioned in Perm.

The former substation ensured reliable supply of the existing consumers, increasing requirement in supply for consumers in developing micro districts Iva-1, Iva-2, Arkhiereyka, Visim and Pikhtovaya Strelka in Perm as well as partially unloaded and ensured additional capacity reserves for the existing energy facilities.

The latter substation gave a possibility to connect a new building of the Arbitration court of the Perm region to electric networks. At present it is one of the most important federal facilities being constructed in the region.

The substation also helped to unload substations Danilikha, Yuzhnaya, Zapadnaya as well as to provide energy supply to residential buildings in one of the districts in Perm.

In the ensuing years, starting from 2013, we anticipate further capex increase due to the growth of investment sources, including RAB regulation. We plan 2012 investments at the same level as in 2011 due to restraints of tariff increase and tariffs that were already approved by local authorities.

In 2011 IDGC of Urals, OAO proceeded to successfully integrate electric zones within its service areas and was able to increase its local market share once again. Thus, in 2011 there were 5 new grid rental contracts concluded with municipal authorities and institutions. The largest one is a contract on the rental of Krasnouralsk grids (the Sverdlovsk region, 2 222 c.u.). Overall number of rental contracts concluded on the service area (over 34.8 thous. c.u.) is 30, the volume of grids acquired during 2011 is over 3.5. thous. c.u.

In 2011 over 16.5 thous. new consumers connected to our networks (1.5 times higher than in 2010). Overall connected capacity also showed significant growth - 477 MW against 273.7 MW in 2010.

Planned repairs determined by 2011 repair program are 100% completed and totaled RUR 1 296 671 thous. Special attention in 2011 was also paid to widening of VL 35-220 kV clearings to project width.

The Company traditionally pays a lot of attention to labor protection, personnel training, cooperation with public institutions and core educational institutions.

The Company focuses on creating communication environment favorable for business growth in the tideway of united approaches to the reputation policy of Holding and its SACs. We regularly work with mass media to shape positive business reputation, increase information influence and publicity capital as well as to promote its interests in ambient. In 2011 we renewed with vigor our partnership with business-oriented organizations, such as OPORA Russia, Business Russia, trade union Elektroprofsoyuz and RUIE. The Company maintains a status of the leading regional grid company and actively cooperates with local authorities winning support for its initiatives by the heads of the regions. Our business reputation of a socially responsible company was also retained by our participation of Holding’s mass events aimed at solving important reputational tasks, such as retaining continuity of power engineer generations, patriotic upbringing, development of efficiency drive and inventions among young professionals.

In a resume, we should note that significant changes in the energy sector occurred during 2011 had a negative influence on our revenues. Revision of tariffs in the mid-year and churn of large customers to FSK UES set compound governance challenges for the Board of Directors and senior management. Nevertheless, measures taken to cut costs, timely adjustment of our plans and increase of governance efficiency produced an impressive result.

Under severe environment the Company managed to escape recession and ended the year with growth of all major indicators. This fact allows us to state that chosen development directions and priorities were right. The decisions taken and work done created the basis for success next year that will be one of the complex years in recent history of the Urals grids.

The Board of Directors and senior management will strive to retain high investment activities, effective administration and status of a socially responsible and client-oriented company under this environment.