Revenue and net cost dynamics analysis for the Company for 2010-2012

The Company's revenue in the reporting period was the combined income from the following types of activities:

• service rendering on electric energy transmission;
• technological connection to electric grids;
• production and sale of DPP electric energy in Arkhenergo and Komienergo branches (DPP property complex of JSC Komienergo was implemented in the 4^th quarter of 2010);
• maintenance and repair of electricity supply network facilities;
• other services in the core and non-core activities.

The main consumers of electric energy transmission services rendered by the Company are the selling companies formed during the reorganization of JSC RAO UES of Russia.

The total revenue of JSC IDGC of the North-West for 2012 amounted to RUB 31,169 million, which is RUB 320 million, or 1%, higher than the 2011 level. In addition:

• revenue from electricity transmission decreased by RUB 210 million, or 1%;
• revenue from technological connection services grew by RUB 528 million, or 60%, which was caused by the growth of industrial consumption in the regions and, as consequence, increase in the number of applicants;
• revenue from other activities increased by RUB 2 million.

The decrease in revenues from electricity transmission services as of 2012 compared to 2011 is non-uniform for the regions of the JSC IDGC of the North-West responsibility area. The highest increase in revenues from electricity transmission was observed in Vologdaenergo branch, mainly, due to the increase of the average tariff. The most significant decrease in revenue from electricity transmission was observed in Arkhenergo branch (mainly, due to the decrease of the average tariff).

The structure of actual revenue for 2012 was as follows: the biggest share is presented by revenues from electricity transmission in the amount of RUB 29,276 million, or 93.9%; revenue from technological connection amounted to RUB 1,412 million, or 4.5%; revenue from other activities was RUB 481 million, or 1.5% .

Total actual net cost for 2012 amounted to RUB 28,129 million, which is more than the 2011 level by RUB 349 million, or 1.3%. The greatest increase of expenses is noted in the following items:

• electric energy transmission services by UNPG objects — RUB 194 million, or 2.4%. The most significant reason for the deviation was the inclusion by Komienergo branch in the net power flow with JSC FGC UES of new energy facilities of JSC Vorkutaugol (CJSC Vorgashorskaya Mine 2) — OV-119, OV-120, which were not included in the calculation of the net power flow in 2011. For instance, the balanced energy supply from the JSC FGC UES network in 2012 was 2,131.2 million kW/h, which is 3.3% higher than the 2011 indicator (2,063.1 million kW/h);
• labor costs with social deductions — RUB 219 million, or 2.9%, which is caused by the following factors: economic effect of tariff rates (official salaries) indexation on the actual CPI (Consumer Price Index) pursuant to the terms of the Industry Tariff Agreement in the electric power industry (average annual 4.2%) and the corresponding growth of social deductions, as well the growth of the tariff ratio in general according to the legislation and the growth in the personnel number in branches and the average tariff coefficient of employees on the basis of the results of a scheduled assessment/attestation;
• the increase in actual expenses relating to "Other Production Services" compared to 2011 was due to energy inspection of the Company's facilities carried out in 2012, which amounted to RUB 58,162 thousand
• raw and other materials — RUB 145 million, or 9.4%, due to the increase in expenses on materials for repair operations carried out at the Company's own cost by RUB 62 million, or 10.2% and the growth of the cost of DPP materials and fuel;
• depreciation deductions — RUB 310 million, or 11.6%; the increase in expesnes was due to the increased commissioning of fixed assets compared to 2011;
• the increase in actual expenses relating to "Other Expenses" in 2012 compared to 2011 was due to the creation of the reserve for estimated liabilities for payment for power loss and electricity transmission services through networks of TGOs.

The data above reflects the outstripping growth rate of payment costs for electric energy transmission services of UNPG facilities compared to other expenses of the Company.

By types of activity the actual net cost of 2012 has the following structure:

• net cost of electric energy transmission — RUB 27,664 million, or 98.3%;
• net cost of technological connection services — RUB 104 million, or 0.4%;
• net cost of other activity — RUB 361 million, or 1,3%.

Total growth of actual net cost at year-end 2012 against the last year level amounted to 1.3%, while the revenue grew by 1%.

Analysis of fulfillment of the Company's business plan for 2012

The adjusted business plan of the Company for 2012 was approved by the Board of Directors on October 26, 2012 (Minutes No.113/11).

The deviation of actual results of the Company's activities from the target values are reflected in the table above.

As seen from the above data, the actual total revenue as of the end of 2012 was higher than the target value by RUB 65 million, or by 0.2%, including:

• electricity transmission revenue is less than the target value by RUB 32 million, or by 0.1%;
• technological connection revenue increased by RUB 114 million, or by 8.8%;
• revenue from other activities is less than the target value by RUB 18 million, or by 3.5%.

The main reasons for the decrease in the actual value of revenue from electricity transmission compared to the target value are:

• decrease in the actual average tariffs for electricity transmission services;
• increase in the load loss.

The decrease in the Company's average tariff against the target value was due to the decrease in the average tariff in Vologdaenergo, Kolenergo and Komienergo branches, the share of which in the total net supply is 61%.

The decrease in the average tariff in Vologdaenergo branch was due to the change in the net supply structure: increase in the net supply compared to the target value on the high-voltage side — 106.1% with low tariffs and decrease in the net supply on the low-voltage side — 99.9%. The net supply structure of Vologdaenergo branch is as follows: high voltage — 85.1%, medium voltage 1 — 3.9%, medium voltage 2 — 5.9%, low voltage — 5.1%.

The decrease in the average tariff in Kolenergo branch compared to the target value was due to the reduction of the paid capacity in the 4th quarter of 2012 (change in the capacity to energy ratio in the average tariff when applying two-rate tariffs).

In Komienergo branch the decrease in the average tariff resulted also from the increase in consumption of electric energy compared to the target value while the target capacity of consumers who pay using a two-rate tariff on the high-voltage and medium-voltage-2 side remained unchanged.

The increase in the revenue from technological connection services in the amount of RUB 114 million compared to the target value (108.8%) was mainly due to early fulfillment of a range of agreements.

The failure to achieve the target value for sales of other products of core activities and non-core products was due to the decrease in revenue in Komienergo branch compared to the target value which resulted from the exclusion in 2012 of services of withdrawal of two energy objects of CJSC Yamalgazinvest by RUB 37,516 thousand (exclusive of VAT) and from the delay in financing of these objects by JSC Gazprom. The above decrease in revenues from sale of other products was compensated by overachievement of target values on other branches of the Company.

The total net cost in JSC IDGC of the North-West as of the end of 2012 was RUB 28,129 million, which is higher than the target value by RUB 65 million, or 0.2%.

As seen from the table, the following expenses were substantially lower than the target values:

• purchased power for loss compensation by RUB 29 million, or 8,7%;
• services of electricity transmission through UNPG facilities by RUB 85 million, or 1%;
• services of electricity transmission by distribution grid companies by RUB 192 million, or 19.0%.

The increase in "Labor costs with deductions" by RUB 320 million (by 4.4%) in the net costs was due to the creation of the provision for payment of annual remuneration to the Company's personnel based on the results of 2012 in the amount of RUB 293 million.

The growth of expenses on "Raw and other materials" by RUB 44 million (by 2.7%) compared to the target value is explained by: increased fuel consumption at Mezenskaya DPP (Arkhenergo branch) due to the idle running in the course of replacement of two diesel generators in the 3rd quarter of 2012 and the above-target electricity supply in December 2012; excess expenditure of materials in Novgorodenergo branch used for performance of unscheduled works for replacement of the transformer at SS Valdai 110-35-10 kV and technical maintenance of the systems of control and technological management with replacement of routers, accumulator batteries, modules of telemechanic devices and multiplexor units; above-target write-off of materials for performance of rescue and recovery operations in Arkhenergo and Novgorodenergo branches in order to carry out repair works using own resources in Kolenergo and Komienergo branches; expenses relating to elimination of the consequences of ice storm in December 2012 in Pskovenergo branch in the amount of 11.7 million.

The following expenses account for the largest share in the cost structure: expenses on JSC FGC UES services — 30%, purchased power for loss compensation — 13%, labor costs with deductions — 28%./p>

The main reason for deviation of balance of other income and expenses from the target value was the creation of the provisions for doubtful debt.

The net profit of JSC IDGC of the North-West in the reporting year was RUB 62 million with the target value of RUB 13 million.