1. LETTER TO SHAREHOLDERS

Dear Shareholders,

The reforms in the Russian power industry are reaching completion. Radical changes have taken place in the industry: regional power companies have been split off by kinds of business; new power and capacity market structures have been successfully formed; clear and transparent market rules have been adopted along with regulations determining the functioning of the industry upon completion of the reforms.

The year 2006 has seen the reorganization of power generating companies in Russia and development of their strategic outlook aimed at improving performance and encouraging investments. As a part of this process, our Company has gone through a number of development stages during the last year, thus laying a solid basis for future growth of our Сompany. TGC-1 has set out and adopted its strategy and investment program up to 2015. The merger of St. Petersburg, Kola, and Karelia generating assets has been completed in November. TGC-1 shares started trading on the Russian stock market, and the current capitalization of the Сompany has exceeded RUR 100 billion.

The past year has provided the Сompany with the opportunity to fully test the ability to operate under the new power market conditions, and I see this as one of the most important results that the year has brought. The commencement of a competitive market of electricity in Russia is considered to be one of the most significant results of the industry reforms by the experts. There are market mechanisms that are seen as the determining factors of the Russian power industry in the near future and thus there is no doubt that the power companies’ services will be in great demand. According to forecasts of the Russian Ministry of Economic Development, the GDP growth is likely to be around 6%, the growth of industrial production — up to 4.5%. These figures imply that the average annual increase in electricity consumption will be within 5%, and that is the challenge that the power industry is expected to address.

According to the program of RAO “UES of Russia” the country will get more than 40 thousand MW of new capacities in the coming 4-5 years.

180 MW have already been added to the unified energy system in May 2006, when TGC-1 has commissioned the first unit of the Pravoberezhnaya CHPP in Saint-Petersburg, which is the first completed construction in the “List of to-be-commissioned priority power objects of the holding”. And this is only the beginning — TGC-1 investment program, approved by the Board of Directors in the past year, provides for about twenty other generating assets of the Сompany to be reconstructed or newly commissioned in the coming decade, with the total estimated reconstruction and construction costs of more than RUR 130 billion. Financing is planned to be mainly provided through own and borrowed funds as well as funds raised with additional shares issue.

In this respect, it is a major challenge for us to introduce and comply with the best international and Russian corporate governance practices and standards in order to provide the maximum transparency of the Сompany, achieve high performance of the management system and, as a result, increase the confidence of potential investors. The power sector of the North-West Region has good traditions and unique experience in addressing these tasks, including owing to the long-term interactions with foreign strategic investors. Since first days of its work TGC-1 has been strictly following the principles of transparency and publicity of its business, social responsibility, and corporate stability. It should be noted that TGC-1 was one of the first territorial generating companies to receive a high corporate governance rating from Standard & Poor’s, as compared with the general level of ratings awarded to the Russian power generating companies — CGS-5.0 according to the international scale, CGS-5.3 according to the Russian scale. I am confident that a well balanced system of interactions between shareholders, directors, and the Company management will facilitate future active and sound participation of all related parties in discussing and making decisions on the Company’s strategy.

As a chairman of the Board of Directors and on behalf of the shareholders, I would like to express appreciation to the managers of TGC-1 who have provided for the successful establishment of the Company, its formation, as well as steady performance of the production facilities in 2006 in the course of changes in the Company’s management. Present day requirements, the way the economy is growing and priorities in power sector development set new goals for the power sector as a whole and TGC-1 as its part. No doubt that the management of the power generating complex, being actively supported by us, is fully capable of achieving the set goals with a high level of professional expertise and competence, making the Company one of the most promising in Russia.

I wish you all success and prosperity!

 

Chairman of the Board of Directors of JSC “TGC-1”   Alexander Chikunov     

 

 

Dear Shareholders,

No doubt that the past year 2006 will stand apart in the history of TGC-1 development. It has become the first full calendar year of Company’s operations. In the past year TGC-1 has got the status of a unified production complex and a full-fledged joint-stock company, by having completed by November 1, 2006 all the corporate procedures launched in connection with the reforming of the energy system of the North-West of Russia. From now on, the generating assets and heating grids previously owned by Lenenergo, Kolenergo and Karelenergo and operated by our Company on a lease basis has become the property of JSC “TGC-1” since October 1, 2005. Thus, today is the first time we reckon up the results of the Company’s production, business and financial activity for twelve months.

Heat deliveries in 2006 totaled 22,190 thousand GCal. Electricity output — 23,242.4 million kWh. The autumn-winter peak of 2005-2006 has seen the maximum electricity consumption ever recorded in Saint-Petersburg of about 4.3 thousand MW, which is objectively not the limit. The region is constantly growing and developing and thus prevention of possible shortages in power supplies becomes our main objective.

In 2006, the Company has allocated more than RUR 5 billion to repairs, reconstruction and new construction. We have launched large-scale investment projects. In May, we put into operation the first generating unit at Pravoberezhnaya CHPP-5, which is practically a brand new power plant. Such large projects have not been implemented in Saint-Petersburg for the past several years. Many of the equipment control systems, environment protection units, and automated facilities installed here have no analogues in Russia yet.

Along with this we are currently reconstructing several hydroelectric power plants, and are finishing the commissioning work at a new turbine unit at Avtovskaya CHPP-15. Almost all preparation works have been completed in order to start implementation of reconstruction projects for Pervomayskaya CHPP-14, Vasileostrovskaya CHPP-7, Central CHPP and cascades of Vuoksinskiye, Pazskiye and Nivskiye HEPPs. Besides that, the preparation to construction of a coal-fired combined heat and power plant in Murmansk and expansion of the existing plant in Kirovsk (Leningrad Region) by building two new coal-fired power generating units are underway.

Historically, the region has a very complex engineering systems infrastructure. However, I am confident that, keeping up the pace we currently have will enable us to create a new modern infrastructure in the nearest future. The continuous constructive dialogue with administration of the regions of TGC-1 operation serves the pledge of this confidence. This dialogue is based on the mutual understanding of the challenges we face and the methods to address them. We have already moved from formal arrangements to implementation of concrete joint projects. Reconstruction of a power plant on the Valaam Island – one of the centers of Orthodoxy, started in 2006 and being carried out by TGC-1 in close cooperation with the Government of the Republic of Karelia under the aegis of the Administration of the President of the Russian Federation is a viable example of such cooperation. In July 2006, the Governor of Saint-Petersburg Mrs. Valentina Matvienko and the Chairman of the Board of RAO “UES of Russia”, Mr. Anatoliy Chubais signed an Agreement on realization of prior arrangements on construction and modernization of electric power facilities in St.Petersburg. Pursuant to this agreement and in accordance with the Company’s development strategy, TGC-1 experts have elaborated a program of large-scale renovation of generating facilities in Saint-Petersburg. Similar documents are being prepared to be signed by the heads of other regions. We believe that the coordination of the company’s plans with the development plans of Russian Federation constituent regions will allow us to fully implement our projects, which are initially based on the observance of a reasonable balance of interests of the company’ shareholders and investors on the one hand, and of that of state and society — on the other hand.

TGC-1 refurbishment program up to the year 2015 provides for 3,549 MW increase in the Company’s installed electric capacity and 2,348 GCal/h increase in its installed heat capacity. This is the objective set for the Company by the shareholders and society. This objective is not an easy one to reach, but a responsible and a feasible one. This is a challenge we are going to tackle with all the efforts and responsibility.

With all this in mind, it is a high priority for TGC-1 today to raise large-scale financial resources in order to provide radical modernization of the power sector, utilizing the state-of-the-art technologies. This, in turn, will stand for the value of the company, create a basis for economic growth and social development of the North-West Region, provide for the environmental safety and guarantee the security of energy supply for future generations.
The Company, together with the entire power industry of the country, enters a new stage of its history — the stage of renovation.

We know what shall we do, and have proved that we are able to do this. And what we need to feel strong is your understanding and confidence in our abilities.

General Director of JSC “TGC-1”   Valery Rodin