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Anatoly Chubais Chief Executive Officer RAO “Unified Energy System of Russia” Annual Conference for IG “Renaissance Capital” Investors. 3 June 2003, Moscow. Capitalization increase factors. Since September 2002 capitalization of RAO “UES of Russia” has grown by three times.

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Anatoly Chubais Chief Executive Officer RAO “Unified Energy System of Russia”

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Anatoly chubais chief executive officer rao unified energy system of russia

Anatoly Chubais

Chief Executive OfficerRAO “Unified Energy System of Russia”

Annual Conference for IG “Renaissance Capital” Investors

3 June 2003, Moscow


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization increase factors

Since September 2002 capitalization of RAO “UES of Russia” has grown by three times

Market capitalizationof RAO “UES of Russia”

300%

RTS index

CapitalizationUS$ 9.858 bn.

280%

260%

240%

220%

CapitalizationUS$ 3.229bn.

200%

180%

160%

140%

120%

100%

24.09.2002

08.10.2002

22.10.2002

05.11.2002

19.11.2002

03.12.2002

17.12.2002

31.12.2002

14.01.2003

28.01.2003

11.02.2003

25.02.2003

11.03.2003

25.03.2003

08.04.2003

22.04.2003

06.05.2003

20.05.2003

30.05.2003

2


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization increase factors

External

  • Russian political and business elite considerably changed their viewpoints on the power sector reforms at federal and regional levels

  • Russian business entered into RAO “UES of Russia”: both into the parent company and its daughter companies

  • Federal laws on the Russian power sector reform came into force

Corporate

  • Company’s management fully abides by its “Seven Steps towards Shareholders” made public in September 2002

  • Financial and industrial performance of the Holding improved

  • The Concept of RAO UES “5+5” Reforming Strategy for 2003-2008 was approved

  • Corporate ethics standards were adopted following management's proposal (Basic Principles for Operations with Securities by Members of the Board of Directors and Executive Board of RAO UES were approved on 29 April 2003)


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization increase factors

Political and business elite changed their viewpoints on the reform process

Historical opponents

Current opponents

Adviser tothe Russian President and Deputy Energy Minister, supported by some senior officials

Conservatively-minded energy specialists and scientists

5

Deputy Energy Minister

1

1

Majority of regional Governors led by the Moscow Mayor and influential presidents of republics

2

RF Government and RAO “UES of Russia”

RF Government and RAO “UES of Russia”

Most senators in the Federation Council

6

Some foreign minority shareholders

Influentialoligarch groups

7

3

Key political factions in the RF Duma (Fatherland,People’s Deputy, Russian Regions, Agrarian Party of Russia, Yabloko, Communist Party of the RF)

Two political factions in the State Duma: Yabloko (G. Yavlinsky), Communist Party of the RF (G. Zyuganov)

2

4

RF President and the RF Government are playing a key role at every stage of the reform

On April 1st, 2003, the Law on the Electric Power Industry became effective


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization increase factors

Evaluation of the Ownership Structure of the Holding

  • New shareholders of the daughter companies have invested circa USD 1.2 billion into acquisition of blocking stakes in over 30 AO-energoes

  • New shareholders of the mother company have invested circa USD 800 million into acquisition of approximately 10% stake of RAO “UES of Russia”

In total about USD 2 billion

Basic investors:

  • MDM Group

  • SUAL Holding

  • YUKOS

  • Lukoil

  • Norilsky Nikel / INTERROS

  • NLMK

blocking stake

blocking stake

(allegedly)

no blocking stake

Results of the AGM of 30 May 2003: the Board of Directors sees considerable number of strategic investors and change in representation of portfolio investors


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization increase factors

Financial and industrial performance in 2002

Proceeds and profit of Holding*, RUB billion

Electricity generation per employee, thousand MWh\person

564.7

60

600

50

500

453.6

40

0.98

400

335.7

0.98

29.5

30

0.96

300

20

200

14

0.94

9.5

0.94

0.93

10

100

0.92

0

0

0.90

2000

2002

2001

2000

2001

2002

Net proceeds

Net profit

* Russian accounting standards


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization increase factors

Cost reduction programs mean improvement of business efficiency

Trends for costs reduction

18

  • Separation of repairs and maintenance services and making them competitive

  • Optimization of fuel costs

  • Optimization of the personnel structure and number of employees

  • Sale of non-core businesses

14

17.1

RUB billion

13.8

10

12.3

6

2001

2002

2003 (target)

Costs reduction structure in 2002

Other costs

9%

Fuel

34%

Wages

10%

Non-core assets

10%

Reducing electricity transmission losses

Repairs and maintenance

16%

21%


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization increase factors

Adoption of the Concept of RAO UES “5+5” Strategy

The Draft Concept was elaborated in collaboration with the shareholders and consortium of Alfa-Bank and Merrill Lynch consultants

The Concept was UNANIMOUSLY approved by the Board of Directors

8 April

2003

24 April

2003

23 May

2003

29 May

2003

2002

Concept was taken up with the Board of Directors

Concept together with the Action Plan for the Program of Power Sector Reforming for 2003-2005 were presented at the meeting of the RF Government Commission on Energy Reform and were taken as a basis

The Concept was discussed by the Board of Directors, then made available at the official site of RAO UES for public discussion


Anatoly chubais chief executive officer rao unified energy system of russia

Reaction of the market to the changes in power industry

Adoption of the energy reform package of laws

Russian business entering into power sector

Approval of the «5+5» Strategy Concept

Improvement of financial and industrial performance of the Holding

Changing of the elite’s attitude towards the reform

Adoption of corporate ethics standards

Increase of capitalization of RAO UES undoubtedly proves that the reform was accepted and supported by the business


Anatoly chubais chief executive officer rao unified energy system of russia

Key prospects

External

  • Adopting appropriate standards and regulations (by-laws), including:

  • Launching a competitive 5 – 15% part of the wholesale electricity market

  • Action Plan for the Program of Power Sector Reforming for 2003-2006

  • Rules and regulations for the wholesale electricity market

  • List and structure of wholesale generating companies

  • Resolution on launching a transition period market

  • Rules and regulations for non-discriminatory access to the grid

  • Rules and regulations for the retail electricity markets in transition

Corporate

  • Launch of the “5+5” Strategy

  • Improving financial and industrial performance along with further cost reduction

  • Advance in corporate governance


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization growth is top priority

Company’s mission

RAO “UES of Russia”, acting for the benefit of its shareholders, seeks to ensure a sustained growth of the valueof its shares and the shares of the companies that will be established in the course of restructuring through a successful implementation of the reform and increased efficiency and transparency of its operations as well as the operations of the companies established in the restructuring process

From the Concept of RAO UES “5+5” Strategy for 2003-2008, adopted by the Board of Directors on 29 May 2003


Reform stages

Capitalization growth is top priority

Reform Stages

Transition period

2003-2004,

1st stage

2004 – 2006,

2nd stage

2006 – 2008,

3rd stage

Initial stage of restructuring (pilot projects and second turn of AO-energos’ restructuring, launch and adjustment of the 5-15% market and a regulatory base)

Completion of market infrastructure and of AO-energos’ restructuring

Launch and functioning of liberalized market

Final decision is to be made by the RF Government


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization growth is top priority

“5+5” philosophy:

transformations in the interests of shareholders

  • Proportional allocation of shares is the shareholders’ right rather than duty

    The wholesale generating companies’ stakes belonging to RAO UES that are not demanded on the proportional exchange basis shall be auctioned

  • Consolidation of the newly created power market entities:

    • Setting up circa 20 territorial generating companies instead of 32

    • Establishment of 5 inter-regional distribution grid companies instead of 7

  • Transition to the unified share (where possible) in all the newly created market entities, except hydroelectric wholesale generating companies

  • Other shareholders of wholesale generating companies shall enjoy the right to put their shares up for auction jointly with wholesale generating companies’ shares owned by RAO UES

  • If one or several shareholders acquire control of a 30% stake and over of the newly created companies, the government or RAO UES shall support the right of any shareholder to sell shares for the same price


New initiatives in the company s performance and corporate governance

Capitalization growth is top priority

New initiatives in the Company’s performance and corporate governance

Company’s

performance

  • To toughen cost-reduction programs considerably and to revise their principles

  • To sell non-core assets

  • To plan for financial and economic indicators:

    • To approve the financial and economic indicators in order to evaluate Company’s efficiency and make proper forecasts

    • To reduce accounts preparing timeline

    • To start setting up an integrated system of accounting, centralized asset and equipment maintenance investments management

Corporate governance

  • To advance corporate governance:

    • Improving operation of the Board of Directors.

    • Regulating the information policy.

    • Developing standards of corporate ethics.

    • Introducing corporate governance ratings and corporate audit system.


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization growth is top priority

Company’s tariff policy is being revised

Our viewpoint

  • Restrict electricity tariffs fluctuations by the inflation index, linking at the same time trends for electricity tariffs increase with the anticipated gas price rise

  • Eliminate the cost-base approach in pricing

Our proposals

  • With the marginal electricity tariffs growth being established for 2004, it is imperative that the following is set as well:

    • Tariff caps for the next two years

    • Tariffs differentiated by subjects of the Russian Federation

    • Separately - for the population, due to the problem of cross subsidizing


Advance in corporate governance

Capitalization growth is top priority

Advance in corporate governance

Improvement of operation of the Board of Directors

  • Setting up an efficient system for distribution of authority between management bodies of the companies

  • Increase in the number of independent directors

Regulation of the information policy

  • Establishing the list and scale of information disclosure, its schedule, methods and periods

  • Regulating the interaction of members of the Board of Directors and the Management Board with the public community

Progress of corporate ethics standards

  • Members of the Board of Directors and the Executive Board shall be obliged:

  • To comply with the principles of executing transactions with Company’s shares

  • To advise the Company Board of Directors on possessing the Company’s shares, as well as on a conflict of interests while executing transactions

  • To be liable for any damage to the Company and to be responsible for disclosure of confidential information

Introduction of corporate governance ratings and corporate audit system


Anatoly chubais chief executive officer rao unified energy system of russia

Capitalization growth is top priority

Strategic priority of the management is to ensure further increase of capitalization

Management priorities for the nearest years

Launch of the “5+5” Strategy in the interests of shareholders

Launch of a competitive 5 – 15% part of the wholesale electricity market

New positioning in the tariff policy

Improvement of the Holding’s financial and industrial performance

Advance in corporate governance

Company’s Mission is to ensure that the overall capitalization of the newly created companies is greater than that of RAO “UES of Russia” currently


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