eesr 151102

VYACHESLAV SINYUGIN Deputy CEO Unified Energy Systems of Russia: 

VYACHESLAV SINYUGIN Deputy CEO Unified Energy Systems of Russia 15 November 2002 Boston

Agenda: 

Agenda UES Highlights Reform - Rationale and Status Dialogue with Shareholders Next Steps

UES Highlights: 

UES Highlights

UES: 

* As of 14 November 2002 Highlights Key Data Russia - 4th Largest Power Market in the World 26.5% 8.4% 7.2% 5.7% 3.9% 3.7% 3.6% 3.5% 2.5% 2.2% % of World Total Bn MWh UES One of the world's largest electric utility companies 407 thermal and hydro power plants 2,7 mln km of power transmission lines 646,000 employees 627 bn kWh of electricity generated; 72% of the overall generation in Russia 53% state-owned

IAS 1H02: Revenues: 

Rb Bn * Provisional Data Russian rouble as of June 30th, 2002 IAS 1H02: Revenues 188 217 231 IAS 1H02: Operating and Net Profit Rb Bn.

Reform - Rationale and Status: 

Reform - Rationale and Status

Slide7: 

Global Experience in the Electric Power Sector Complete Liberalization of Electric Power Sector State monopoly Russia (2001) France (2000) Italy (1999) Ukraine (1997) EU Directive (1996) SAR (2000) Greece (2000) Kazakhstan (1998) Moldova (1999) California (1995) Competition Price Liberalization Non-discriminatory Access to Grid Private Investments

Russia: The Context for Structural Reforms: 

Russia: The Context for Structural Reforms The strong economic performance of the last three years sets the foundation for implementation of profound structural reforms designed to complete modernization of the Russian State The current focus is on reforming natural monopolies The reforms are unprecedented in scope They will constitute one of the critical drivers in the economic modernization of Russia, and have significant impact on the energy sectors and economies of Eurasia At the core, the reforms are driven by the development of new, market driven regulatory and operating regimes The overriding objective is to unlock the significant potential of the current monopolies and create value for: The consumers The shareholders The State The reform of RAO UES is critical to the modernization of the Russian State

Russian Reform : Incorporate the Best of Industry Experience: 

Optimal Industry Structure Create transparent and competitive market place Improve overall economic efficiency of the system Ensure financial viability of individual enterprises Secure affordable end consumer electricity price Attractive Investment Profile Encourage capex into areas where new build is required Raise economic competition and quality through involvement of foreign strategic investors Establish clear and effective regulatory framework Enhance shareholder value of UES, while ensuring fair treatment of minority shareholders Social Considerations Ensure smooth transition to a deregulated market with minimal price shocks Ensure reliability of the new system Constraints Objectives Russian Reform : Incorporate the Best of Industry Experience

Reform Basics: Separation of Monopolistic and Competitive Sectors: 

Competitive sectors Natural monopolies Liberalisation of price-setting Stimulation of market participation Market rules Regulated tariffs Securing equal access to grids Establishment of market infrastructure GENERATION SUPPLY TRANSMISSION DISTRIBUTION Reform Basics: Separation of Monopolistic and Competitive Sectors

Anticipated Timetable: 

Anticipated Timetable Development of the legal framework Revision of the market structure Pilot test of the wholesale market Set up of competitive electricity market in generation and supply Attract private investments in various sectors of the industry 2001-2004 2004-2006 2006-2010 Transmission tariff introduced Distribution tariff introduced Unregulated market (5-15%) ISO tariff introduced Government set tariffs remain for FGC, DistCos and heat only Generation and supply are unregulated First Phase Second Phase Third Phase Objectives Market Structure Tariffs Federal Grid Company Wholesale generation companies Unbundled regional companies, consolidated by function Federal Grid Company and regional distribution companies Wholesale generation companies Regional generation companies Supply companies

Legislative Basis of the Reform: 

Package of draft laws on the Russian power sector reform has passed the 1st reading by the State Duma of the Russian Federation Federal Law «On the Electric Power Sector» Amendments to the Civil Code of the Russian Federation Amendments to the Federal Law «On Natural Monopolies» Federal Law «On putting into effect of the Federal Law «On the Electric Power Sector» Amendments to the Federal Law «On Energy Saving» October 9th, 2002 Amendments to the Federal Law «On State Regulation of Electricity and Heat Tariffs» Legislative Basis of the Reform Separation of the Russian power sector into competitive (generation and supply) and monopolistic (transmission and dispatching) segments The new structure of the wholesale and retail power markets, with an equilibrium price based on submitted bids Guarantees for reliable electricity supplies, as well as insurance of the rights and concerns of minority shareholders and the State

Slide13: 

Fair asset value of investment Interest in selected assets Increase value of holdings Fair and transparent treatment Liquidity Corporate governance No shocks for customers Capital investment Taxes Elimination of subsidies National interest in transmission Low cost heat and electricity Reliability Subsidy for some customers Strategic interest in selected assets Legitimate, but Diverse Interests of Key Stakeholders Significant Minorities in Subsidiaries Shareholders The State Customers

Dialogue with Shareholders: 

Dialogue with Shareholders

Slide15: 

Under management control Beyond management control UES Stock Price Drivers in 2002 UES RTS index Insufficient communication with shareholders regarding key principles of the restructuring Premature consideration of asset sales in uncertain sector conditions Modest operating performance and cost-cutting efforts The final industry structure and the means of its regulation remain unclear Prospects for restructuring have grown more vague due to the delay in approval of draft bills from June to autumn A number of Duma deputies support the plan for grid nationalization Cents 8 12 16 20 24 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09

Seven Steps of Management for the Benefit of Minority Shareholders: 

Seven Steps of Management for the Benefit of Minority Shareholders Moratorium on sale of core assets and granting of options to purchase these assets until the mechanisms of fair valuation and proceeds distribution are established No pledge of shares for loans No asset transfers to Government other than at fair value Pro-rata allocation of shares Preservation of liquidity of shares at all levels throughout the process Financial / operating results to remain a priority during restructuring Substantial modification of the dividend policy for the benefit of shareholders

UES Stock Has Outperformed the Index Recently: 

1 4 5 6 10 11 12 13 November 99 104 109 114 119 124 129 134 139 144 149 Growth Rate, % 24 25 26 27 30 September 1 2 3 4 7 8 9 10 11 14 15 16 17 18 21 22 23 24 25 28 29 30 31 October UES of Russia Common Share Russian Trade System Index UES Stock Has Outperformed the Index Recently September 25th, 2002 Presentation of the Seven Steps

Next Steps: 

Next Steps

Next Steps: 

Next Steps Restructuring Power Sector Reform Laws Second reading November 29 Third reading December Restructuring plan (“3+3”) Task force to start the discussion November 22 Board of directors to review the Plan December 29 Operations Government to discuss natural monopolies tariff-setting December IAS FY2002 results Q2 2003