RAO UES of Russia: Towards Economy Of Growth

Through Reform Of Energy Sector

Presented by A. B. ChubaisChairman of the Board,

RAO UES of Russia

Brunswick UBS«Russia: Investing into Economy of Growth»

September 28, 2004

2

RAO UES of Russia: Growth Dynamics

RAO UES of Russia provides for approximately 70% of power generation and consumption in Russia

Source: RAO UES of Russia

Nationwide energyconsumption growthin Russia

Increase in power

generation by power

plants comprising the

RAO UES of Russia

holding

- Optimistic scenario:1290 bln kWt.h towards 2020 (on average, 2,76% a year beginning from 1998 )

- Moderate scenario: 1110 bln kWt.h towards 2020 (on average, 1,54% a year beginning from 1998)

Source: Energy strategy of Russia

Forecast for further growth

of energy consumption in Russia

-2

-1

0

1

2

3

4

1999 2000 2001 2002 2003 2004

%

3

RAO UES of Russia Group: Financial Showing For The Past Years (IAS)

Mln$

-5

0

5

10

15

20

25

1999 2000 2001 2002 2003

-15

-10

-5

10

15

20

25

0

5

1999 2000 2001 2002 2003

EBITDA

Revenues

Income (loss) from operations

EBITDA margin

Operating margin

%

8,015

- 0,87

0,4

20,14

2,2

4,2

5,06

- 11

20,1

10,9

4

Corporate Center Reform Management

Center

Business Unit

1

Business Unit

2

Business Unit

«Grids»

Business Unit

«Hydro Generation»

Business Unit

«Service»

Management Board

The new organizational structure of RAO UES of Russia must stimulate the reform progress in the electric power sector of Russia

SO-CDU Hydro WGCs(4),Hydro Power Stationsunder construction

Thermal WGCs(3), TGCs (8), CorrespondingRegionalEnergos

Thermal WGCs(3), TGCs (6),CorrespondingRegional Energos

Repair andService Companies

Federal Grid Сompany,IDCs,Export-import,Foreign assets

Improvement of Management:New Corporate Configuration of RAO UES

time is pressing

5

Bln Roubles

time is pressing

 

Profit before taxation: Results of 2003; Forecast and dynamics for 2004

Transition to a new management system based on Key Performance Indicators (KPI).

Increase in motivation and personal responsibility of the company management

(including the system of KPI-based bonuses and RAO UES share options).

 

2003 actual 2004 planned(initial business plans of subsidiary companies)

23.96 25.47

2004 planned(approved by the RAO

UES Management Board on Sept 20, 2004)

38.34

(prior to establishment of business units)

(updated 3 months into functioning of

business units)

New Corporate Configuration of RAO UES: Growth in Efficiency

Planned effect from introduction of

modern management techniques:

12,87

6

Georgia: about 20% of generating plants and 35% of distribution facilities have been purchased or assumed under trust management;

 

Armenia: Assets comprising about 85% of that country’s power generating facilities have been purchased or assumed under trust management;

 

Kirghizia, Tadjikistan:

Talks are unfolding about purchasing assets (completion of energy facilities).

 

Kazakhstan: Consummation of a deal on purchase of a share in a large power plant.

 

Purchase of Energy Assets in Other Countries

time is pressing

7

«Lesser Energy Business»:Results and Perspectives

time is pressing

JSC «RKS» Established in May 2003

Sales volumefor the first yearof operation: 14 billion roubles

Net loss: 117 million roubles

Facts Perspectives

Concentration of the core business in 14 cities of Russia.

Gradual expansion of core business geography

(up to 30 cities). Increase in sales volume

up to $1 billion in 2005.

Chief objective: break-even business plan for 2005,

generation of net profit starting from 2006.

8

Growth and Investment Factors in RAO UES: Pros and Cons

Slow pace of reformReform as the key

factor of a competitiveenergy market

High potentialof capitalization increasedue to undervaluation of

company stocks

High-capacity andever-growing

consumption marketCross funding

Risks associatedwith imperfect

legislationon company restructuring

+ -

9

++

Establishment of new industry units

Wholesale GenerationCompanies (WGC)

Territorial GenerationCompanies (TGC)

Establishment of Wholesale Generation Companies started: - Charter capital of «WGC-5» JSC comprises 29 407 170 459 roubles;

- Initially, 100% of company shares remain in the ownership of RAO UES of Russia.

- Shares are paid for by material assets and money (4 228 964 180 roubles).

Establishment of Territorial Generation Companies started: - RAO UES of Russia establishes a 100% owned subsidiary joint-stock company (TGC) - Pays for 50%+1 shares of the new company’s charter capital. - Unpaid shares pass into the ownership of the TGC. - Shareholders of “Energo” joint-stock companies, except for RAO UES of Russia obtain the right of purchasing 50% - 1 shares at par value.

Charter capital of «TGC-9» JSC: 4 200 000 roubles (generating assets of«Permenergo» and «Sverdlovskenergo» to be leased to the concern). Charter capital of «TGC-14»: 3 100 000 roubles (generating assets of «Buryatenergo» and «Chitaenergo» to be leased to the concern).

Energy Sector Reform:Latest events

10

+

Creation and development of a competitive energy market

Reform ofregional energy systems

Establishment of new industry units: Interregional Distribution Companies (IDC)

Exchange floor of the trading system administrator (ATS):

- Started operation on November 1, 2003.- Entered the Top 10 list of world’s largest energy exchanges.- Unites over 80 participant companies- Expected sales volume for 2004 – around $850M.

- Functional division was initiated in 46 energy enterprises («Energos»). - Shareholders approved of the reform program in 32 energy systems. - Three new «Energo»-based companies completed state registration.

Establishment of Interregional Distribution Companies started: - IDCs will be established as 100% owned subsidiary concerns of RAO UES of Russia.- Charter capitals of the IDCs will be paid for by shares of distribution grid companies, assigned at the time of restructuring the regional energy systems. - For transition period the IDC shares will be passed under trust management of the Federal Grid Company.

Energy Sector Reform:Latest events +

11

0

20

40

60

80

100

120

140

160

180

No

vem

be

r

Dec

emb

er

Jan

ua

ry

Feb

ruar

y

Mar

ch

Ap

ril

May

Jun

e

July

Au

gu

st

Mln

KW

t/h

100

200

300

400

500

600

Ro

ub

les/MW

thFree tradevolume

Free marketprices

Regulated marketprices

522 1327 2616 43833781 3580

493 490,85508,8 498,93

393,59

431,43

477,79 481,44

276,94

264,25

251,95

3987 3844

494,40

3605

517,55

4217

491,47

* Forecasted volumes

200333,7NEPOOL (USA) 10

(2004)45ATS (Russia)* 9

(2004)56 EEX (Germany)* 8

(2004)62AESO (Canada)* 7

(2004)67GME (Italy)* 6

2002104NYISO (USA) 5

2003118Nord Pool (Scandinavia) 4

2003119PJM (USA) 3

(2004)184NEM (Australia)* 2

2003229OMEL (Spain) 1

#Mln

MWthTotal

(forecast) for year

Spot Market

Free Market of Energy World Top 10 Exchange Floors

Source: ATS

Energy Market:A Positive Trend +

12

RAO UES of Russia: Potential for Capitalization Increase

Source: RAO UES of Russia based on IBES, Nelson, JCF estimates

EV/EBITDA (2004 Forecast) Mcap/kW (Beginning of September of 2004)

RAO UES Discount in relation to foreign companies’

EV/EBITDA average value

– from 43% to 62%

RAO UES capitalization per 1 KWt ofinstalled capacity

is several times lower than that of foreign energy

companies

+

0

1

2

3

4

5

6

7

8 7,5

2,9

5,96,5 6,6

0

116

538

160

473

940

100

200

300

400

500

600

700

800

900

1000

RAO UES

CEMIG

CEZ

ENDESA

E.ON

RAO UES

CEZENDESA

E.ON

CEMIG

13

-

+

Crossfunding

Risks associatedwith imperfect

reform legislation

Slowpace

of reform

Elimination ofcross funding

within several years

Elimination of conflictbetween corporate

and legislative norms

Quality of reformstill preferred over

pace of reform

Making it legalby creating

a system of action grants.

Amending the legislation(Tax Code, Law on Joint-stock

Companies, other legislative acts).

Previous decisionson energy system reform and

interregional framework of new companiesare not to be reviewed.

Removing the «Cons»

14

New Initiative of RAO UES: Concept of «Managed Expansion» of the Energy Market

Proposals Measures

• Transformation of the federal wholesale energy market (FOREM) into a system of bilateral agreements.

• Transfer of the entire regional power generation system to the FOREM

• Gradual reduction of the total contractual supply volumes through governmental decisions (within 3 to 5 years).

• Employment of bilateral agreements for protection of selected consumer groups

Withholding from immediate transition to the target model of market and its substitution with managed expansion of the energy market.

• Controlling energy price upsurge risks.

• Smooth accommodation of consumers and producers to market conditions.

• Retaining control over energy supply to the two most vulnerable consumer groups: major energy-intensive industrial plants and the residential sector.

Effects

15

Thank you for your attention