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29 September 2003, Moscow
Anatoly Chubais
Chief Executive Officer
Unified Energy System of Russia
Brunswick UBS
Annual Investor Conference
Contents
Company
Priorities for future
development
Results
Reform
3
Energy reform law package was approved and became effective Company’s “5+5” Reform Strategy for 2003-2008 was adopted Action Plan for the Power Sector Reform for 2003-2005 was
approved by the government resolution # 865-p as of 27 June 2003 Resolution # 1254-p on the “Structure of Generation Companies in
Wholesale Power Market” was signed by the Government 1 September 2003
Government resolution on rules and regulations of the transition wholesale power market is drafted
The “5+5” Strategy is launched Business efficiency is improving, corporate governance is
advancing Company value has increased by a factor of four Company shareholders’ membership changed
Reform
Company
Results achieved
4
ResultsSeven Steps of the Management for the Benefit of Minority Shareholders (proclaimed 25 September 2002)
1. Moratorium on sale of core assets and granting options to purchase these assets until the mechanisms of fair valuation and proceeds distribution are established
2. No pledge of shares for loans
3. No asset transfers to Government other than at fair value
4. Pro-rata allocation of shares at all stages of the reform
5. Preservation of liquidity of shares at all levels throughout the restructuring
6. Financial / operating results to remain a priority during restructuring
7. Substantial modification of the dividend policy for the benefit of shareholders
ьь
ь
ьь
will beensured
will beensured
Reform: results
6
Creation of a transparent and competitive market Improving overall economic performance in the sector Providing for financial stability of emerging companies Making regulatory environment straightforward and efficient Ensuring smooth transition to the liberalized market with minimum price fluctuations
Competitive sectors
Natural monopolies
Reform Goals
Energy reform package of laws was approved and came into effect
Results
On 26 March 2003, energy reform package was signed into law by the Russian President
Free price-setting Stimulating
market entry
Market rules
Regulated tariffs
Securing equal access to grids
Setting up market infrastructure
Generation Sales
Transmission Distribution Dispatching
Reform Basics: Separation of Monopoly and Competitive Sectors
7
Adoption of RAO UES “5+5” Strategy Concept for 2003-2008
24 April2003
23 May2003
29 May20032002
Results
The Draft Concept was developed in collaboration with the shareholders and consortium of Alfa-Bank and Merrill Lynch consultants
The Concept was discussed by the Board of Directors’ special session and made available for public discussion
Concept together with the Action Plan for the Power Sector reform for 2003-2005 were presented at the meeting of the RF Government Commission on Energy Reform and were approved in principle
Concept was reviewed by the Board of Directors
The Concept was UNANIMOUSLY approved by the Board of Directors’ special session
8 April2003
8
Concept of Company’s “5+5” Strategy for 2003-2008 was adopted
The “5+5” Strategy Concept was unanimously approved by the Board of Directors’ Special Session in May 2003
The System Operator was set up
The Federal Grid Company was set up
Mechanisms for creation of wholesale generation companies are being devised
Restructuring of regional power companies was launched
Results
Resolution of the RF Government “Action Plan during the 1st Stage of Electric Power Industry Reform” # 1040-RF as of 3 August 2001
9
The Strategy provides for the following structural transformations be carried out by 2008
Minority Shareholders
FGC
Thermal generation-
based WGCs
Holding of guaranteed suppliers, isolated
AO-energos
System Operator
About 20 TGCs
Isolated AO-energos
Guarantee suppliers
<25% <25%65-100%<48% <48%75-100%
1 IDC’
Up to 5 IDC
DC 1 DC N
49%
100% 100%
Hydro generation-
based WGCs
<48%
Regional generation companies
49-100%
49-100% 49-100%
FGC – Federal Grid Company (the Unified National Electricity Grid)IDC – Interregional Distribution CompanyIDC’ – a RAO UESR’s spin-off holding IDC’s sharesDC – Distribution CompanyWGC – Wholesale Generation CompanyTGC – Territorial Generation Company
Results
“5+5” Strategy for 2003-2008 is launched
Company performance
11
Auditing Committee was set up within the Board of Directors
“Basic Principles for Operations with Securities of RAO UES and its Daughter Companies by Members of Board of Directors and Management Board” were approved and are being adhered to
Company’s information policy is being revised
Optimizing and reducing cost: Repair services are unbundled into
independent businesses and subsidiary companies (planned cost reduction for 2003 - RUB 3 billion)
Optimization of fuel cost (planned cost reduction for 2003 - RUB 4.2 billion)
Optimization of the personnel structure and number of employees (planned cost reduction for 2003 - RUB 5.5 billion)
Divestiture of non-core businesses (planned cost reduction for 2003 - RUB 1 billion)
Developing new businesses: Housing and communal sector Former Soviet Union countries (Georgia,
Armenia)
Improvement of corporate governance Growth of business efficiency
Business efficiency is increasing, corporate governance is improving
Results
12
Company’s value has increased by a factor of four
Results
Market capitalization of RAO UES
Russian Trading System index
100%
150%
200%
250%
300%
350%
400%
450%
24.0
9.20
02
24.1
0.20
02
24.1
1.20
02
24.1
2.20
02
24.0
1.20
03
24.0
2.20
03
24.0
3.20
03
24.0
4.20
03
24.0
5.20
03
24.0
6.20
03
24.0
7.20
03
24.0
8.20
03
26.0
9.20
03
13
Priorities for future development
Creation of power reform legal basis
Launch of the wholesale power market
Establishing and spinning off wholesale generation companies
AO-energos restructuring
Consolidation of HV AO-energos’ grids into the Federal Grid Company
Revision of tariff-setting principles
Improvement of corporate governance
Developing new cost-cutting programs
Elaboration and implementation of a market regulatory system for grid assets
Management system optimization
Reform
Company
Reform: Priorities for future development
15
Setting up rules and regulations for reforms in power industry
Priorities for future development
In 2003, it is intended to approve the following rules and regulations:
Rules and regulations for the transition market
On determining the federal authority’s mandate in regulating natural monopolies
Rules of non-discriminate access to grids, dispatching and Trading System
Administrator (TSA) services
Program for changing state-regulated prices (tariffs) in power industry, including
criteria and calculation procedure of return on invested capital
On elimination of cross-subsidization in power industry
Information disclosure standards for natural monopolies
16
Launching the wholesale power market
Adoption of RF Government Resolution on the ‘Rules and Regulations for the Transition Wholesale Power Market’ (setting, among other things, the launching date for the market)
Readiness of market participants in terms of rules and regulations, technology, and organization
Approval of documents on tariffs in the fluctuation sector and methods of setting up tariffs for TSA services
Elaboration and approval of rules and regulations concerning specifics of accounting for and taxation of market participants
Approval of TSA regulations and the contract system
The market model is based on nodal pricing
Trading at the spot market (the day-ahead market) and bilateral (direct) contracts are envisaged
Priorities for future development
Suggested date for launching a competitive sector at 5-15% of the wholesale power market – in October 2003; complete market liberalization – in 2006
What is necessary:
Two most important issues of market operation have been settled:
17
Establishing and separation of wholesale generation companies (WGC)
Creation of new players in the competitive wholesale power market
Attraction of direct investment into generation
Increasing the share of State in the Federal Grid Company
Considering the shareholders’ interests and maintaining the value of the Company
Priorities for future development
Goals of WGC separation
Sale of WGC for cash
Sale of WGC for RAO UES
shares
18
Schedule
Preparation of WGC for the auction
Establishing WGC and their management Preparation of an information document
Priorities for future development
Establishing and separation of wholesale generation companies
Pilot WGC: late 2004
Discussion at the Board of Directors – November 2003
Completing WGC creation (2nd quarter 2004)
Approval of spinning-off (3rd quarter 2004)
Remaining WGCs – 2005-2006
Schedule is determined in many respects by the rate of AO-energos restructuring
19
Start-up of pilot AO-energos restructuring projects
Restructuring in 30 AO-energos is expected to begin by the end of 2003
Major problems of AO-energos restructuring:
Difficulties in coordinating restructuring projects with minority shareholders who have controlling blocks in most of AO-energos
Organizational difficulties
AO-energos restructuring
1 January 2005: restructuring of AO-energos by a clear majority
Restructuring is completed
Priorities for future development
2003 2004 2005
20
Consolidation of HV AO-energo grids into the Federal Grid Company (FGC)
Consolidation of HV AO-energo grids into FGCElaboration and implementation of the market
regulation system for grid assets
Preparation of a comprehensive technical foundation and preliminary discussions are in progress
The key issues are as follows:
Fair valuation of assets
Gradual introduction of the market-oriented rate of return on invested capital (ROI)
Introduction of incentives for increased efficiency and capital investment
Introduction of a new, market-oriented regulating system should not cause any price shocks
Implementation of a fair system of grid asset regulation is a key element in adding value for RAO UES shareholders
Consolidation of all HV grids into FGC and increasing the state share to 75% (primarily by divesting generation) is a key issue for RAO UES
Priorities for future development
Consolidation of HV assets is a key component in the RAO UES strategy
To date, consolidation implies setting up and spinning off inter-regional HV grid companies
Envisaged and discussed are alternative scenarios for consolidation of HV assets into FGC
Increased state share is a necessary prerequisite for FGC spinning off
Company: Priorities for future development
22
Transformation procedures during
reform
Improving corporate governance
Capitalization increase of the Company
Priorities of RAO UES for future development
Priorities for future development
Upgrading Company performance and
cost-cutting
23
Revision of tariff-setting principles
Elimination of cost-base approach in
pricing during the transition period until
the market is fully liberalized
Setting by the Government of tariff caps for each power system, and RAO UES as a whole for three years, taking into account inflation forecasts
Draft resolution on setting maximum increases in power tariffs up to 2006 was submitted to the Government
Motivation of AO-energos to cut cost and prepare to work in market conditions
Suggested power tariff growth:2004 – 13% 2005 – 9,5% 2006 – 6,5%
Priorities for future development
24
Establishing an efficient system for distribution of authority between company management bodies
Setting up a Remuneration Committee within the Board of Directors Approval of Company’s Information Policy Elaboration of a Program for Improvement of Corporate Governance Formulation of a RAO UES Code of Ethics Members of the Board of Directors and Management Board should comply with the
Basic Principles for Operations with Securities of RAO UES and its Daughter Companies Members of the Board of Directors and Management Board are held responsible for
damage to the Company and unauthorized disclosure
Enhancing efficiency and transparency in RAO UES Holding
companies
Moving from the administrative governance system to corporate
governance
Moving to new quality of corporate governance
Improvement of corporate governance
Priorities for future development
