RUSSIA POST ELECTIONS: GREAT EXPECTATIONSVIII ANNUAL INVESTOR CONFERENCE

Moscow, Russia

22.06.2004

Speech of the Chairman of the Management Board

of RAO «UES of Russia»

A. Chubais

RAO «UES of Russia»: The energy of the reform

2

TWh

Overview of Russia and Russian Electricity Sector

Positive Consumption Trend

Russia: 4th Largest Power Producer in the World in 2003

3,864

1,4721,033 889 588 580 577 546 383 328

01,0002,0003,0004,0005,000

US China Japan Russia Canada Germany India France UK Brazil

25.0% 9.5% 6.7% 5.7% 3.8% 3.7% 3.7% 3.5% 2.5% 2.1%

% of WorldTotal

TWh

Optimistic Scenario

Pessimistic Scenario750

1,000

1,250

1,500

1,750

1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2010 2015

1,073

841 828 813 809 832 863 875 879 889945

911

1,135

1,020

1,315

1,100

1,545

1,200897

2020

Source: IEA

Source: Energy Recearch Institut, Russian Academy of Sciences

3

RAO “UES of Russia” Today: Operating Highlights

Source: RAO “UES of Russia”, IEA

 

The World’s Ten Largest Electricity Companies (2003)

>156RussiaRAO UES

Capacity (GW)Home-baseCompany

42South AfricaESKOM

43GermanyRWE

45ItalyENEL

49FranceSUEZ

54GermanyE.ON

59JapanTEPCO

121FranceEDF

151ChinaSPCC

42USAAEP

Key Facts

Except for nuclear capacity

and several large independent generators,

UES controls the electricity industry in Russia

72% of Russia’s installed generation capacity

69% of Russia’s electricity output

32% of Russia’s heat production

96% of Russia’s power transmission lines

4

Russian Electricity Sector: Today’s Structure

Federal Grid

Company System Operator

44 FederalPower

Stations(incl. 8 power

station under

Construction)

Generation

Transmission &

Distribution Grids

SupplyDispatching

Services

RussianFederation

MinorityShareholders

of the Parent Company

IndependentAO-Energos:

Irkutskenergo

Tatenergo

Bashkirenergo

RosEnergoAtom

Government

10 NuclearStations

73 Regional Power Companies - AO-Energos

From 49% to 100%

52% 48%

100% 100%From 50 to 100%

RAO UES of Russia

5

RAO “UES of Russia” Today: Key Financial Data

2003 (Forecast Data): Revenue – around $19,6 bn

2002:Revenue – $15,83 bn

US$ m 9 months ended 30 Sept 2001

9 months ended 30 Sept 2002

9 months ended 30 Sept 2003

Revenue 8,474 10,328 13,720

Net Profit 909 669 543

EBITDA 1,070 1,494 2,720

EBITDA Margin 12.6% 14.5% 19.8%

Operational Margin 1.2% 0.6% 8.9%

Net Margin 10.7% 6.5% 4%

Fixed Assets 24,201 25,834 29,293

Shareholder Equity 14,404 16,730 19,733

6

Growth of the market capitalisation of RAO «UES of Russia» (RTS data)

440%420%400%380%360%340%320%300%280%260%240%220%200%180%160%140%120%100%80%

Capitalisation of RAO «UES of Russia»

RTS Index

08/0

6/20

04

02/0

9/20

02

In the recent two years the stocks of RAO «UES of Russia» were largely outperforming the Russian securities market as a whole

Oct-Dec 2002

Jan-Mar2003

Apr-Jun2003

Jul-Sep2003

Oct-Dec2003

Jan-Mar2004

Adoption of a package of laws on electricity industry

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Power sector reform after adoption of a package of laws: restructuring of RAO «UES of Russia»

Approval of a configuration of Wholesale Generation Companies;

Approval of a configuration of Territorial Generation Companies;

Approval of a configuration of Interregional Distribution Companies and Interregional Transmission Companies;

Approval of the corporate strategy concept (“5+5”);

Ongoing consolidation of transmission and operational control assets (within AO “Federal Grid Company” and AO “System Operator”);

Adoption of restructuring decisions by 30 AO-Energos. Restructuring of the first utility (“Kalugaenergo”) has been completed;

Ongoing spin-off of repair and maintenance businesses;

A management company for AO “North-West CHPP” (an international consortium involving ENEL and ESN Energo) has been chosen through a public tender procedure.

Establishment of new market participants:

- 10 wholesale generation companies (WGCs),

- Up to 20 territorial generation companies (TGCs)

- 5 interregional distribution companies (IDCs); 

! Sale of thermal WGCs and TGCs to private investors;

Completion of the restructuring of AO-Energos: by the end of 2004, 40 AO-Energos will have held restructuring shareholders meetings);

Completion of the consolidation of transmission and operational control assets;

Attracting initernationally recognized strategic investors into the Russian power sector

Results Plans

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Power sector reform after adoption of a package of laws: formation of the market

Since November 2003, electricity trading sessions have been going on in the competitive sector 5-15

Within the first 7 months of its operation, the trading exchange of the Non-Commercial Partnership «ATS» became one the ten largest specialized trading exchanges of the world by trading volumes

The free sector of the market represents some 8% of the total electricity generation and consumption in European Russia and Urals

Implementation of the current model of the competitive wholesale electricity market throughout the Russian territory (with the exception of isolated power systems and the Far East)

Development of a new target model of the market

Establishment of regional liberalized retail market (subject to the elimination of the cross subsidisation practices)

Results Plans

9

0

20

40

60

80

100

120

140

160

180

Mln

.kW

t.h

100

200

300

400

500

600

Ru

b/M

Wt.

h

Trading volume

Price in the competitive sector

Price in the regulated sector

November December January February

522 1327 2616 4383

March

3781 3580

MayApril

493 490,85508,8 498,93

393,59

462,2

431,43

477,79 481,44

276,94

264,25 251,95

3987 2022

June (15 days)

483

Volume and price dynamics in the competitive sector of the wholesale market

Source: NP ATS

Power sector reform: formation of the market

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Improvement of management

Corporate Center

Reform Management

Center

Business Unit

1

Business Unit

2

Business Unit

«Grids»

Business Unit

«Hydro Generation»

Business Unit

«Service»

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

Thermal WGCs(3),TGCs (8), CorrespondingRegional Energos

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

Repair andService Companies

Management Board

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

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

11

Participation in assets management,Export

In addition to the traditional exports, RAO «UES of Russia» has launched a new stage of its strategy abroad based on the acquisition of foreign assets. The company has acquired energy assets in Georgia and Armenia.

Expansion of the geographical scope of exports, attraction of investments into the export-oriented core business development projects.

Participation in assets management or acquisition or foreign assets in the CIS area (Moldova, Ukraine, Kazakhstan, Kyrgyzstan,Tadjikistan) and foreign countries (Slovakia, Bulgaria, Poland, Romania, Turkey).

Results Plans

Approval of the key parameters of the Feasibility Study of synchronous

interconnection by the European Commission.

The Union for the Co-ordination of Transmission of Electricity (UCTE) has prepared draft Terms of Reference for the development of a Feasibility Study of the synchronization project.

Synchronization of the electricity systems of Russia and European countries.

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«OK, Mr. Chubais, I agree that a quality of your reform is more important than its terms… But… Time is money, isn’t it?!»

RAO “UES of Russia” Restructuring: Terms and Quality

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RAO “UES of Russia” Restructuring: Wholesale Generation Companies (WGC)

• I stage: Wholesale Generation Companies are set up as 100 % daughter companies of RAO UES

(based on the assets and stocks of federal power plants belonging to RAO UES)

July-August, 2004: setting up of Wholesale Generation Companies №№ 1, 2, 4, 5, 6

• 2 stage: Auctions to sell out Wholesale Thermal Power Generation Companies

Auctioning mechanism should be approved by the Russian Government

14

RAO “UES of Russia” Restructuring: Territorial Generation Companies (TGC)

• April 2004: RAO UES Directors Board has endorsed the scheme of the Territorial Generation Companies being established on the basis of the rented generation equipment of AO-Energos.

• Based on this scheme Territorial Generation Companies №№ 9 and 14 will be set up.

• It is planned that Territorial Generation Companies №№ 9 and 14 will start operating since 01.01.2005.

• Territorial Generation Companies №№ 9 and 14 could be sold to investors after their formation has been completed (2006).

15

02.12.2004: Time to make a choice

Setting up and further splitting off WGCs and TGCs–

the biggest actors on the future electric power competitive market

in Russia

Breach of time schedule of setting up

electric power competitive market in Russia

- +

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THANK YOU FOR YOUR ATTENTION