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Unified Energy System

February 28, 2003

Results of RAO UES Board of Directors meeting on 28 February 2003

Moscow, 28 February. The Board of Directors has reviewed the information on the use of provisions giving the Board broader powers in controlling transactions in shares, units, and assets of the Company's subsidiaries in accordance with the "Procedures for interaction of RAO "UES of Russia" with business companies whose shares (units) are owned by RAO "UES of Russia" ("Procedures"). The Procedures were approved by the Board on 15 August 2002 and became effective on 1 September.

It was noted that, in pursuance of the Procedures, the Board has considered 31 items relating to determination of agendas for shareholder meetings of the Company's subsidiaries and dependent companies (SDCs) and 20 items regarding the SDCs' participation in other entities, etc.

The Board also approved the wording of amendments and additions to the Charter of RAO "UES of Russia" based on generalized practice which is to be submitted for shareholder approval at the Company's annual meeting.

Back in August 2002, the Board of Directors approved the proposed amendments and additions to the Company's Charter prepared by the Board's Working Group as a result of consultations with minority shareholders and representatives from the Russian Ministry of Property Relations, and instructed the Management Board of RAO "UES of Russia" to sum up the practice of use of those provisions and finalize the wording of the amendments and additions to the Charter to be submitted for shareholder approval at the Company's AGM. These amendments and additions seek to increase shareholder control over the activities of SDCs' management throughout the restructuring period.

In particular, the amendments no longer contain information about the specific amount and categories of transactions, as these are to be determined by the Procedures. In addition, in the sub-paragraph of the Charter regulating transactions by RAO "UES of Russia" in a certain category of assets there has been deleted the indication of the specific value (amount) of the UES property involved in such transactions. Instead, there is a reference to a special procedure determined by the Board in accordance with the current Charter of RAO "UES of Russia" (taking into account the proposed amendments).

Such approach is more flexible and will allow the Board of Directors to more promptly take the necessary decisions based on practice and the Procedures (without a resolution by UES shareholders to amend the Charter). The Board may, upon demand of shareholders, tighten or loosen these requirements.

This practice is used, for example, for loan and credit agreements, where the UES Board takes a special decision in accordance with the Charter in respect of such agreements (determining the powers of the Company's executive bodies on this issue and the limits for such agreements).

The complete text of amendments to the Charter will be published on the UES website: www.rao-ees.ru.

The Board also instructed the Chairman of the Company's Management Board to ensure that proposals to make the relevant amendments and additions to the SDCs' Charters are included on the agendas of AGMs of the SDCs of RAO "UES of Russia".

***

The Board reviewed the report on the results of 2002 investment program and the Company's investment program for 2003 approved by FEC.

It was noted that there was an increased investment in electric power projects in 2001 - 2002. Total investments throughout the Holding Company increased from RUB 43.76 billion to RUB 60.45 billion, and in RAO "UES of Russia" from RUB 11.98 billion to RUB 19.72 billion. The performance of investment programs in the Holding Company increased from RUB 45.19 billion to RUB 57.03 billion, and in RAO "UES of Russia" from RUB 12.7 billion to RUB 17.06 billion.

In February 2002, the Russian Government approved the program of investments in the electricity industry for 2002 with RUB 16.7 billion in funds allocated to RAO "UES of Russia".

After the Russian Government had reviewed the additional rationale for the increase in the RAO UES investment program for 2002, the FEC of Russia made adjustments to the List of major construction projects in the electricity industry to be funded from the investment allocations of RAO "UES of Russia" by increasing the funds committed by RUB 2,688 million. These funds were allocated as follows: construction of Bureyskaya HPP - RUB 2,038 million; Irganayskaya HPP - RUB 200 million; restoration of destroyed electric power facilities in the Republic of Chechnya - RUB 450 million.

As a result, the investment program of RAO "UES of Russia" for 2002 (taking into account the approved quarterly budgets) totalled RUB 19.764 billion in allocations from all of the Company's sources of revenue.

The Company's 2002 budget provided for RUB 11.392 billion in funds for the construction of generating facilities, RUB 6.731 billion for the construction of power networks, including RUB 2.187 billion for power grid re-equipment.

In 2002, RAO "UES of Russia" provided RUB 11.7 billion in funds for the generation projects, with the value of construction work done making RUB 9.59 billion (or 84.2%), and RUB 6.4 billion for the power grid projects, with the value of work done making RUB 6.0 billion (91%).

In 2002, the investments in regional energos and AO-power plants amounted to RUB 38.2 billion and RUB 2.9 billion respectively. As before, the primary source of finance for the regional energos' investment programs was the depreciation charges, which made up 81.5% of the total financing in 2002 as compared to 65% in 2001.

The actual amount of investment in the regional energos made RUB 34.5 billion, or 90.4%, and RUB 2.3 billion in AO-power plants, or 78.3% of the target for the year.

Despite limited financial possibilities, in 2002 RAO "UES of Russia" was able to provide financing for the projects near completion. This allowed several power facilities to be commissioned, thus meeting certain economic and technical goals in the regions:

- in June, the testing facility was launched at the Ivanovskaya CPP, which allowed to test the 110 MW Russian-made gas engine to be used in the re-equipment of many power plants, where CCGTs with this kind of engine are to be installed;

- in October, two 25 MW power generating units at the Mutnovskaya GeoTPP started pilot operation, which will allow to reduce the amount of fossil fuel that has to be transported to the Kamchatka Peninsula, boosting the power supply reliability in the area and ensuring the implementation of new technologies using geothermal water;

- in October, the second 80 MW hydroelectric generating unit was commissioned at Zelenchukskaya HPP, which ensures reliable energy supply in the Karachay-Cherkess Republic;

- Aushigerskaya HPP (three 20 MW hydroelectric generators), part of the Nizhnechereksky HPP Cascade, was put into operation in December. This will help establish an independent energy source in the Kabardino-Balkaria Republic and boost power supply reliability in the region.

Besides, several power grid facilities were commissioned, including the following transmission lines: "Vyborg – State Frontier", "Zarya – Barabinsk", "Pskovskaya CPP – Staraya Russa", "Pskov – Yuzhnaya".

In 2002, the regional energos commissioned 493.7 MW of generating facilities, 5 steam boilers of 2,060 t/h, 1 hot water boiler of 180 Gcal/h, over 1,524 km of HV lines of 35 kV and over, 80.9 km of heat networks.

In 2003, about 2,432.7 MW of turbine capacities are planned to be put into service throughout the Holding Company, with 428.2 MW to be funded by RAO "UES of Russia" and the rest of the turbine capacities to be financed with the regional energos' own funds. The most important of the capacities to be commissioned next year are two 185 MW hydroelectric generating units at Bureyskaya HPP.

The FEC approved the investment program of RAO "UES of Russia" for 2003 in the amount of RUB 23.551 billion (RUB 28.49 billion taking into account the depreciation and other sources).

The investment in power generation is planned at RUB 13.220 billion. The program has been developed taking into account the resolutions of the Russian Government and orders of Russia's President concerning those thermal and hydroelectric power plants that are ready for launch, or power plants under construction that will have large capacity, or plants which ensure power supply reliability in the current period. These include Bureyskaya HPP, Kaliningradskaya CHPP-2, Sochinskaya CHPP, and other projects, which are expected to resolve the problem of electricity shortage in the respective regions.

The power grid projects in the investment program are broken down into two groups: power transmission, interconnection lines and substations. The investments envisaged total RUB 7,492 million.

For the purposes of market infrastructure development, RUB 524 million in funds have been committed for the upgrade of hardware and software of "UES SO-CDA" and the Integrated Dispatch Administrations (IDAs), and for the creation of an automated commercial electricity metering system.

The FEC approved financing of RUB 2.315 billion for the reconstruction of energy facilities in the Republic of Chechnya.

The regional energos' planned investment programs for 2003 total RUB 54.3 billion, to be funded as follows: RUB 37.64 billion from depreciation charges, RUB 12.8 billion from profit, RUB 3.86 billion from external sources of finance (including foreign borrowings, funds from the budgets of all levels, and funds committed by RAO "UES of Russia" to specific projects).

In 2003, AO-power plants plan to invest RUB 5.5 billion to be funded from depreciation charges.

However, it should be noted that the tariff policy currently pursued by the regulatory authorities, particularly, their refusal to include the investment component in the energy tariffs to the necessary extent, led to a slowdown in the commissioning of power facilities over the past few years.

These negative trends in the energy industry call for a radical change in the current industry management practices and for the transition from administrative to market-based methods of regulation. The establishment of a competitive electricity market is intended to create investment incentives, which are based on the economic evaluation of investment efficiency.

***

The Board of Directors unanimously decided that it would be advisable for OAO "UES Payment Optimization Center" (OAO “UES POC”) to sell its non-core asset, i.e. the stake in OOO "REN-TV Media Holding".

OAO "REN-TV Media Holding" is a subsidiary of OAO "UES POC", which in turn is a wholly-owned subsidiary of RAO "UES of Russia". OAO "UES CPO" holds a 69.9879% stake in OOO "REN TV Media Holding".

The decision to sell the stake in REN-TV was taken in accordance with the RAO UES policy of non-core assets disposal.

The REN TV group of companies was formed on the basis of ZAO "REN TV Company", OOO "Accept "REN TV Channel", ZAO "REN TV Network", OOO "REN TV Publishing House", which are united into OOO "REN TV Media Holding".

Although "REN TV Media-Holding" is expected to have a positive profit margin in 2002 for the first time in its history, its further development in an increasingly competitive television market would require an investment of at least USD 70-100 million over the next three years. This would have to be long-term investment, which is not in the interests of the majority shareholder.

The procedure and terms for sale of a stake of OAO “UES POC” in OOO “REN TV Media Holding” are to be decided upon by the Board of Directors after the Management Board of the Company introducing respective proposals.

***

The Board of Directors of RAO "UES of Russia" determined the money value of the Company's property contributed to the capital of OAO "UES FGC", based on the market value of said property in the amount of RUB 9,972,718,264.81.

On 15 March 2002, the Board of Directors of RAO "UES of Russia" decided to make a contribution to the capital of OAO "UES FGC" in cash and property of RAO "UES of Russia", and to determine the money value of that property.

The value of fixed assets contributed as at 1 January 2003 made RUB 89,690,915,192. Besides, RAO "UES of Russia" transferred to OAO "UES FGC" part of its unfinished construction projects valued at RUB 459,257,000.

The Addendum to the report of the Consortium of Appraisers determines the market value of part of the unfinished construction projects that have been abandoned by RAO "UES of Russia" as at the appraisal date. The book value of these projects made RUB 9,972,718,264.81 as at 29 December 2002.

The evaluation procedure has been approved by the Federal Service for Financial Rehabilitation and Bankruptcy of the Russian Federation.

***

The Board invalidated its own decision dated 1 October 1999 with respect to the sale of its stake in OAO "SibVNIIPIenergoprom" to OAO "Irkutskenergo".

RAO "UES of Russia" holds an 80% stake in OAO "SibVNIPIenergoprom".

On 1 October 1999, the Board of Directors of RAO "UES of Russia" decided to sell its shareholding in OAO "SibVNIPIenergoprom" to OAO "Irkutskenergo". To date, that decision has not been carried out due to the lengthy process of approval of this deal by the Russian Ministry for Antimonopoly Policy (MAP). By now, the MAP approval has been received. The transaction has to be finalized by an order of the Russian Government. However, over the past three years, the financial position of OAO "SibVNIPIenergoprom" has improved: the research institute is no longer near bankruptcy; the attachment of its assets has been released. As a result, the market value of the Institute's shares has increased.

During the same period, the Board of Directors of RAO "UES of Russia" approved the guidelines for restructuring the research and development entities of RAO "UES of Russia", which envisage the establishment of 8 regional research and technology centers (RDTs), including the Siberian Research and Technology Center based on the RAO UES research institutes based in Siberia.

In furtherance of the Board decision, the Management Board of RAO "UES of Russia" took a decision to organize a management company, OAO "Siberian Energy Research and Technology Center" (SERTC) based in Novosibirsk, and to transfer the powers of the one-man executive body (Director General) of OAO "SibVNIPIenergoprom" to the newly established Center. In this connection, the Management Board recommended that the Board of Directors of RAO "UES of Russia" invalidate the Board decision dated 1 October 1999 to the extent relating to the sale of its stake in OAO "SibVNIPIenergoprom".

In its turn, OAO "Irkutskenergo" insists that RAO "UES of Russia" fulfil its obligations, as it is OAO "SibVNIPIenergoprom" that provides services to the power plants owned by OAO "Irkutskenergo". However, OAO "SibVNIPIenergoprom" is the only organization in Siberia and the Far East of Russia engaged in the design of various co-generation plants, heating mains, boiler houses, electric boilers, heating and pumping facilities for other regions and industries. Besides, the Institute has unique archives of technical documentation not only for OAO "Irkutskenergo", but for the whole of Siberia and Far East.

This is the reason why the Board of Directors of RAO "UES of Russia" has decided against the sale of its stake in the Institute. OAO "SibVNIPIenergoprom" will work within the Siberian Research and Technology Center and provide services under contracts, including those made with OAO "Irkutskenergo".

***

The Board noted the necessity of ADR issuance for the companies to be established in the reorganization of RAO "UES of Russia".

The Board deemed it advisable to consider the issue of conversion of ADR programs within the framework of the Company's restructuring strategy, the "3+3 Program" (seeking to ensure liquidity of the Company's shares). The Management Board has been instructed to include the ADR conversion issue in the draft of "3+3 Program", taking into account the results of consultations with the Depositary Banks (Deutsche Bank, The Bank of New York) and ADR holders.

As of 31 December 2002, the Company's common ADR make 16.33% and preferred ADR 0.84% of the Company's capital.

Deutsche Bank acts as Depositary Bank for the Company's sponsored ADR programs for common (5.51% of capital) and preferred shares (0.84% of capital). The Bank of New York is the Depositary Bank for the non-sponsored program (10.82% of capital).

The forthcoming restructuring of the Company, establishment of new companies, and distribution of shares in the new companies among the existing shareholders brings forth the issue of continuing the Company's ADR programs.

Consultations with the Depositary Banks have shown that the launch of new ADR programs for the new companies appears technically and procedurally feasible.

At the same time, the preservation of an ADR program and the choice of a conversion scenario must necessarily be approved by ADR holders. Besides, it is necessary to take into account the particulars of the Company's restructuring and the development strategies of the would-be companies. Ignoring the interests of the minority shareholders (ADR holders) may result in a situation when all shares on deposit could be presented for repurchase after the Company's shareholder meeting called to consider the reorganization.

However, today, given the absence of a legislative framework for the Parent Company's restructuring, including the determination of the number of companies to be formed in the restructuring process, their capital structures, main business characteristics and development strategies, it does not appear feasible to choose a specific scenario (scheme) for the conversion of the Company's ADR programs. In this connection, it would be advisable to consider this issue at the Board meeting as part of the Company's restructuring strategy ("3+3 Program").

***

The Board of RAO "UES of Russia", performing the functions of a shareholder meeting of OAO "UES SO-CDA", has approved the appointment of OOO "Mikhailov & Co. Audit" as Auditor of the System Operator for 2002.

This audit firm has been selected because they have served as auditors for OAO "UES CDA" since 2000 and know the details of the Company's very well. At present, OOO "Mikhailov & Co. Audit" is auditing the financial statements of OAO "UES CDA" for 2002. The appointment of this firm as auditor of OAO "UES CDA" for 2002 will allow to control, to the fullest extent possible, the proper transfer of the assets (including the property purchased from OAO "UES CDA"), which are contributed to the capital of OAO "UES SO-CDA", and ensure that the transfer of personnel from OAO "UES CDA" to OAO "UES SO-SDA" is effected in compliance with the Russian laws. Besides, the fees charged by this audit firm are lower than those charged by the other audit firms accredited with RAO "UES of Russia".

At the same time, the Board of Directors recognized that further auditor for OAO “UES SO-CDA” shall be chosen through respective tender procedures.

 

 

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