Transcript ANATOLY CHUBAIS, Chief Executive Officer Unified Energy

VYACHESLAV SINYUGIN
Deputy CEO
Unified Energy Systems of Russia
15 November 2002
Boston
2
Agenda

UES Highlights

Reform - Rationale and Status

Dialogue with Shareholders

Next Steps
UES Highlights
4
UES
Key Data
Highlights

One of the world's largest electric utility
companies
Market Capitalisation ($ mn)*

407 thermal and hydro power plants
UES Consolidated Operating Data

2,7 mln km of power transmission lines
Generation Capacity (MW)
Thermal Power Plants
Hydro Power Plants
Generation (TWh)
Sales-to-end-users (TWh)

646,000 employees

627 bn kWh of electricity generated;
72% of the overall generation in Russia

53% state-owned
5,286
122,000
34,100
610
578
* As of 14 November 2002
Russia - 4th Largest Power Market in the World
5
Bn MWh
4
3.9
3
2
1.2
1.1
1
0.8
0.6
0.6
0.5
0.5
0.4
0.3
Canada
Germany
India
France
UK
Brazil
3.6%
3.5%
2.5%
2.2%
0
US
% of World Total
26.5%
Chain
Japan
Russia
8.4%
7.2%
5.7%
3.9%
3.7%
5
IAS 1H02: Operating and
Net Profit
IAS 1H02: Revenues
Rb Bn
Rb Bn.
250
231
217
188
200
18
150
15
16
43
14
15
44
12.42
12
38
10.38
10
7.15
8
100
173
158
6
4
132
50
2
0
0
2000 1st Half
Power Sales
17.8
18
2001 1st Half
2002 1st Half
Heat Sales
Other Revenues
* Provisional Data
Russian rouble as of June 30th, 2002
-2
-0.45
0.96
2000 1st Half 2001 1st Half 2002 1st Half
Operating profit
Net profit
Reform - Rationale and Status
7
Global Experience in the Electric Power Sector
Complete
Liberalization
of Electric
Power Sector
Great Britain (1990)
Scandinavia (1992)
Argentina (1990)
Hungary (1999)
California (1995)
Thailand (1996)
Brazil (1995)
Kazakhstan (1998)
Italy (1999)
EU Directive (1996)
Competition
Russia (2001)
Moldova (1999)
Price Liberalization
Ukraine (1997)
Greece (2000)
France (2000) SAR (2000)
Private Investments
State monopoly
Non-discriminatory
Access to Grid
8
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
9
Russian Reform : Incorporate the Best of Industry
Experience
Objectives
Optimal
Industry
Structure





Attractive
Investment
Profile


Constraints

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
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

Ensure smooth transition to a deregulated market with
minimal price shocks

Ensure reliability of the new system
Social
Considerations
10
Reform Basics: Separation of Monopolistic and Competitive
Sectors
Market rules
GENERATION
SUPPLY
TRANSMISSION
DISTRIBUTION
Competitive
sectors
Natural
monopolies
Liberalisation of
price-setting
Stimulation of market
participation
Securing equal access
to grids
Establishment of
market infrastructure
Regulated
tariffs
11
Anticipated Timetable

Objectives


2004-2006
2006-2010
First Phase
Second Phase
Third Phase
Development of the legal
framework
Revision of the market
structure
Pilot test of the wholesale
market


Market
Structure
2001-2004

Federal Grid Company
Wholesale generation
companies
Unbundled regional
companies, consolidated
by function







Tariffs


Transmission tariff introduced
Distribution tariff introduced
Unregulated market (5-15%)
ISO tariff introduced


Set up of competitive
electricity market in
generation and
supply
Federal Grid Company
and regional
distribution companies
Wholesale generation
companies
Regional generation
companies
Supply companies
Government set tariffs
remain for FGC,
DistCos and heat only
Generation and supply
are unregulated

Attract private
investments in various
sectors of the industry
12
Legislative Basis of the Reform
October 9th, 2002
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 Federal
Law «On Energy Saving»
Amendments to the Federal
Law «On Natural
Monopolies»
Amendments to the Civil
Code of the Russian
Federation
Amendments to the Federal
Law «On State Regulation
of Electricity and Heat
Tariffs»
Federal Law «On putting into
effect of the Federal Law
«On the Electric Power
Sector»

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
13
Legitimate, but Diverse Interests of Key Stakeholders
Shareholders




Increase value of holdings
Fair and transparent
treatment
Liquidity
Corporate governance
Significant Minorities in Subsidiaries


The State





No shocks for customers
Capital investment
Taxes
Elimination of subsidies
National interest in
transmission
Fair asset value of investment
Interest in selected assets
Customers




Low cost heat and electricity
Reliability
Subsidy for some customers
Strategic interest in selected
assets
Dialogue with Shareholders
15
UES Stock Price Drivers in 2002
Cents
24
UES
RTS
index
20
16
12
Under management control

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
09
08
07
06
05
04
03
02
01
12
11
10
09
08
07
06
05
04
03
02
01
8
Beyond management control

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
16
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
17
UES Stock Has Outperformed the Index Recently
Growth Rate, %
149
144
139
September 25th, 2002
Presentation of the Seven Steps
134
129
124
119
114
109
104
99
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October
November
September
Russian Trade System Index
UES of Russia Common Share
Next Steps
19
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