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Unified Energy System

January 28, 2004

Information about meetings of RAO UES Audit Committee held in January 2004

At the two meetings of the Audit Committee of the Board of Directors of RAO "UES of Russia" held in January 2004, the Committee members considered in-depth the questions of arranging insurance and investment process at RAO "UES of Russia" ("Company"), approved the interim report of the Audit Committee to the Board of Directors, and adopted a series of recommendations relating to the system of working capital financing in the Company.

Having analysed the insurance system arrangements at RAO "UES of Russia", the Audit Committee stated that the quality of the insurance system has significantly improved as a result of the efforts by the Company's management to centralize the insurance payments and create mixed-risk insurance products which provide equal coverage to the Company's subsidiaries having different "insurance quality" and make it possible to reinsure the Company's risks on the international market.

The Committee said that RAO "UES of Russia" would not have been able to establish an efficient and comprehensive insurance coverage for RAO UES companies if it had used a decentralized approach to purchasing insurance services, especially those related to reinsurance of risks and securing reasonable insurance premiums. In view of the fact that since a new centralized system was established, the insurance at RAO "UES of Russia" has been handled by ROSNO Insurance Company under the management contract whereunder ROSNO runs the captive insurance company ASO "Leader" owned by RAO "UES of Russia", the Audit Committee recommended preserving the centralized insurance system created over the past few years and organizing a tender to procure insurance services to RAO "UES of Russia". The Committee also noted the possible ways to improve the insurance coverage system, especially those aimed at reducing insurance costs by giving up some kinds of insurance, and said it would prepare specific recommendations to achieve such improvement.

Upon review of the working capital financing system at RAO UES, which ensures RUB130 billion in borrowings throughout RAO UES Holding annually (and approximately the same amount needed to repay such debt), the Audit Committee recommended that the Management Board of RAO "UES of Russia" submit the proposal to centralize the Company's system of working capital financing for consideration by the Board of Directors by 1 May 2004, and look into the advisability of requesting the Federal Energy Company (FEC) to revise the current tariff policy in order organize a centralized working capital financing at RAO "UES of Russia". As most short-term borrowings are used to buy fuel, the Audit Committee included on its activity plan for 2004 the question of whether it is economical to pre-pay for the fuel supplies and whether it is possible to shift part of the burden of working capital financing of the Company's subsidiaries and dependent companies (SDCs) to fuel suppliers and/or create a different, efficient system for short-term funding of fuel purchases.

The Committee pointed to the fundamental fault of the existing system of working capital financing, viz. its decentralized character: within RAO "UES of Russia" system there are 90 borrowers taking loans from credit institutions, with the average weighted cost of borrowed funds standing at 15% per annum (for Ruble loans) as at 1 October 2003. The Committee expressed an opinion that the creation of a centralized borrowing system at the Holding will help reduce the cost of raising and servicing debt throughout RAO "UES of Russia".

The Committee also reviewed its preliminary report on organizing the investment process in the Company and said it would carry out an in-depth study of that process in the first half of 2004. After a preliminary discussion of approaches to investment process in the Company, the Committee would prepare and substantiate a proposal for the Board of Directors to establish a centralized process for budgeting of capital expenditures at the Company, including new acquisitions and investments in the SDCs. A decision was also taken to conduct a special examination of the decision-making process and the investment criteria used for new acquisitions by RAO "UES of Russia" abroad.

The Committee stated that it would be advisable that the investment projects funded from earmarked allocations of the federal budget should be considered separately from the general investment programme of RAO "UES of Russia", taking into account the specific criteria applied to such projects and their full and gratuitous funding from the Federal budget of the Russian Federation.




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