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Unified Energy System

March 12, 2004

RAO UES Board of Directors Holds its Regular Meeting

Moscow, 12 March 2004. At its regular meeting held today, the Board of Directors of RAO "UES of Russia" considered and noted the report on the results of the unregulated electricity market* and the RAO UES proposals on the procedures to be followed by the Holding's companies when admitting new consumers to the wholesale electricity market.

The Board of Directors deemed it inadvisable, if no resolution is taken to combat the consequences of cross-subsidization, to further increase the number of consumers taking part in the regulated segment of the wholesale electricity market (FOREM), including those acting through energy distribution organizations.

Pursuant to Resolution of the Russian Government No. 643 of 24 October 2003 "On "On rules of the wholesale electricity market for the transition period" and Resolution No. 793 of 12 July 1996 "On Federal (All-Russian) Wholesale Electricity Market", consumers may be admitted to the wholesale electricity market its competitive or regulated segment provided that they meet certain requirements.

Admission of new consumers to the regulated segment of the wholesale market may result in financial losses for the SDCs of RAO "UES of Russia" and a reduction in dividends. The Management Board suggested that the Board of Directors admit new participants to the wholesale market only by increasing the number of participants on the competitive market.

RAO "UES of Russia" worked out some regulations governing the relationships between RAO "UES of Russia" and consumers on the wholesale electricity market.

In addition, the Management Board of RAO "UES of Russia" has prepared proposals designed to improve the procedure for admitting commercial entities to the Federal Wholesale Electricity Market and proposals on the interim Procedure for admitting new participants to the Federal Wholesale Electricity Market outside the competitive segment of the wholesale market.

***

The Board of Directors has approved the Draft Restructuring Plan for OAO "Altayenergo" compliant with the basic reorganization plan, which envisages the following:

  • reorganization of OAO "Altayenergo" through spin-off of the following companies (preserving the current capital structure): OAO "Altay Management Energy Company", OAO "Baraulenergo", OAO "Altayenergosbyt", and OAO "Altay Trunk Grids", whose only asset is with shares in Siberia ITC.
  • the establishment by OAO "Altayenergo" of the wholly-owned subsidiaries: OAO "Altayenergotekhremont", OAO "Barnaulteplosetremont", OAO "Altayelectrosetremont";
  • the transfer of the power grid facilities owned by OAO "Altayenergo" which are part of the Unified National Power Grid (UNPG) as consideration for the additional shares in Siberia ITC.

The Board of Directors also resolved that the power distribution networks that are not part of the UNPG are to remain the property of OAO "Altayenergo".

The Board of Directors agreed to the transfer of functions of the one-man management bodies (i.e. CEOs) of OAO "Barnaulenergo", OAO "Altayenergosbyt", and OAO "Altayenergo" to OAO "Altay Energy Management Company".

The Board instructed RAO UES representatives to vote for the approval of all items of business of board meetings and shareholder meeting of OAO "Altayenergo" and shareholder meetings of the newly established companies, so as to ensure implementation of the reorganization plan of OAO "Altayenergo".

***

The Board of Directors has approved the Draft Restructuring Plan for OAO "Buryatenergo" compliant with the basic reorganization plan, which envisages the following:

  • the reorganization of OAO "Buryatenergo" through spin-off of the following companies (preserving the current capital structure): OAO "Buryat Management Company", OAO "Buryatgeneratsia", OAO "Buryatenergosbyt", and OAO "Buryat Trunk Electricity Grids", whose only asset is shares in Siberia ITC.
  • the establishment by OAO "Buryatenergo" of the wholly owned subsidiaries: OAO "Avtotransportnoe Predpriyatie", OAO "Buryatsetremont", and OAO "Buryatenergoremont";
  • the transfer of the power grid facilities owned by OAO "Buryatenergo" which are part of the Unified National Power Grid (UNPG) as consideration for the additional shares in Siberia ITC.

The Board of Directors also resolved that the power distribution networks that are not part of the UNPG are to remain the property of OAO "Buryatenergo".

The Board of Directors agreed to the transfer of functions of the one-man management bodies (i.e. CEO) of OAO "Buryatgeneratsia", OAO "Buryatenergosbyt", and OAO "Buryatenergo" to OAO "Buryat Management Company".

The Board instructed RAO UES representatives to vote for the approval of the items of business at the Board meetings and shareholder meeting of OAO "Buryatenergo", and shareholder meetings of the newly established companies that are required to ensure implementation of the reorganization plan of OAO "Buryatenergo".

***

The Board of Directors has approved the Draft Restructuring Plan for OAO "Tyumenenergo" compliant with the basic reorganization plan, which envisages the following:

  • the reorganization of OAO "Tyumenenergo" through spin-off of the following companies (preserving the current capital structure): OAO "Surgutskaya TPP-1", OAO "Surgutskaya TPP-2", OAO "Nizhnevartovskaya TPP", OAO "Urengoiskaya TPP", OAO "Tyumen Regional Generation Company", OAO "Tyumen Trunk Grid Company", OAO "Tyumen Energy Retail Company".
  • the establishment by OAO "Tyumenenergo", together with OAO "TsNII NPKenergo", of the following subsidiaries: OAO "Tyumenenergoremont", OAO "Tyumenenergosetservis", OAO "Baza proizvodstva stroitelnykh materialov dlya energetiki" ("Construction Materials Production Base for Energy Industry"), and OAO "Predpriyatie stroitelnykh rabot energetiki" ("Energy Industry Construction Enterprise"). The stake owned by OAO "Tyumenenergo" in the above subsidiaries will be 100% minus one share, whereas OAO "TsNII NPKenergo" will own 1 share in each of the above companies, provided that its stake is not more than 1%.
  • the transfer of the power grid facilities owned by OAO "Tyumenenergo" which are part of the Unified National Power Grid (UNPG) to OAO "Tyumen Trunk Grid Company";
  • the contribution of the shares in OAO "Tyumen Trunk Grid Company" (100% minus 1 share) received by RAO "UES of Russia" as a result of the reorganization of OAO "Tyumenenergo" to the authorized capital of OAO "UES FGC".

The Board of Directors also resolved that the power distribution networks which are not part of the UNPG are to remain the property of OAO "Tyumenenergo".

The Board of Directors agreed to the transfer of functions of the one-man management bodies (i.e. CEOs) of OAO "Tyumenenergo", OAO "Tyumen Regional Generation Company", OAO "Tyumen Energy Retail Company", OAO "Tyumen Trunk Grid Company", OAO "Surgutskaya TPP-1", OAO "Surgutskaya TPP-2", OAO "Nizhnevartovskaya TPP", OAO "Urengoiskaya TPP" to OAO "Urals Energy Management Company" (until they are transferred to the generation company of the wholesale electricity market).

The Board instructed RAO UES representatives to vote FOR the approval of the items of business of Board meetings and shareholder meeting of OAO "Tyumenenergo", and shareholder meetings of the newly established companies, that are required to ensure implementation of the reorganization plan of OAO "Tyumenenergo".

***

The Board of Directors considered a report on the organization of competitive and regulated non-competitive procurement at RAO "UES of Russia".

The Board of Directors that the steps taken by RAO "UES of Russia" to implement competitive and regulated non-competitive procurement are economically expedient, they help improve the public image of RAO "UES of Russia" and are in line with the Government's policy in that area.

The Board of Directors approved the basic principles of procurement management, including:

  • the introduction of uniform procurement methods to be used by all RAO UES entities, and the procedures for their choice;
  • the principal procurement method is to be public tender; other methods are to be used on limited occasions subject to approval by the Central Procurement bodies and/or the Management Boards of the procuring enterprises;
  • any forms of procurement may, fully or partly, involve the use e-trading floors approved by the Central Tender Commission of RAO "UES of Russia";
  • independence of SDCs in the current procurement matters achieved by creating a standard procurement system in SDCs: 3-tier system in larger SDCs, and 1- or 2-tier system in smaller SDCs.

The basic principles of procurement management are set forth in the package of regulatory documents which the Board of Directors instructed the Management Board to approve before 1 April 2004.

The Board of Directors also commissioned the Management Board of RAO "UES of Russia" to ensure that each SDC takes relevant decisions on the organization of procurement management and approves the procurement rules and regulations.

These changes will make the spending of funds more transparent and controllable, ensuring that the cost component of the tariffs of the Holding's entities are market based, and implement a single procurement standard to be used by the reorganized enterprises.

In 2003, the Holding's entities produced RUB670 million of goods (VAT inclusive), spending about RUB 323 billion (inclusive of VAT) to purchase fuel, materials, equipment, works, services, etc. Thus, the value of procurements is comparable with half of the value of the Holding's commercial output, and this value has remained approximately the same over the past few years. The share of competitive procurement expenses has been steadily rising over the past years, reaching an estimated 18% in 2003. It is anticipated that this share will grow to 30% in 2004.

Today, there are two trading floors working in the electricity sector: B2B-energo and TZS-elektra. Since B2B-energo went live in October 2002, RUB1.45 billion worth of goods and services have been procured through the system. Transition to the e-commerce platform will help cut procurement costs by 50% and bring down the prices of goods and services by 5-30%.

***

The Board of Directors of RAO "UES of Russia" approved the amendments to the Principles of the Company's dividend policy in respect of its subsidiaries and dependent companies (SDCs)*.

Specifically, the institutes, science and technology centers, construction firms, retail companies, and contractors are no longer covered by the RAO UES Dividend Policy Principles, which is due to the fact that the Principles take into account the specifics of the electricity industry while disregarding the particular characteristics of non-core businesses.

One more amendment will make it possible to change, on extraordinary occasions by order of the Chairman of the Management Board of RAO "UES of Russia", the ratio affecting the dividend amount paid by a subsidiary or dependent company. This is due to the fact that the existing approaches to the calculation of SDCs' dividend amounts do not take account of the external factors that have an influence the Companies and their dividend amounts.

* The Dividend Policy Principles define the methods used to calculate the dividend amounts for which RAO UES representatives will be instructed to vote at the meetings of Boards and Annual General Meetings of shareholders of the SDCs of RAO "UES of Russia".

***

The Board of Directors of RAO "UES of Russia" considered the issue of holding a tender to select an audit firm to conduct the annual statutory audit of the Company's financial statements for 2004.

The Board of Directors resolved to form a Tender Commission consisting of:

  • Aleksandr Voloshin, Chairman of the Board of Directors of RAO "UES of Russia"; - Commission Chairman;
  • Seppo Remes, Member of the Board of Directors of RAO "UES of Russia"; Audit Committee Chairman, - Commission Secretary;
  • Sergey Kosarev, member of Board of Directors of RAO "UES of Russia"; Deputy Minister of Property Relations of the Russian Federation; member of the Audit Committee of RAO "UES of Russia";
  • Igor Yusufov, member of the Board of Directors of RAO "UES of Russia".

The Commission will also include representatives from the Ministry of Finance and the Ministry of Energy of the Russian Federation as agreed with the heads of these Ministries. Besides, the Commission will include a representative of an auditors' professional association which will be approved by the Board of Directors subject to agreement of the Ministry of Finance of the Russian Federation.

The Board of Directors instructed the Commission to draft and approve, by 26 March 2004, the following documents:

  • "Regulation on the Tender Commission to select an audit firm to conduct the annual statutory audit of the financial statements of RAO "UES of Russia" for 2004";
  • "Procedure for holding a tender to select an audit firm to conduct the annual statutory audit of the financial statements of RAO "UES of Russia" for 2004";
  • draft of the Contract and Terms of Reference for the conduct of the annual statutory audit of RAO "UES of Russia" financial statements for 2004.

The Board of Directors also instructed the Tender Commission to hold a tender to select an audit firm for the conduct of the annual statutory audit of RAO UES financials for 2004 and to submit a report on the results of the tender to the Board of Directors.

As a result of the tender held in 2003, RAO "UES of Russia" selected a new auditor, ZAO "KPMG". To ensure efficient work in such a big company as RAO "UES of Russia", auditors need enough time to get an understanding of the Company's accounting system, rules and regulations.

***

As a measure to address the priority issues of the energy companies' insurance coverage, the Board of Directors of RAO "UES of Russia" approved the participation of RAO "UES of Russia" in [the establishment of] the captive insurance broker OAO "Energozashchita" under the following terms and conditions: the authorized capital of OAO "Energozashchita" will be RUB1 million; RAO "UES of Russia" will hold an interest of at least 51% in the authorized capital of the captive insurance broker OAO "Energozashchita", and the capital contribution is to be made in cash.

The Board of Directors instructed the Management Board of RAO "UES of Russia" to attract, on a competitive basis, an international insurance broker company wishing to acquire an interest of up to 49% in the insurance company to be established.

The Board of Directors of RAO "UES of Russia" approved the sale by RAO "UES of Russia" of its holding of 1,000,000 registered ordinary shares in OAO "ASO Leader", par value of RUB210 per share, at a price not lower than the market value [of the shares] determined by an independent appraiser. The shares are to be sold for cash prior to 1 January 2005. The Board of Directors requested the Management Board to arrange for the market valuation of the shares in ASO "Leader" by an independent appraiser.

The Board of Directors noted the concept for insurance coverage of the risks of energy enterprises as approved by the Management Board of RAO "UES of Russia". The concept includes the following phases for liberalizing the insurance coverage system:

  • With effect from 1 January 2005, the captive insurance company (OAO "ASO "Leader") which performed, among other duties, the functions a captive insurance broker, will be replaced by a [new] captive insurance broker. The latter is to arrange tenders to select insurers providing insurance coverage to the SDCs of RAO "UES of Russia" for all kinds of risks, work out documents regulating the conduct of tenders, and exercise control over the compliance by the SDCs with the requirements of RAO "UES of Russia" relating to the insurance coverage, as well as reinsurance of risks assumed by the insurers selected through a tender process;
  • With effect from 1 January 2006, the captive insurance broker will arrange tenders to select insurers providing property and liability insurance coverage to the SDCs of RAO "UES of Russia", and exercise control over the compliance by the SDCs with the requirements of RAO "UES of Russia" relating to the insurance coverage, and the reinsurance of risks assumed by the selected insurance companies; SDCs of RAO "UES of Russia" will select, through a tender process, insurers to provide insurance coverage for other risks. Tenders to select insurers will be conducted by the insurance brokers accredited by RAO "UES of Russia";
  • With effect from 1 January 2007, insurers providing insurance coverage for all risks will be selected by the SDCs through a tender process. Tenders to select insurers will be conducted by the insurance brokers accredited by RAO "UES of Russia". The captive insurance broker OAO "Energozashchita" will exercise control over the compliance by the SDCs with the requirements of RAO "UES of Russia" relating to arranging insurance coverage, organize tenders to select insurers by the insurance brokers, and reinsurance of the risks assumed by the selected insurance companies.

***

The Board of Directors approved the following decision of the Management Board of RAO "UES of Russia" taken pursuant to the ""Procedure for interaction of RAO "UES of Russia" with business entities whose shares are owned by RAO "UES of Russia":

  • to instruct the representatives of RAO "UES of Russia" to vote FOR the following resolution on the item of business of the Board meeting of OAO "Krasnoyarskenergo" "On determining the attitude of OAO "Krasnoyarskenergo" to the items of business of the general meetings of shareholders and Board meetings of the subsidiaries and dependent companies of OAO "Krasnoyarskenergo":
    • To instruct the representatives of OAO "Krasnoyarskenergo" to vote AGAINST the resolution to increase the authorized capital of OAO "Krasnoyarskaya HPP".
  • To instruct the representatives of RAO "UES of Russia" to vote AGAINST the resolution to increase the authorized capital of OAO "Krasnoyarskaya HPP".

 

 

 

 

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