Moscow. 31 January. – Taking into the account the broad public discussion around the guarantee suppliers, which are to be created in the process of reforming the Russian energy sector, the Board of Directors heard to the issue of guarantee suppliers and the terms of their future business activities as market participants. The Board noted that the resolution on this particular issue stands within the competence of the respective legislative and executive powers. In this connection, the Board commissioned the Chairman of the Management Board of RAO “UES of Russia” to appeal to the Deputy Prime Minister of the RF Victor Khristenko to consider the issues of creating the guarantee suppliers and regulating their activities at the Commission on the Energy Reform within the Government of the Russian Federation.

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The Board of Directors has approved the procedure for separation of the HV lines currently owned by OAO "Tulenergo", OAO "Kalugaenergo", OAO "Orelenergo", OAO "Bryanskenergo", whose reorganization is expected to be completed prior to the registration of the additional share issue of the Interregional Trunk Grid Company (ITGC) currently being established.

At the first stage, the following companies are to be established by way of separation from OAO "Tulenergo", OAO "Kalugaenergo", OAO "Orelenergo", OAO "Bryanskenergo", along with the companies to be spun off under the restructuring plans of the above regional energos:

OAO "Tula Trunk Grid Company"
OAO "Kaluga Trunk Grid Company",
OAO "Orel Trunk Grid Company",
OAO "Bryansk Trunk Grid Company",

The HV lines owned by the regional energos will be transferred to the newly established companies in accordance with the separation balance sheets of the respective regional energos.

The first stage will last 11 months from the time when property inventory is taken until modifications are made to the share registers of both the reorganized and the newly established companies.

At the second stage, OAO "Tula Trunk Grid Company", OAO "Kaluga Trunk Grid Company", OAO "Orel Trunk Grid Company", and OAO "Bryansk Trunk Grid Company" will be reorganized through merger with and into ITGC. The shares in the merging companies will be exchanged for shares in ITGC.

If shareholders of the above companies do not approve their mergers with the ITGC, RAO "UES of Russia" will transfer its stakes in these companies to OAO "UES FGC". The process is expected to take about 6 months.

The second stage will also last 11 months: from the time when property inventory is taken until modifications are made to the share register of the ITGC.

In October 2002, the Electricity Reform Commission approved the joint restructuring project of OAO "Tulenergo", OAO "Kalugaenergo", OAO "Bryanskenergo", and OAO "Orelenergo". Preparations are currently underway for the launch of pilot projects.

However, as the launch of the pilot restructuring projects is scheduled to start before the set-up of the ITGC, it is necessary to revise the procedures for transfer of HV lines to the ITGC to be used for OAO "Tulenergo", OAO "Kalugaenergo", OAO "Orelenergo", OAO "Bryanskenergo", and submit these procedures for approval by the Board of Directors of RAO "UES of Russia".

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The Board has approved the interested party transaction with Non-profit Partnership "Administrator of Trading System" (NP "ATS") to transfer part of the functions currently performed by RAO "UES of Russia", viz. administration of operation and development of the Federal Wholesale Electricity Market (FOREM), to NP "ATS".

Pursuant to the resolution of the Russian Government, RAO "UES of Russia" is responsible for the administration of FOREM operation and development.

The FOREM trading system operator is ZAO "CDR FOREM", which is included in the list of FOREM entities.

NP "ATS" was established pursuant to the resolution of the Russian Government dated 11 July 2001 No. 526 to organize trading on the wholesale electricity market, ensure payments for electricity and services supplied, develop wholesale market rules and control compliance with these rules, create a system of pre-court settlement of disputes between market participants, control the actions of the System Operator that have an impact on the efficiency of the wholesale market.

RAO "UES of Russia" and NP "ATS" have made a contract of purchase/sale of shares in ZAO "CDR FOREM".

During the transition phase of the energy sector restructuring, it would be most efficient to give NP "ATS" the status of administrator of FOREM's competitive sector, while ZAO "CDR FOREM" would retain its function as operator of the FOREM's regulated sector throughout the period during which RAO "UES of Russia" is authorized by regulations to act as FOREM organizer.

Such arrangement would help minimize the risks connected with operation of the wholesale electricity market and ensure confidence of market participants by maintaining stability, continuity, and transparency of data and cash flows in the changeover to a competitive wholesale market.

Under the proposed agreement between RAO "UES of Russia" and NP "ATS" part of the powers of RAO "UES of Russia" are to be delegated to NP "ATS". This agreement must be approved by the Board of Directors of RAO "UES of Russia", as it constitutes an interested party transaction with the following essential conditions:

• the agreement shall be valid throughout the period during which RAO "UES of Russia" has statutory authority to perform the functions being transferred to NP "ATS";
• the functions shall be transferred to NP "ATS" on condition that ZAO "CDR FOREM" retains all of its current statutory functions connected with the operational management of FOREM's regulated sector;
• part of the functions relating to improvement of FOREM's management system and development of FOREM's regulatory framework is to be performed by both NP "ATS" and ZAO "CDR FOREM", with responsibility therefor lying with NP "ATS".
• RAO "UES of Russia" shall have authority to control performance of the functions being transferred;
• NP "ATS" shall be obliged to include at least 50% of representatives from RAO "UES of Russia" on the Supervisory Board of ZAO "CDR FOREM", provided that NP "ATS" has authority to appoint the Director General, and the Supervisory Board of ZAO "CDR FOREM" has the power to dismiss the Director General;
• payment for services provided by NP "ATS" and ZAO "CDR FOREM" shall be made in accordance with the procedure established by the FEC of Russia, subject to mandatory approval of NP "ATS" budget and ZAO "CDR FOREM" budget by their respective Supervisory Boards.

NP "ATS" shall be obliged to provide reports on a quarterly basis regarding the performance of functions delegated to them under the agreement and on plans to improve the performance of these functions.

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The Board of Directors of RAO "UES of Russia" unanimously approved the principles of the Company's dividend policy related to its subsidiaries and dependent companies (SDCs).

The main change in the Company's dividend policy for SDCs is the use of EBTIDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to analyze the SDCs' financial position.

The instrument to be used for the implementation of the dividend policy is the Methods of dividend calculation for SDCs of RAO "UES of Russia".

The dividend policy proposed by RAO "UES of Russia" in respect of its SDCs is based on the following principles: dividends are to be paid from net profit (i.e. after-tax profit); the dividend calculation and payment practices at SDCs must comply with the laws of the Russian Federation; the amount of preferred dividend is to be calculated in accordance with the provisions of the Federal Law "On joint-stock companies" and the Charters of the SDCs of RAO "UES of Russia".

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The Board took into consideration the proposals of the Management Board on the preliminary calculations of the dividend payments for 2002 on the shares of the Company.

The Board instructed the Management Board to finalize the dividend policy of the Holding Company RAO “UES of Russia” taking into account the discussions of the dividend policy related to its subsidiaries and dependent companies.

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The Board of Directors of RAO "UES of Russia" approved the purchase of 30,947,297 additional ordinary shares in OAO "Kaliningradskaya Combined-cycle Heat & Power Plant-2 (CHPP-2)" valued at RUB 309,472,970.

The shareholder meeting of OAO "Kaliningradskaya CHPP-2" held in July 2002 approved an increase in the company's authorized share capital through issuance of 65,774,297 additional ordinary shares, par value RUB 10 per share, valued at RUB 657,742,970.

The additional shares will be placed by closed subscription to RAO "UES of Russia" (30,947,297 shares), the Property Fund of Kaliningrad Region (4 827 000 shares), and the Ministry of Property Relations of the Russian Federation (30,000,000 shares).

Earlier, the Management Board of RAO "UES of Russia" had recommended the Board of Directors to approve the Company's purchase of the additional shares.

Payment for the shares will be made from the funds allocated by RAO "UES of Russia" for the construction of Kaliningradskaya CHHP-2 in 2003 under the Company's investment program.

Upon completion of the share placement, the stake of RAO "UES of Russia" in OAO "Kaliningradskaya CHHP-2" will decrease to 53.72% from 67.3% before the placement, the stake held by OAO "Yantarenergo" reduce to 6.35% from 19.3%, the stake of the Property Fund of Kaliningrad Region to 9.33% from 13.4%, and the Russian Ministry of Property Relations will acquire a 30.59% stake in OAO "Kaliningradskaya CHHP-2" (before the placement, the Ministry had not held any shares in the Company).

The construction of Kaliningradskaya CHHP-2 is of strategic importance for stable and reliable power supply to this Russian enclave in the context of the Baltics' integration into the EU and the lack of the necessary capacities in the region.

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The Board took into consideration the report on the situation concerning conclusion of the long-term agreement for the supply of natural gas for the generating unit No.1 at Kaliningradskaya CHHP-2 and instructed the Management Board to continue its talks with OAO "Gazprom" on this issue.

It was stated that the power plant's first generating unit of 450 MW will use gas as its main fuel. After the generating unit is put into operation in 2005, its annual gas consumption will be 690 thousand tons (or 600 mln cbm).

The Russian Government had instructed its representatives on the Boards of Directors of RAO "UES of Russia" and OAO "Gazprom" to take steps to ensure that the relevant business entities conclude a long-term agreement for the supply of natural gas required for operation of the power plant's first generating unit.

In Q4 2002, the management of OAO "Kaliningradskaya CHHP-2" held meetings and consultations with senior officials from OAO "Gazprom" and OOO "Mezhregiongaz" on the issue of making the agreement. However, these talks produced no concrete positive results.

Simultaneously, the administration of Kaliningrad Region held talks with OAO "Gazprom" to increase gas supplies to the region from 1,050 mln cbm to 1,400-1,450 mln cbm per year beginning in 2005. Resolution of this issue would facilitate conclusion of the long-term agreement for the supply of natural gas required for the first generating unit of Kaliningradskaya CHHP-2, as allocation of the natural gas supplied to the region is handled by the Commission on the Fuel and Energy Complex of the administration of Kaliningrad Region. However, this issue has not been resolved to date.

In this connection, RAO "UES of Russia" initiated the agreement process by sending a request to OAO "Gazprom" to commission one of its divisions to prepare and execute the long-term gas supply agreement. If no positive reply is received from OAO "Gazprom" before 1 March 2003, the Board of Directors of RAO "UES of Russia" will send a corresponding appeal to the Board of Directors of OAO "Gazprom".

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The Board approved the combining by the Management Board members of offices in the management bodies of other organizations.

Under the Federal Law "On joint-stock companies", the combining by a person effectuating the functions of one-man executive body of the company (director, director-general) and by members of the collegial executive organ of the company (management board, directorate) of offices in the management bodies of other organizations shall be permitted only with the consent of the board of directors of the company.

This question had been previously considered by the Management Board of RAO "UES of Russia".

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The Board determined the amount to be charged for repair and maintenance services for the power grid of RAO "UES of Russia" in Q1 2003 at RUB 538.678 mln, and the charge for administration of reliable operation and development of the power grid facilities and their use to transmit electricity among entities within the Unified Energy System of Russia for Q1 2003 at RUB 4,576.970 mln.

Further, the Board approved the contracts between the Company and OAO "UES FGC" for the supply of repair and maintenance services for the power grid of RAO "UES of Russia" and administration of reliable operation and development of the power grid facilities and their use to transmit electricity among entities within the UES of Russia.

The Board decided that the service charges for each individual contract and their total amount should be adjusted upward upon approval of the increased subscription fee by the Federal Energy Commission (FEC).

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The Board reviewed the report on work done by the Management Board of RAO "UES of Russia" in Q4 2002, approved the Management Board's plan for Q1 2003 and the Company's report on securities issuance in Q4 2002.