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Unified Energy System

November 25, 2005

RAO UES Board of Directors holds its regular meeting

Moscow. 25 November 2005. The Board of Directors of RAO "UES of Russia" noted the progress report on the implementation of the electricity reform in the Russian Federation. The meeting reviewed the results of the reform efforts over the period since the Board of Directors considered the issue on 29 October 2004.

The restructuring of RAO UES entities is carried out pursuant to the laws and regulations of the Russian Federation, resolutions of the Russian Government and the Board of Directors of RAO "UES of Russia", the Strategy Concept of RAO "UES of Russia" for 2003-2008 ("5+5"). Control over the reform implementation is exercised by the Government of the Russian Federation. Resolutions on reform issues are taken by the state representatives jointly with representatives of other shareholders on the Board of Directors of RAO "UES of Russia".

The sector reform is being implemented along the following lines:

Development of the legal and regulatory framework for the electricity industry

Over the past year, much work was done in that area. By Order 417-r of 15 April 2005, the Russian Government approved the Revised Plan of Measures to Reform the Electricity Industry for Years 2005-2006. This plan contains an updated list of measures, deadlines, and persons responsible for implementation of such measures.

Amendments have been made to the Rules of the Wholesale Electric Power (Capacity) Market of the Transitional Period. Resolution No. 219 of the Russian Federation dated 15 April 2005 provides for the introduction of a price zone of the wholesale electricity (capacity) market of the transitional period in Siberia. By Resolution No. 620 of 17 October 2005, the Government of Russia introduced a competitive deviations segment on the wholesale electricity market—the balancing market.

Resolution No. 291 of the Russian Government dated 6 May 2005 approved the Regulation On Licensing of Electricity Sales to Citizens, and Government Resolution No. 81 dated 16 February 2005 determined the sources for compensating the expenses to support the activities and perform the duties of an operating entity and made the relevant amendments to the Rules for Wholesale Electricity Market of the Transitional Period.

In order to fulfil the Plan of actions to reform the electricity sector, the energy-related ministries and agencies prepared a number of regulatory documents, including the draft Federal Law On Heat Supply, draft resolutions of the Russian Government On the procedure for creating a source of funds to provide services aimed at creating a technological capacity reserve for electricity generation and the procedure and terms of financing projects for the generation of electricity capacity in order to prevent electricity capacity deficit, On approval of rules for making and performing public contracts on the wholesale and retail electricity markets, On approval of operation rules of retail electricity market during the transitional period, On approval of the rules for antimonopoly control over the wholesale and retail electricity (capacity) markets.

Also, a whole range of other regulatory acts was developed, part of which is now being considered by the Russian Government. These documents determine, among other things:

 - the list of entities engaged in dispatching in the electricity industry, their structure and areas of dispatching responsibility;

 - the procedure for obtaining by entities of a status of wholesale electricity (capacity) participants, and the possibility for a regional generation company to set its tariffs when it enters the wholesale electricity market;

 - the procedure for the transfer of regional energos' shares to the authorized capitals of Interregional Distribution Companies (IDCs);

 - changes to the criteria for including transmission lines in the facilities of the Unified National Electricity Grid (UNEG), providing for including 110-kV lines in the UNEG.

Work is in process to develop criteria for determining participants that should not be prohibited from combining kinds of activities in the electricity industry, and the drafting of the relevant legislative acts, in particular, amendments to Federal Law No. 36-FZ of 26 March 2003, providing for limitation of the prohibition from combining the kinds of activities established by Article 6 of said Law.

Reforming the Wholesale Electricity (Capacity) Market

To date, the following stages of the reform have been completed:

 - On 1 May 2005, a competitive segment of the wholesale [electricity] market was put into operation in Siberia. It is one more step towards liberalization of the wholesale market, which began operation on 1 November 2003, when the free trading segment was launched embracing the European and Urals part of the UES of Russia.

 - On 20 October 2005, the balancing electricity market started operation. Pursuant to Resolution of the Russian Government No. 620 dated 17 October 2005, competitive pricing mechanisms were introduced in the deviations sector of the wholesale market in both price zones of the wholesale market (European part and Urals, and Siberia).

Pursuant to the resolution of the Government of the Russian Federation of 24 December 2004, RAO "UES of Russia" has been working to develop the electricity market in the following areas:

Transformation of the regulated segment of the wholesale market. RAO "UES of Russia" developed and submitted to the energy-related ministries and agencies its recommendations regarding the concept of changing the wholesale market. At the meeting of the Interagency Commission for Electricity Reform held 21 October 2005, this concept was approved as a whole. The plan for reforming the wholesale market provides that regulated contracts will be introduced in 2006, and the free trading segment will undergo significant transformation.

Regulated contracts are planned to be introduced for a term until 31 December 2006. It is anticipated that this period will become a preparatory stage for the launch of a system of long-term regulated contracts in 2007. The amounts of electricity (capacity) bought/sold under long-term regulated contracts will decrease on an annual basis, which will make it possible to gradually expand the scope of competition on the wholesale electricity market and pave the way for transition to a completely competitive wholesale market as provided by the Federal Law On Electric Power Industry.

Entry of regional generation companies into the wholesale market. With effect from 1 January 2006, the generation companies formed as a result of regional energos' reorganization—WGCs, TGCs, and RGCs—are expected to be granted the status of independent wholesale market participants. Entry of the regional generators into the wholesale market will help streamline the planning and scheduling process and improve the market performance of regional power plants.

Solution to the cross-subsidization problem. RAO "UES of Russia" has done a lot of work to analyse the possible ways and instruments to address the cross-subsidization problem, and prepared its proposals to solve the problem.

The mechanism for "translation" of the wholesale market prices for retail buyers. In a changing wholesale electricity market, it is proposed to put in place a mechanism linking the price of electricity on the wholesale market to its price on the wholesale market.

Investment guarantee mechanism. RAO "UES of Russia", in conjunction with the interested ministries and agencies, has drafted a Government resolution which is now being considered by the Government administrative staff. It is planned to implement the investment guarantee mechanism provided by this draft at the transitional phase of the electricity reform as a temporary measure so as to ensure construction of new generating facilities required to handle the capacity deficit anticipated in some regions in 2008-2009. The mechanism being proposed involves providing guarantees to private investors that put their money in the construction of generation facilities.

Electricity industry restructuring

As at 31 October 2005, the Board of Directors of RAO "UES of Russia" approved the restructuring plans for 66 regional energos (51 plans are being carried out in accordance with the basic scenario and 15 plans in accordance with the non-basic scenario). 49 regional energos held general shareholder meetings to approve the companies' reorganization. The state registration was completed by 219 new companies established in the course of restructuring of 52 subsidiaries and dependent companies of RAO "UES of Russia".

On 2 September 2005, the Board of Directors approved the restructuring plan for the energy companies in the Far East of Russia. The plan provides, inter alia, for the establishment of a single holding company on the basis of assets of OAO "Khabarovskenergo", ZAO "LuTEK", OAO "Amurenergo", OAO "Yakutskenergo" (the part of the company comprising to the Southern energy zone), and OAO "Dalenergo".

In June 2005, shares of the companies spun off from regional energos started trading on stock markets. Shares of 51 new energy companies were admitted to trading on OAO "RTS Stock Exchange" and ZAO "MICEX Stock Exchange".

Consolidation of Facilities of the Unified National Electricity Grid (UNEG)

A process is underway to consolidate transmission grid assets. As at 31 October 2005, 42 regional transmission (trunk) grid companies were established as a result of the regional energos' restructuring. Within the consolidation process, the Board of Directors of RAO "UES of Russia" approved on 25 February 2005 a model for consolidation of regional energos' transmission grid assets providing, in particular, for:

 - transfer, beginning in 2006, of the UNEG facilities owned by the Interregional Transmission Companies (ITCs) for use to OAO "UES FGC";

 - merger of all Interregional Transmission Companies and Transmission Companies (TCs) with one of the ITCs, subject to approval of TC shareholders.

Under this model, most energy systems entered into agreements on the transfer of the UNEG facilities for use to Center ITC. By year end 2006, the ITCs registered in Q1-Q3 2005 are expected to merge with and into "Center ITC".

Formation of Interregional Distribution Companies (IDCs)

As a measure to consolidate the distribution grid assets, four Interregional Distribution Companies (IDCs) were established and completed state registration in 2005—OAO "Center and North Caucasus IDC", OAO "North-West IDC", OAO "Urals and Volga IDC", and OAO "Siberia IDC".

Also, the deadlines were approved for the transfer of shares in distribution companies (DCs) as payment for additional shares in IDCs scheduled for issuance in March 2006.

In October 2005, the Interdepartmental Commission for Electricity Industry Reform backed the resolution of the Board of Directors of RAO "UES of Russia" to transfer IDC shares for fiduciary management to OAO "UES FGC" for a term of 3 to 5 years. This measure is designed to build a centralized system for management of the distribution network facilities, maintain their reliability, efficient functioning and development. The contract for fiduciary management of IDC shares between RAO "UES of Russia" and OAO "UES FGC", which constitutes an interested party transaction, has been submitted for consideration at today's meeting of the Board of Directors of RAO "UES of Russia".

Consolidation of Operational Dispatch Administration

This process will occur in two phases. During the first phase, OAO "System Operator-Central Dispatch Administration of the Unified Energy System" ("System Operator") established branches to which regional energos transferred the operational dispatch functions and leased the property of Regional Dispatch Administrations (RDAs) owned by them. This phase has largely been completed.

The second phase will see repurchase by the System Operator of the RDA assets leased from the energy companies. This phase will be continued in 2006.

Establishment of Wholesale Generation Companies (WGCs)

By now, all seven WGCs have completed their registration with the state authorities.

On 27 May 2005, the Board of Directors of RAO "UES of Russia" approved the target model for the operation of thermal WGCs as unified operating companies established through merger of AO-power plants with and into the WGCs. On 30 September 2005, the Board of Directors of RAO "UES of Russia" approved the target model for operation of OAO "HydroWGC", an operating company managing its branches (hydropower plants) and effecting corporate management at its subsidiaries established to engage in new kinds of activities and implement capital investment projects. Under the law, the stake held by the Federal Government in the operating company, OAO "HydroWGC", must be not less than 50% plus 1 share.

By now, all the thermal WGCs, except for OAO "WGC-6", have launched the transitional model of operation: AO-power plants have transferred the functions of their One-man Executive Bodies (CEOs) to the respective WGC. OAO "WGC-6" performs the functions of the One-man Executive Body (CEO) of OAO "Kirishskaya TPP", OAO "Krasnoyarskaya TPP-2", OAO "Novocherkasskaya TPP", and OAO "Ryazanskaya TPP". The contracts to transfer the powers of the One-man Executive Body (CEO) of OAO "GRES-24" ("TPP-24") and OAO "Cherepovetskaya TPP" are to be concluded before year end 2005.

The second phase of establishment of WGCs—merger of the power plants spun off from regional energos into the respective WGC, has been completed at OAO "WGC-5" and is in progress at OAO "WGC-3".

Documents relating to the second phase and reorganization of OAO "WGC-2" will be considered at today's meeting of the Board of Directors of RAO "UES of Russia".

WGC-1, WGC-4, WGC-6 are taking steps to appraise the shares of the AO-power plants to be included in the WGCs for the purpose of implementing the second phase of WGC establishment.

The reorganization of WGC-3 and WGC-5 is expected to be completed in Q1 2006; and the reorganization of WGC-1, WGC-2, WGC-4, WGC-6 will be reorganized in H2 2006.

Formation of Territorial Generation Companies (TGCs)

As at 31 October 2005, the Board of Directors of RAO "UES of Russia" approved the plans for the establishment of 13 out of 14 TGCs, which have completed the registration with the authorities.

Five TGCs (TGC-1, TGC-5, TGC-8, TGC-9, TGC-14) have leased the generating assets from regional generation companies (RGCs). All these TGCs are already engaged in the generation of electricity and heat.

TGC-4, TGC-6, and TGC-11 have started to implement the transitional model of operation: extraordinary general meetings of the RGCs included in the configuration of those TGCs approved the transfer of the CEO's powers to the respective management company, TGC. The transitional model for operation of TGC-10 and TGC-13 will be launched by year end 2005.

During the next phase of the TGC formation, the RGCs will merge with and into the respective TGCs, taking into account the position of the minority shareholders. At ten TGCs, a process is underway to merge RGCs with and into TGCs.

Establishment of six TGC (TGC-2, TGC-4, TGC-5, TGC-6, TGC-8, TGC-9) must be completed by 1 July 2006. The other TGCs will be formed by the end of 2006.

Retail Companies

A systemic decision on the strategy for organizing the retail activities of RAO UES Holding Company is expected to be made in April 2006 after the autumn-winter period is over. On 24 June 2005, the Board of Directors of RAO "UES of Russia" took a temporary decision on the transfer of retail companies' shares for fiduciary management to the TGCs for a term of 1 year. At the same time, there are plans to implement up to 10 pilot projects envisaging other forms of disposing of shares in energy retail companies. The list of "pilot" energy retail companies and the principal terms of those projects were approved by the Board of Directors of RAO "UES of Russia" on 30 September 2005.

In conclusion, the Board of Directors noted that the reform of the electricity industry was largely implemented according to the plans of the Russian Government and resolutions of the Board of Directors of RAO "UES of Russia" both with regard to restructuring of the wholesale electricity (capacity) market, development of the legal and regulatory framework, and creation of infrastructure organizations and new industry members.

* * *

The Board of Directors of RAO "UES of Russia" reviewed and noted the proposals on liquidation of cross-subsidization submitted by the Company's management. The Board stated that today, the existence of cross-subsidization in its current form is a significant constraint on the electricity reform.

Before the launch of the sector reform, cross-subsidization of socially important consumer groups was effected by setting higher tariffs for the rest of consumers served by the same regional energy company. In the course of the reform, most of the vertically-integrated regional energos were unbundled into independent generation, power grid and retail companies. At the same time, the electricity reform envisages free access for consumers to the wholesale electricity market or their receipt of services from the emerging independent energy retail companies, which helps these consumers eliminate the burden of cross-subsidization.

In such a situation, the energy retail companies, especially the guaranteeing suppliers providing electricity to the socially important consumer groups, face a greater risk of bankruptcy. Because of that, the existing cross-subsidization arrangements need to be revised.

The Board of Directors of RAO "UES of Russia" approved of the work done by the Company's management to develop a package of measures designed to legalize and liquidate cross-subsidization.

In 2005-2006, it is planned to preserve the existing mechanism of cross-subsidization while simultaneously preparing the regulatory basis for introducing a new mechanism for subsidization in the electricity industry. The risks of collapse of the subsidization system should be minimized next year owing to the restricting terms of large consumers' access to the wholesale market.

With effect from 2007, subject to approval of the mechanism by the Government, it is planned to put in place a new subsidization system providing for:

 - introducing a social norm of electricity consumption, within which the socially important consumer groups will purchase electricity at reduced rates, with the consumption in excess of such norm to be charged at economically justified rates.

 - the creation in the federal budget (with the relevant changes made to the revenue and expenditure parts) of a social reserve for the purpose of subsidy payments to compensate for the losses due to the need to supply electricity to the socially important consumer groups at reduced rates. Beneficiaries of such subsidies will include electricity sellers purchasing electricity on the wholesale market or on the retail market directly from power producers, and selling it to the socially important groups of consumers directly and/or through resellers on the retail market.

It is proposed to create a social reserve similar to the universal service reserve created pursuant to the Federal Law On Communications. The social reserve is to be created from the mandatory non-tax levies collected from the payers determined by the law, and from other sources not prohibited by the law. Such payers of mandatory levies should include subsidizing consumers and energy retail entities (energy providers) which buy electricity on the wholesale market or on the retail market directly from generators, and sell it to subsidizing consumers. The rest of buyers will not make direct mandatory payments to the social reserve, but will pay the mandatory levies as part of the tariff (price) of purchased electricity.

Introduction of the mandatory payments to the social reserve will not result in increased electricity payments by subsidizing consumers; the change will occur only in the legal form of cross-subsidization.

 - As the rates for households are brought to the economically justified level, but not later than the end of the transitional period of the electricity reform, it is planned to move to a system of targeted support to households from the budget, which provides for the grant of subsidies directly to households, rather than electricity enterprises. A similar system is already used for benefits relating to residential utilities services. However, in view of the fact that the cross-subsidization system currently embraces a vast majority of Russia's population, such transition to targeted subsidies would require creation of the relevant infrastructure, which will take time and cost money to the state. In this connection, it appears advisable to switch to the targeted subsidies system in the electricity industry after the tariffs for households are gradually increased.

These proposals on changing the cross-subsidization mechanism were prepared by the management of RAO "UES of Russia" and are currently reviewed and agreed with the energy related ministries and agencies. The Board of Directors instructed the Management Board to continue working in that direction.

Cross-subsidization is where lower rates are set for one group of consumers (primarily households) at the expense of higher rates set for other groups (large industrial enterprises). Cross-subsidization [of energy prices] by industry in favour of households is estimated by RAO "UES of Russia" at about RUB60 billion annually, with the level of cross-subsidization differing by several times region by region.

* * *

The Board of Directors of RAO "UES of Russia", performing the functions of the EGM of OAO "WGC-2",* approved the resolutions designed to finalize the establishment of OAO "WGC-2" and create the target structure of the company.

By now, the first stage of the process to establish OAO "WGC-2" has been completed by contributing the shares in the federal power plants—OAO "Pskovskaya TPP", OAO "Stavropolskaya TPP", and OAO "Troitskaya TPP"—owned by RAO "UES of Russia" to the authorized capital of OAO "WGC-2".

It is planned that the establishment of OAO "WGC-2" will be completed as the Company will be consolidated through exchange of shares in the subsidiaries—OAO "Surgutskaya TPP-1", OAO "Serovskaya TPP" owned by RAO "UES of Russia" and shares in OAO "Pskovskaya TPP", OAO "Stavropolskaya TPP", and OAO Serovskaya TPP" owned by minority shareholders in these AO-power plants—for additional shares in OAO "WGC-2".

For that purpose, the Board of Directors of RAO "UES of Russia" resolved to increase the authorized capital of OAO "WGC-2" through issuance of 17,285,574,300 additional ordinary shares, RUB1 par value each.

The target model for OAO "WGC-2" is to be achieved through reorganization of OAO "WGC-2" by way of merger of OAO "Pskovskaya TPP", OAO "Stavropolskaya TPP", OAO "Surgutskaya TPP-1", OAO "Serovskaya TPP", and OAO "Troitskaya TPP" [with and into OAO "WGC-2", on the terms provided by the Merger Agreement. As a result of such merger of the AO-power plants with OAO "WGC-2", all rights and obligations of these power plants will be transferred to OAO "WGC-2" under deeds of assignment.

It is planned to complete the share exchange at OAO "WGC-2" in Q2 2006, and the merger of the subsidiary power plants with and into OAO "WGC-2" in Q3 2006.

In the process of share exchange and reorganization of OAO "WGC-2", holders of the relevant class of shares will be granted the same scope of rights, which will be ensured by the use of common share exchange and conversion ratios.

According to the exchange ratios approved by the Board of Directors of RAO "UES of Russia", the following amounts of shares will be exchanged for one ordinary share in OAO "WGC-2"**:

 - 1.125/2.285 of an ordinary share in OAO "Pskovskaya TPP"; and/or

 - 1.125/6,229.835 of an ordinary share in OAO "Stavropolskaya TPP"; and/or

 - 1.125/41.505 of an ordinary share in OAO "Surgutskaya TPP-1"; and/or

 - 1.125/1.695 of a Type A preferred share of OAO "Serovskaya TPP"; and/or

 - 1.125/1.850 of an ordinary share of OAO "Serovskaya TPP".

Payment for the additional shares in OAO "WGC-2" in the course of consolidation and share exchange is to be made with a whole number of shares required to purchase at least one additional ordinary share in OAO "WGC-2". If, as a result of such calculation, a shareholder is entitled to receive a fractional number of shares, the fractional part will be dropped, and only the whole number of shares will be taken into account.

* The decision on the establishment by RAO "UES of Russia" of OAO "WGC-2" as a wholly-owned subsidiary was taken by the Board of Directors of RAO "UES of Russia" at its meeting held 24 December 2004. The state registration of OAO "WGC-2" was effected by Inspectorate No. 2607 of the Federal Tax Service of Russia for Izobilnensky District, Stavropol Kray on 9 March 2005.

The Director General of OAO "WGC-2" is Mikhail Kuzichev.

Pursuant to Order of the Government of the Russian Federation No. 1254-r of 1 September 2003, the following companies were included in OAO "WGC-2": OAO "Pskovskaya TPP", OAO "Serovskaya TPP", OAO "Stavropolskaya TPP", OAO "Surgutskaya TPP-1", and OAO "Troitskaya TPP".

** For the purpose of determining the market value of shares of the AO-power plants and shares of OAO "WGC-2", the Company hired a consortium of appraisal firms consisting of ZAO "Rossiyskaya Otsenka" ("Russian Appraisal"), ZAO "Natsionalnoe Agentstvo Otsenki i Konsaltinga" ("National Agency for Appraisal and Consulting"), and OOO "Investitsionnaya otsenka Otkrytie" ("Investment Appraisal Discovery") accredited with OAO RAO "UES of Russia".

As a result of a tender process, the Company selected a consortium of investment banks, OOO "Metropol Investment & Finance Company" and ZAO "ING Bank", to determine the share exchange and conversion ratios that would be fair for shareholders, taking into account the results of the share valuation by the consortium of appraisal firms, and to hold negotiations with the participating shareholders on the share exchange and merger of the AO-power plants.

* * *

The Board of Directors of RAO "UES of Russia" noted the information on the terms of [fiduciary] management of the 30.41% shareholding in OAO "Power Machines" owned by Burbot* on the basis of an irrevocable power of attorney valid until 1 January 2007.

An agreement on the grant of such power of attorney was reached between RAO "UES of Russia" and the owner of the shares.

Under the terms of the power of attorney, RAO "UES of Russia" will receive a full range of rights attached to the 30.41% holding of voting shares in OAO "Power Machines", except for the right to receive dividends and the right to dispose of the shares.

During the period of managing the 30.41% shareholding, RAO "UES of Russia", jointly with the owners of the shares, will develop and start implementation of a new business development strategy for OAO "Power Machines", and will determine the amount of funds needed to implement such strategy, as well as the mechanisms for raising such funds.

The strategy will pursue the following objectives:

 - arrangement of financing for re-equipment of power engineering plants and research efforts to create new equipment meeting the requirements of RAO UESR technical policy;

 - reducing production and other expenses at power engineering manufacturing enterprises;

 - reducing the periods needed to complete the design and development, installation and commissioning works; development of comprehensive design, maintenance, and engineering services.

The Board of Directors instructed the management of RAO "UES of Russia" to continue the talks with Burbot on the terms and possibility of extending the period of management by RAO "UES of Russia" of the 30.41% shareholding in OAO "Power Machines", and on the conditions and advisability of an option contract to purchase these shares, taking into account the RAO UESR development strategy.

* At the Board meeting held 30 September 2005 - 4 October 2005 (with the Board members voting in person and in absentia), the Board of Directors of RAO "UES of Russia" took a decision to purchase from Interros Holding Company a 22.43% shareholding in OAO "Power Machines". Besides, the Board of Directors instructed the Management Board of RAO "UES of Russia" to present, among other things, its proposals on the terms of management of the 30.41% shareholding of OAO "Power Machines" and [conclusions] on the advisability of an option contract to purchase said shareholding.

* * *

The Board of Directors considered the question of further reform of the energy repair business at RAO UES Holding Company.

The Board resolved to resume the process to gradually divest the Company's interests in ("reduce the level of affiliation of") energy repair and maintenance companies of RAO UES Holding Company on the terms approved by the Board of Directors of RAO "UES of Russia" on 31 October 2003.* The Board of Directors, on the recommendation of the Strategy and Reform Committee, took a decision to lift the restrictions imposed on the purchase of the Holding Company's repair and maintenance companies by minority shareholders of RAO "UES of Russia" and its subsidiaries.

The Board of Directors of RAO "UES of Russia" set the deadline for completing the process —July 2007, and authorized the Management Board of RAO "UES of Russia" to determine the terms of sale of shares in dependent R&M companies.

At the same time, the Board of Directors of RAO "UES of Russia" will take resolutions on the divestiture of R&M companies providing repair services to hydropower plants (HPPs) with an installed capacity of over 1,000 MW on a case-by-case basis for each such individual company.

As resolved by the Board of Directors, shares in R&M companies will be sold at auctions in accordance with the methodology used for sale for non-core assets of RAO "UES of Russia" and its SDCs.

In particular, the shares will be sold at an auction with a start price equal to the market value determined by an independent appraiser. If the auction fails due to the lack of buyers, the shares will be sold in a public offering. The initial price shall be equal to the start price of the failed auction, and the minimum price shall be equal to 50% of the initial price of the offering. If the sale through a public offering fails due to lack of buyers, the Management Board shall inform the Board of Directors thereof, and the latter shall decide on further ways of sale of such repair or maintenance company.

The sale of shares in repair companies is to be effected with the involvement of an asset disposal agent of RAO "UES of Russia" and its SDCs.

The decisions taken by the Board are intended to accelerate the process of divestiture ("lowering the degree of affiliation") of the repair and maintenance units and to complete the reform of repair business at RAO UES Holding Company.

At its meeting held on 31 October 2003, the Board of Directors of RAO "UES of Russia" deemed it possible to sell shares in R&M subsidiaries owned by regional energos and AO-power plants to persons not affiliated with RAO "UES of Russia" and its SDCs, or to establish on their basis of integrated companies, which is to be followed by the sale of shares in such companies.

After that, steps were taken to prepare for the sale of shares in repair and maintenance companies, auctions were held for the right to make contracts to purchase 100% shareholdings in some of those companies.

However, after the blackout in the Moscow energy system, the Board of Directors of RAO "UES of Russia" resolved, at the meeting held 24 June 2005, to suspend the process of divestiture of the repair and service companies and revise the direction of the reform at the energy repair companies with a view to preserve and increase reliability of the UES operation.

In order to implement this decision, a conference was held on 6 September 2005, which was chaired by Chairman of the Management Board of RAO "UES of Russia" Anatoly Chubais. Present at the conference were the members of the Management Board of RAO "UES of Russia", representatives of subsidiaries and dependent companies of RAO "UES of Russia", and the Company's shareholders. The Board resolved to resume the process to gradually divest ("reduce the level of affiliation" of) the energy repair and maintenance companies on the terms previously approved by the Board of Directors of RAO "UES of Russia". This resolution was backed by the Management Board of RAO "UES of Russia" at the meeting of 17 October 2005.

* * *

The Board of Directors of RAO "UES of Russia" made amendments to the plan for establishment of OAO "TGC-4" which will make it possible to reduce the time needed to complete the formation of the company's intended structure.

Initially, the plan for the formation of the intended structure of OAO "TGC-4", as approved by the Board of Directors of RAO "UES of Russia" on 25 February 2005, provided for the establishment, at the first phase, of OAO "Priokskaya Investment Company" (OAO "PIC") as a wholly-owned subsidiary of RAO "UES of Russia" by contributing the shares in regional generation companies (RGCs) owned by RAO "UES of Russia" [to the capital of OAO "PIC"], and merger of the RGCs and OAO "PIC" with and into OAO "TGC-4", an operating company.

At the second phase, it was planned to issue additional shares of OAO "TGC-4", which will be exchanged for shares in those RGCs whose shareholder meetings do not approve the companies' merger [with OAO "TGC-4"] during the first phase.

However, in the course of implementation of the plan, it was decided that establishment of OAO "PIC" would be impractical, as its presence in the TGC-4 establishment plan complicates the plan and produces additional risks that the deadlines set for the plan implementation may have to be extended.

The amendments to the plan provide that the intended structure of TGC-4 will be formed in two phases, as previously decided.

In this connection, the Board of Directors decided to form the intended structure of OAO "TGC-4" by way of merger of OAO ""Bryansk Generation Company", OAO "Voronezh Generation Company", OAO "Kaluga Generation Company", OAO "Kursk Generation Company", OAO "Lipetsk Generation Company", OAO "Oryol Generation Company", OAO "Priokskaya Territorial Generation Company", OAO "Ryazan Heat Supply Company", OAO "Smolensk Generation Company", OAO "Tambov Generation Company", and OAO "Heat Energy Company" with and into OAO "TGC-4" without establishing OAO "PIC".

The preferred scenario for the formation of the intended structure of OAO "TGC-4" will be merger of all of the above RGCs with and into OAO "TGC-4".

At the second phase, in the event that shareholders of one or more RGCs do not approve the merger [of their companies] with and into OAO "TGC-4", only those RGCs will merge with TGC-4 whose shareholder meetings approve such merger. OAO "TGC-4" will issue additional shares which will be exchanged for shares in RGCs owned by RAO "UES of Russia" and minority shareholders that support the RGC's reorganization or do not participate in the voting on that issue.

The Board of Directors of RAO "UES of Russia" approved ratios for the conversion of shares in RGCs merging with OAO "TGC-4" [into TGC-4 shares]. As a result of such conversion, ordinary shares in the RGCs will be converted into ordinary shares of OAO "TGC-4", and preferred shares in the RGCs will be converted partly into ordinary shares and partly into preferred shares of OAO "TGC-4".

Thus, 43.43% of the total number of preferred shares in the merging RGCs will be converted into additional ordinary shares of OAO "TGC-4", and the remaining 56.57% preferred shares in the RGCs held by RGC shareholders will be converted into preferred shares of OAO "TGC-4" being placed.

At the first phase, if all 11 RGCs merge [with and into OAO "TGC-4"], preferred shares will make 5.4% of the authorized capital of OAO "TGC-4".

As a result, the following amounts of shares will be converted into one ordinary share of OAO "TGC-4" of RUB0.01 par value:

 - 1/1594.4431060 of an ordinary share and 1/1460.1909965 of a Type A preferred share in OAO "Bryansk Generation Company", par value RUB1.5 each;

 - 1/1657.8982522 of an ordinary share and 1/1518.3032193 of a Type A preferred share in OAO "Voronezh Generation Company", par value RUB16 each;

 - 1/115.9384251 of an ordinary share in OAO "Kaluga Generation Company", par value RUB1 each;

 - 1/89.9376967 of an ordinary share and 1/82.3649427 of a Type A preferred share of OAO "Kursk Generation Company", par value RUB0.35 each;

 - 1/1709.6397662 ordinary shares in OAO "Lipetsk Generation Company", par value RUB18.34 each;

 - 1/501.9621087 of an ordinary share and 1/459.6968992 of a Type A preferred share in OAO "Oryol Generation Company", par value RUB3.5 each;

 - 1/191.3909409 of an ordinary share in OAO "Priokskaya Territorial Generation Company", par value RUB1 each;

 - 1/311.1653441 of an ordinary share in OAO "Ryazan Heat Supply Company", par value RUB2.86 each;

 - 1/588.5655505 of an ordinary share and 1/539.0083312 of a Type A preferred share in OAO "Smolensk Generation Company", par value RUB0.75 each;

 - 1/69.7883060 of an ordinary share and 1/63.9121307 of a Type A preferred share in OAO "Tambov Generation Company", par value RUB1.4 each;

 - 1/47738.2931364 of an ordinary share and 1/43718.7288543 of a Type A preferred share in OAO "Heat Energy Company", par value RUB600 each.

the following amounts of RGC shares will be converted into one preferred share of OAO "TGC-4" of RUB0.01 par value:

 - 1/1594.4431060 of a Type A preferred share in OAO "Bryansk Generation Company", par value RUB1.5 each;

 - 1/1657.8982522 of a Type A preferred share in OAO "Voronezh Generation Company", par value RUB16 each;

 - 1/89.9376967 of a Type A preferred share in OAO "Kursk Generation Company", par value RUB0.35 each;

 - 1/501.9621087 of a Type A preferred share in OAO "Oryol Generation Company", par value RUB3.5 each;

 - 1/588.5655505 of a Type A preferred share in OAO "Smolensk Generation Company", par value RUB0.75 each;

 - 1/69.7883060 of a Type A preferred share in OAO "Tambov Generation Company", par value RUB1.4 each;

 - 1/69.7883060 of a Type A preferred share in OAO "Heat Energy Company", par value RUB600 each.

The conversion ratios were calculated on the basis of the report on the market valuation of shares in the merging companies prepared by the investment bank "United Financial Group" with the participation of a consortium of independent appraisers: ZAO "Ernst & Young Valuation Consulting", ZAO "ENPI Consult", OAO "International Appraisal Center".

If, as a result of such calculation, a merging company's shareholder is entitled to receive is a fractional number of shares, such fractional part will be rounded off in accordance with the generally accepted rules. If as a result of such rounding a shareholder is not entitled to receive any shares, such shareholder will receive one ordinary share in OAO "TGC-4" of the respective class.

The Board of Directors also instructed the representatives of RAO "UES of Russia" at OAO "TGC-4" and the RGCs to vote at meetings of the Boards of Directors and at general shareholder meetings FOR the approval of all resolutions required to complete the formation of the intended structure of OAO "TGC-4".

OAO "TGC-4" was registered on 20 April 2005 with the Inspectorate of the Federal Tax Service of Russia for the city of Tambov. The share issue and share placement report of OAO "TGC-4" was registered by the FSFM of Russia on 20 June 2005.

The authorized capital of the Company is RUB10 million. Gennady Kochetkov was elected Director General of the Company.

OAO "TGC-4" will comprise the heat generation assets of OAO "Heat Energy Company", generation assets of OAO "Bryansk Generation Company", OAO "Voronezh Generation Company", OAO "Kaluga Generation Company", OAO "Kursk Generation Company", OAO "Lipetsk Generation Company", OAO "Oryol Generation Company", OAO "Ryazan Heat Supply Company", OAO "Smolensk Generation Company", OAO "Tambov Generation Company", OAO "Priokskaya Territorial Generation Company".

The resolution to establish OAO "TGC-4" as a wholly-owned subsidiary of RAO "UES of Russia" was approved by the Board of Directors of RAO "UES of Russia" at its meeting held on 25 February 2005.

* * *

The Board of Directors of RAO "UES of Russia" approved the list of measures to implement the first phase of the restructuring plan of OAO "Yakutskenergo".*

The project is intended to improve reliability of the energy system in the Sakha (Yakutia) Republic, increase its capitalization and investment attractiveness, eliminate the interregional cross-subsidization, and curb the rise in heat and electricity tariffs.

In particular, during the first phase, it is planned to establish wholly-owned subsidiaries, OAO "Energotranssnab" and OAO "Teploenergoservis", on the basis of assets of the corresponding branches of the energy company. This will help optimize the transportation and logistical business of the company and promote increase in the generation of heat and residential utility services in the energy system.

Besides, OAO "Yakutskenergo" is to be reorganized by spinning off OAO "South Yakutia Energy Company", which will receive the assets which will further be used for the establishment of OAO "Far Eastern Energy Company".**

Afterwards, it is planned that OAO "South Yakutia Energy Company" will merge with and into OAO "Far Eastern Energy Company". The questions relating to this process will be submitted, by stages, for consideration by the Board of Directors of RAO "UES of Russia".

The Board of Directors of RAO "UES of Russia" instructed its representatives on the Boards of Directors and at general shareholder meetings of OAO "Yakutskenergo", OAO "Southern Yakutskenergo", and OAO "Far Eastern Energy Company" (when these are established) to vote FOR the approval of the resolutions designed to implement the plan.

The Management Board of RAO "UES of Russia" was given the task, after the problem of cross-subsidization at OAO "Yakutskenergo" is solved, to submit for consideration by the Board of Directors of RAO "UES of Russia" a list of measures to further reorganize OAO "Yakutskenergo",

* OAO "Yakutskenergo" is a subsidiary of RAO "UES of Russia", which holds a 47.9% in its authorized capital. Pursuant to the resolution of the Board of Directors of RAO "UES of Russia" of 25 June 2004, OAO "Yakutskenergo" was included in the group of energy systems with limited competition. Such energy systems may be reorganized using scenarios different from the "basic" restructuring plan.

OAO "Yakutskenergo" operates in the Republic of Sakha (Yakutia). The energy system comprises four energy districts isolated due to the lack of interconnections. Three of them—the Western energy area, Central energy area, and South Yakutia energy area—are served by OAO "Yakutskenergo". The Northern energy area is served by OAO "Sakhaenergo", a wholly-owned subsidiary of OAO "Yakutskenergo".

** At the meeting held 2 September 2005, the Board of Directors of RAO "UES of Russia" approved the restructuring plan for the energy systems of the Far East and the list of measures to implement that plan. The restructuring plan for the energy systems in the Far East includes a number of concurrent corporate actions.

In particular, in December 2006, it is planned to create a single Holding Company, OAO "Far Eastern Energy Company" ("FEEC"), through merger of OAO "Khabarovskenergo", ZAO "LuTEK", OAO "Amurenergo", OAO "Southern Yakutskenergo", and OAO "Dalenergo".

* * *

The Board of Directors of RAO "UES of Russia" approved the contract for fiduciary management of the rights attached to shares in interregional distribution companies (IDCs) between RAO "UES of Russia" and OAO "UES FGC".*

Under the contract, RAO "UES of Russia" will transfer to the fiduciary manager, OAO "UES FGC", the entire range of rights attached to the IDC shares. The fiduciary management is carried out in the interests of RAO "UES of Russia" and concerns only the exercise of rights attached to the shares. Said contract constitutes an interested party transaction, as some members of the Management Board and Board of Directors of RAO "UES of Russia" are also members of the Board of Directors of OAO "UES FGC".

The fiduciary management contract is to be made for a term of one calendar year of the date on which the contract is entered into. The Board of Directors of RAO "UES of Russia" instructed the Company's Management Board to explore the issues of development strategy for power grid facilities and disposal of IDC shares, and the alternative options for management of IDC shares, and report [their findings to the Board of Directors] in Q2 2006.

The Board of Directors determined the method of calculating the contract price, and the method of calculation and procedure for payment to OAO "UES FGC" of remuneration for the fiduciary management.

* At its meeting held 23 April 2004, the Board of Directors of RAO "UES of Russia" decided that it was advisable to transfer IDC shares for fiduciary management to OAO "UES FGC" to the extent of exercise of rights attached to such shares.

To date, four IDCs have completed their registration with the state authorities: OAO "Center and North Caucasus IDC", OAO "North-West IDC", OAO "Urals and Volga IDC", and OAO "Siberia IDC".

The rights attached to 100 million shares of OAO "Siberia IDC", OAO "North-West IDC", OAO "Urals and Volga IDC", and OAO "Center and North Caucasus IDC", par value RUB0.1 [each], will be transferred for fiduciary management to OAO "UES FGC".

* * *

The Board of Directors of RAO "UES of Russia" instructed RAO UESR representatives on the Boards of Directors of OAO "Orenburg Heat Generation Company", OAO "Orenburgenergosbyt", OAO "Dalselenergoproekt", OAO "Southern ITsE", and OAO "WGC-5" to vote for including on the agenda of shareholder meetings the proposal to elect new Board members of the companies. Besides, the agenda of general shareholder meeting of OAO "WGC-5" will include an item of election of members of the Auditing Commission of the company.

At OAO "Orenburg Heat Generation Company", the election is needed due to the departure of the current Board members, Victoria Shamritskaya and Mikhail Bychkov, from the executive staff of RAO "UES of Russia".

At OAO "Orenburgenergosbyt", the election is due to the transfer of the current Board member Andrey Kolesnikov to another job.

At OAO "Dalselenergoproekt", the election is due to the transfer of the current Board member Elena Ivanova to another job.

At OAO "Southern ItsE", the election procedure was initiated due to departure of the current Board member Ilya Gorev as member of the Central Executive Staff of RAO "UES of Russia".

At OAO "WGC-5", the election of new members of the Board of Directors is due to the changes in the company's capital structure; and the election of new members of the Auditing Commission is due to the departure of Commission member Evgeny Tsyba as member of the Company's executive staff.

* * *

The Board of Directors of RAO "UES of Russia" made amendments to its resolution of 25 March 2005, which will make it possible to transfer the generation assets of the regional energos managed by OAO "Caucasian Energy Management Company" to OAO "HydroWGC", provided that RAO "UES of Russia" preserves its 100% ownership of OAO "HydroWGC".

Earlier, at the meeting held 30 September 2005, the Board of Directors of RAO "UES of Russia" resolved to preserve the 100% interest held by RAO "UES of Russia" in the authorized capital of OAO "HydroWGC" until the establishment of that company is finalized. However, the project to turn around and restructure OAO "Ingushenergo", OAO "Kabbalkenergo", OAO "Karachaevo-Cherkesskenergo", and OAO "Sevkavkazenergo", managed by OAO "Caucasican Energy Management Company", which was approved on 25 March 2005, provides that said regional energos and the hydrogeneration companies (HGCs) created on their basis are to participate in OAO "HydroWGC".

The amendments to the Turnaround And Restructuring Project approved by the Board of Directors of RAO "UES of Russia" provide that OAO "Kabbalkenergo", OAO "Sevkavkazenergo", and OAO "Karachaevo-Cherkesskenergo" will sell shares in the previously established subsidiaries (hydrogeneration companies)* to the companies that are included in the configuration of OAO "HydroWGC"—OAO "Cascade of Nizhne-Cherekskie HPPs", OAO "Zaramagskie HPPs", and OAO "Zelenchukskie HPP", respectively.

The Board of Directors of RAO "UES of Russia" instructed the Company's representatives on the Boards of Directors and at general meetings of shareholders of the above companies to vote FOR the approval of the resolutions needed to implement the Turnaround and Restructuring Project.

By now, OAO "Kabardino-Balkaria Hydrogeneration Company", OAO "Karachaevo-Cherkessia Hydrogeneration Company" and OAO "North Ossetia Hydrogeneration Company" have completed their state registration.

* * *

The Board of Directors of RAO "UES of Russia" approved the transformation of the Branch "Energy Building Complex of UES" into an open joint stock company, OAO "Energy Building Complex of UES" (OAO "ESKO UES").

OAO "ESKO UES" will be established as a joint stock company with an authorized capital of RUB15 million. RAO "UES of Russia" will hold 49% shares in the company, and OAO "HydroWGC" 51%. The shareholders will pay for the shares in OAO "ESKO UES" with cash.

The Board of Directors of RAO "UES of Russia" instructed RAO UESR representatives on the Board of Directors of OAO "HydroWGC" to vote for the approval of OAO "HydroWGC" taking a stake in OAO "ESKO UES".

The establishment of "ESKO UES" in the form of an open joint stock company (OAO) will make it possible for RAO "UES of Russia", its subsidiaries and dependent companies to reduce their expenses on construction and modernization of generation facilities. The newly established company will take up the functions of RAO UES Branch "Energy Construction Complex of UES" (including the control over the construction projects financed with earmarked investment funds of RAO "UES of Russia"). Besides, the company will perform the functions of a single technical procurer for projects implemented by OAO "HydroWGC". In the future, after the establishment of independent generation companies is completed, OAO "ESKO UES" is to become one of the leading players on the market for consulting services in the construction and modernization of energy facilities.

* RAO UES Branch, Energy Building Complex of the UES, was set up in 1997 for the purpose of improving economic efficiency of investment resources management at RAO "UES of Russia". It pursues the following principal goals:

 - coordinating and organizing the activities of energy construction and installation entities, balancing the production of structures and products with the plan for the implementation of start-up projects and projects under construction;

 - organizing the management of construction and installation entities and scientific research organizations;

 - implementing a scientific and technological policy in the construction of energy facilities and building industry.

Besides, "ESKO UES" has been entrusted with organizational and technical support of activities of the Operational Start-up Headquarters of RAO "UES of Russia".

Over the past period, ESKO UES has been directly involved in the commissioning of generation facilities at all hydro and thermal power plants financed with earmarked investment funds of RAO "UES of Russia".

 

 

 

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