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Unified Energy System

September 2, 2005

RAO UES Board of Directors holds its regular meeting

Moscow, 2 September 2005. At its meeting held today, the Board of Directors of RAO "UES of Russia" approved a Supplementary Agreement to the Agreement on Interaction in the Course of Restructuring the Electricity Sector of the City of Moscow, entered into by RAO "UES of Russia", OAO "Mosenergo", the Moscow City Government and the Regional Energy Commission of the City of Moscow on 7 October 2003. The Supplementary Agreement was signed by the Chairman of the Management Board of RAO "UES of Russia" Anatoly Chubais and the Moscow Mayor Yury Luzhkov.

The Supplementary Agreement states that, in connection with the restructuring of OAO "Mosenergo" and state registration of OAO "Moscow Heat Distribution Company" and OAO "Moscow City Electricity Distribution Company", the obligations of OAO "Mosenergo" have been discharged, and the further performance of the Agreement will pass to these companies.

Also, under the Supplementary Agreement, RAO "UES of Russia" and the Moscow City Government will establish, on a parity basis, a joint management company, OAO "Moscow Management Energy Grid Company" and transfer to it the powers of the One-man Executive Bodies (CEO) of OAO "Moscow Heat Distribution Company" and OAO "Moscow City Electricity Distribution Company" spun off from OAO "Mosenergo", and OAO "Moscow United Energy Company".

The Supplementary Agreement envisages broader possibilities for increasing the stake held by the Moscow City Government in OAO "Moscow Heat Distribution Company" and OAO "Moscow City Electricity Distribution Company", including through the following measures:

 

- the electricity and district heating grids and other power facilities owned by the city of Moscow and/or business companies wholly owned by the Moscow municipal authorities;

- funds contributed by the city of Moscow or business companies wholly owned by the municipal authorities;

- shares in the companies established in the course of reorganization of OAO "Mosenergo" owned by the Moscow city, or the business companies wholly owned by the Moscow municipal authorities;

- shares in business companies wholly owned by the Moscow municipal authorities, or shares held by the business companies wholly owned by the Moscow municipal authorities whose principal business is heat generation and transmission of heat and electricity;

- the above property and assets in various combinations.

 

As the electricity and heating grid companies are natural monopolies, the Supplementary Agreement states that it would be advisable to pool the assets of these companies with the assets and electricity facilities owned by the city of Moscow or the companies wholly owned by the Moscow municipal authorities.

* * *

 The Board of Directors of RAO "UES of Russia" approved the restructuring plan for the Far Eastern energy systems and the list of measures needed to implement the plan.

The reform of the energy sector in the Far East of Russia seeks to increase reliability of the energy system, to create a system of control over the energy sector in the Far East after the separation of RAO "UES of Russia", and to raise capitalization and investment attractiveness of the region's energy companies. The reform is also intended to optimize the energy balance in the Far East and reduce the energy generation costs.

Pursuant to the resolution of the Board of Directors of RAO "UES of Russia" of 25 June 2004, the energy systems of the Far East energy systems may be reorganized using scenarios different from the "basic" restructuring plan. This is due to the peculiarities of the region's energy sector, which make it impossible to create competition in the generation segment in the period of five years. In order to create prerequisites for the introduction of competition and ensure a transparent pricing mechanism in the region's energy sector, it is planned to functionally unbundle the existing energy systems.

These prerequisites, as well as the reorganization of RAO "UES of Russia" scheduled for 2007, necessitate the establishment of a company that has sufficient financial and organizational resources to ensure the management of the entire energy system in the Far East and is capable of addressing the problems of cross-subsidization, maintaining reliability, and implementing repair and investment programmes throughout the region.

The restructuring plan for the energy systems in the Far East as approved by the Board of Directors of RAO "UES of Russia" includes a number of concurrent corporate actions.

Specifically, it is intended to establish a subsidiary of OAO "Yakutskenergo", OAO "Yuzhnoe Yakutskenergo", on the basis of the Southern energy area of OAO "Yakutskenergo".

It is also planned to create a single Holding Company, OAO "Far Eastern Energy Company", through merger of OAO "Khabarovskenergo", ZAO "LuTEK", OAO "Amurenergo", OAO "Yuzhnoe Yakutskenergo" (to be established on the basis of assets of the Southern energy area of OAO "Yakutskenergo", and OAO "Dalenergo".*

Simultaneously, OAO "Far Eastern Generation Company" and OAO "Far Eastern Distribution Company" will be set up. Each of them will be founded as a wholly-owned subsidiary by one of the regional energos participating the project. The authorized capital of the new companies will be RUB5 million and will be divided into 500 million ordinary shares of RUB0.01 par value. Payment for the shares in OAO "Far Eastern Generation Company" and OAO "Far Eastern Distribution Company" will be made in cash within one month after the state registration of the companies.

At a later time, the authorized capitals of OAO "Far Eastern Generation Company" and OAO "Far Eastern Distribution Company" will be increased through issuance of additional shares. Payment for such shares will be made in form of generation and heating grid assets, and the distribution grid assets of OAO "Dalenergo", OAO "Khabarovskenergo", OAO "Amurenergo", ZAO "LuTEK", and OAO "Yuzhnoe Yakutskenergo". Thus, upon completion of the energy sector reform in the Far East, OAO "Far Eastern Energy Company" will be the only shareholder in these companies.

The plan also provides for the separation of facilities of the Unified National Electricity Grid (UNEG) currently owned by the energy companies being reorganized through establishment of wholly-owned subsidiaries of said companies (OAO "Primorskaya Trunk Grid Company", OAO "Khabarovsk Trunk Grid Company", OAO "Amurskaya Trunk Grid Company", and OAO "Yakutskaya Trunk Grid Company"), with the UPEG facilities to be contributed to their capital and subsequent merger of the newly-established companies with and into OAO "Center ITC".

Under the approved Plan, OAO "Far Eastern Energy Company" will retain the electricity retailing functions. Until the cross-subsidization problems are resolved in the Republic of Sakha (Yakutia), OAO "Yakutskenergo" will handle electricity retailing in the Southern energy area of the Republic.

In view of the peculiarities of the Far Eastern energy systems, a Holding Company owning stakes in OAO "Far Eastern Energy Company" will be spun off from RAO "UES of Russia" in the course of the latter's reorganization for the purpose of preserving state control over these energy systems.

The Board of Directors of RAO "UES of Russia" instructed the Management Board to submit for consideration by the Board of Directors the following:

 

- not later than November 2005, the matters relating to approval of the restructuring plan for OAO "Yakutskenergo", which provides, inter alia, for the spin-off of a company owning shares in OAO "Yuzhnoe Yakutskenergo" and its subsequent merger with and into OAO "Far Eastern Energy Company";

- not later than March 2006, the proposals relating to the completion of creation of OAO "Far Eastern Energy Company" through merger of OAO "Dalenergo", OAO "Khabarovskenergo", ZAO "LuTEK", OAO "Amurenergo", and OAO "Yuzhnoe Yakutskenergo", and measures to increase the authorized capital of OAO "Far Eastern Generation Company" and OAO "Far Eastern Distribution Company" [through issuance of additional shares]. Payment for the additional shares will be made in the property of OAO "Dalenergo", OAO "Khabarovskenergo", OAO "Amurenergo", ZAO "LuTEK", and OAO "Yuzhnoe Yakutskenergo".

 

The Board of Directors of RAO "UES of Russia" also commissioned the Management Board, to develop and ensure implementation in 2005-2010 of a number of measures designed to eliminate the power grid limitations in the Eastern IES. This will create the prerequisites for creating a competitive environment in electricity generation. The Board of Directors of RAO "UES of Russia" also instructed the Management Board to conduct a thorough analysis of the retail market model in the Far East and the conditions for the activities of Guaranteeing Suppliers.

* These energy companies constitute the Eastern Integrated Energy System (Eastern IES) and are not isolated energy systems. The restructuring plans of the isolated energy systems in the Far East—OAO "Sakhalinenergo", OAO "Kamchatskenergo", OAO "Chukotskenergo", OAO "Magadanenergo", and OAO "Kolymaenergo"—are currently under consideration.

Today, the installed capacity of the power plants in the Eastern IES totals 7.4 GW, with the energy consumption in the area making 26.5 billion kWh.

* * *

The Board of Directors of RAO "UES of Russia" considered the question of disposal of OAO "Taymyrenergo"* shares and deemed it advisable to sell 100% of its shares in an open auction. The Board of Directors also noted the information on the possible starting auction price.

The Board instructed the Management Board of the Company to submit for consideration by the Board of Directors, within two months, proposals on the measures and timeframes for their implementation to prepare and carry out the sale, including the appraisal [of the shares], and proposals on the allocation of the proceeds.

To date, RAO "UES of Russia" and OAO "Norilsk Nickel Mining and Metallurgical Company" jointly founded OAO "Norilsk-Taimyr Energy Company" (OAO "NTEC"), which will lease the assets of OAO "Taymyrenergo", as provided by the resolution of the Board of Directors of RAO "UES of Russia" of 25 March 2005.

* OAO "Taymyrenergo" is a wholly-owned subsidiary of RAO "UES of Russia". Pursuant to the resolution of the Board of Directors of RAO "UES of Russia" of 25 June 2004, OAO "Taymyrenergo" is classified as an energy system with limited competition. Such energy systems may be reorganized using scenarios different from the "basic" restructuring plan. This is due to the peculiarities of the Norilsk isolated energy area: the local energy system does not have any links to the country's power grid; another factor is that OAO "Norilsk Nickel MMC" consumes 97% of the electricity generated by OAO "Taymyrenergo". Besides, OAO "Norilsk Nickel MMC" has its own generation and power grid facilities.

* * *

The Board of Directors of RAO "UES of Russia" approved the sale of property owned by RAO "UES of Russia" to OAO "WGC-5".*

Pursuant to the Order of the Russian Government of 1 September 2003, contributions to the authorized capital of OAO "WGC-5", which is a wholly-owned subsidiary of RAO "UES of Russia", have been made, among other things, in property of the Reftinskaya TPP and Sredneuralskaya TPP. Moreover, a list has been made of the property, plant and equipment of said power plants which has not been contributed to the authorized capital of OAO "WGC-5", but will be necessary for the company's operations. The market value of said property, as determined by an independent appraiser, is RUB1,294 million.

Under the approved contract, OAO "WGC-5" intends to pay:

 

- RUB1,097,432,243 in funds during the two weeks after the sale contract is inked;

- RUB197,537,804 in funds over three years following the conclusion of the contract, in accordance with the payment schedule.

 

OAO "Fifth Generation Company of the Wholesale Electricity Market" (OAO "WGC-5") was registered with the state authorities in the city of Yekaterinburg on 27 October 2004. The Director General of OAO "WGC-5" is Anatoly Bushin, formerly the CEO of OAO "Konakovskaya TPP". OAO "WGC-5" comprises OAO "Konakovskaya TPP", OAO "Nevinnomysskaya TPP", the property of the Reftinskaya TPP and the Sredneuralskaya TPP. The resolution to establish OAO "WGC-5" as a wholly-owned subsidiary of OAO RAO "UES of Russia" was approved by the Board of Directors of RAO "UES of Russia" on 3 September 2004.

* * *

The Board of Directors of RAO "UES of Russia", acting as an EGM of OAO "WGC-6", approved the early termination of the Board members of OAO "WGC-6" and elected new members of the Board of Directors.

The new Board of Directors of OAO "WGC-6" includes: Boris Vaynzikher, member of the Management Board and Technical Director of RAO "UES of Russia"; Dmitry Kaygorodov, Executive Director of Business Unit 1 of RAO "UES of Russia"; Yury Dolin, Deputy Managing Director, Executive Director of Business Unit 1 of RAO "UES of Russia"; Ilyas Zagretdinov, Deputy Managing Director, Executive Director of Business Unit 1 at RAO "UES of Russia"; Sergey Fil, Head of Corporate Events Directorate of Business Unit 1 at RAO "UES of Russia"; Valentin Sanko, Director General of OAO "WGC-6"; Anna Vasilyeva, Deputy Head of HR Department of the Corporate Center of RAO "UES of Russia"; Alexander Kazakov, Chairman of the Committee for the Federation Affairs and Regional Policy at the Federation Council of the Federal Assembly of the Russian Federation; Seppo Remes, President of Kiuru Partners Ltd.; Alexander Shumilov, Deputy Director of Department at OAO "Siberian Coal Energy Company" ("SUEK"); Sergey Arinin, Chief Analyst of the Energy Directorate with OOO "EvrazHolding".

The election of Board of Directors of OAO "WGC-6" was due to the resignation of some of its members from RAO "UES of Russia", including the Deputy Executive Directors, Executive Directors of Business Unit 1 of RAO "UES of Russia" Alexander Negomedzyanov, Danil Nikitin, and Ilya Gorev. OOO "EvrazHolding" also requested for replacement of its representative on the Board of Directors of OAO "WGC-6", Dmitry Skryabin, Planning Manager of the Energy Directorate of OOO "EvrazHolding", with Sergey Arinin, Chief Analyst of the Energy Directorate at OOO "EvrazHolding".

* OAO "Sixth Generation Company of the Wholesale Electricity Market" (OAO "WGC-6") was registered with the Inspectorate of the Federal Tax Service of Russia for the Leninsky District, city of Rostov-on-Don, on 17 March 2005. The Director General of the Company is Valentin Sanko.

OAO "WGC-6" comprises OAO "Ryazanskaya TPP", OAO "GRES-24" (or "TPP-24") of OAO "Mosenergo", OAO "Novocherkasskaya TPP-1", OAO "Kirishskaya TPP", OAO "Krasnoyarskaya TPP-2", and OAO "Cherepovetskaya TPP".

The resolution to establish OAO "WGC-6" as a wholly-owned subsidiary of OAO RAO "UES of Russia" was approved by the Board of Directors of RAO "UES of Russia" on 24 December 2004.

* * *

The Board of Directors of RAO "UES of Russia" approved the purchase by the Company of 14,545 ordinary shares, par value of USD1,000, in OAO "Sangtuda HPP-1", through open subscription. The payment for the shares will be made in cash, in the amount of USD14,545,000.

The shares to be purchased by RAO "UES of Russia" are being issued as a measure to increase the authorized capital of OAO "Sangtuda HPP-1" in accordance with the provisions of the Agreement between the Government of the Republic of Tajikistan and the Government of the Russian Federation on the procedure for and conditions of shared participation in the construction of the power plant dated 16 October 2004 and the Order of the Federal Tax Service of 17 December 2004.

The increase in the authorized capital of OAO "Sangtuda HPP-1" is designed to attract funds from the federal budget of Russia, RAO "UES of Russia", and OAO "UES FGC" to finance the construction of the power plant in 2005-2006. In addition, the purpose of the share issue is the purchase of the property complex of the Sangtuda HPP-1 under construction, which is owned by Tajikistan.

The additional shares will be issued to the Russian Federation represented by the authorized public authority, RAO "UES of Russia", OAO "UES FGC", and the Ministry of Energy of Tajikistan.

As a result of the share issue, the stake of RAO "UES of Russia" in the power plant will be no less than 5.5 per cent, the stake held by the Russian Federation 37 per cent, and the stake of OAO "UES FGC" no less than 32 per cent. The stake of ZAO "INTER RAO UES" will fall by 74 per cent to less than 1 per cent. Thus, the stake controlled by the Russian participants will be at least 75 per cent.

The above stakes have been calculated on the basis of anticipated amount of financing provided for the construction of the Sangtuda HPP-1 by the parties to the project. Thus, in 2005, the Russian participants plan to provide USD100 million in funds, of which RUB400 million will be contributed by RAO "UES of Russia" and RUB1 billion by OAO "UES FGC". The direct contribution by the Russian Federation into the project will reach USD40 million, plus USD10 million by offsetting part of Tajikistan's sovereign debt [owed to Russia]. In 2006, the Russian party plans to allocate USD$181 million in funds to finance the project to complete the construction of the power plant.

* OAO "Sangtuda HPP-1" is a Russia-Tajikistan joint venture established in 2005 to complete the construction of the hydroelectric power plant on the Vakhsh River. The power plant will have a design capacity of 670 MW. The authorized capital of the Company is USD100,000. Currently, the shareholders in the Company are ZAO "INTER RAO UES" (75%) and the Government of Tajikistan (25%).

* * *

The Board of Directors of RAO "UES of Russia", acting as a General Shareholder Meeting of OAO "WGC-3", determined the number and par value of shares OAO "WGC-3" is authorized to issue in addition to the outstanding shares ("declared shares"), and resolved to increase the company's authorized capital through issuance of additional shares to be placed by way of closed subscription.

The Board of Directors of RAO "UES of Russia" resolved that the maximum number of declared shares that OAO "WGC-3" is authorized to issue shall be 14,144,629,100 ordinary shares having a par value of RUB1, worth a total of RUB14,144,629,100.

Thus, OAO "WGC-3" entered the second phase of its establishment. At the first phase, RAO "UES of Russia" contributed its shares in OAO "Kostromskaya TPP", OAO "Pechorskaya TPP", OAO "Gusinoozerskaya TPP", OAO "Kharanorskaya TPP" and OAO "Cherepetskaya TPP" to the authorized capital of OAO "WGC-3".

The second phase will involve consolidation of the subsidiaries of OAO "WGC-3" through share exchange. For that purpose, the shares held by RAO "UES of Russia" in OAO "Yuzhnouralskaya TPP" (which was spun off from OAO "Chelyabenergo") will be contributed to the authorized capital of OAO "WGC-3". Also, it is planned to exchange the shares in OAO "Kostromskaya TPP", OAO "Pechorskaya TPP", OAO "Cherepetskaya TPP", and OAO "Yuzhnouralskaya TPP" owned by the minority shareholders of these power plants for shares in OAO "WGC-3". The Board of Directors of RAO "UES of Russia" set the placement price of ordinary shares in OAO "WGC-3" at RUB1.04 per share, and determined that the following amounts of shares [in the power plants] would be exchanged for one ordinary share in OAO "WGC-3":

 

- 2.755713 ordinary shares in OAO "Yuzhnouralskaya TPP"; or

- 2.755713 preferred shares in OAO "Yuzhnouralskaya TPP"; or

- 0.164781 ordinary share in OAO "Kostromskaya TPP"; or

- 0.290781 ordinary share in OAO "Pechorskaya TPP"; or

- 0.000252 ordinary share in OAO "Cherepetskaya TPP".

 

These shares are to be placed through closed subscription among the shareholders of OAO "Kostromskaya TPP", OAO "Cherepetskaya TPP", OAO "Pechorskaya TPP", and OAO "Yuzhnouralskaya TPP".

* The Board of Directors of RAO "UES of Russia" approved the establishment by the Company of a wholly-owned subsidiary, OAO "Third Generation Company of the Wholesale Market" (OAO "WGC-3") on 1 October 2004. The authorized capital of OAO "WGC-3" is RUB16,629,846,629 and is divided into 16,629,846,629 ordinary shares of RUB1 par value.

Pursuant to Order of the Government of the Russian Federation No. 1254-? of 1 September 2003, the following companies were included in OAO "WGC-3": OAO "Kostromskaya TPP", OAO "Pechorskaya TPP", OAO "Gusinoozerskaya TPP", OAO "Kharanorskaya TPP" OAO "Cherepetskaya TPP", and OAO "Yuzhnouralskaya TPP".

OAO "WGC-3" was registered with the Interdistrict Inspectorate of the Ministry of Taxes and Levies of Russia for the Republic of Buryatia on 24 November 2004.

The Director General of OAO "WGC-3" is Maxim Kuznetsov.

* * *

The Board of Directors of OAO RAO "UES of Russia" considered the question of trust management of shares in the energy retail companies (ERCs) established as a result of regional energos' restructuring.*

The Board of Directors approved the conclusions of contracts between RAO "UES of Russia" and OAO "TGC-6" for trust management of the ordinary shares in OAO "Vladimir Energy Retail Company", OAO "Nizhny Novgorod Retail Company", OAO "Mordovia Energy Retail Company", OAO "Penza Energy Retail Company", and OAO "Ivanovo Energy Retail Company" as interested party transactions.

The Board of Directors has also approved the conclusion by OAO RAO "UES of Russia" and OAO "Mosenergo" of contracts for trust management of shares in OAO "Mosenergosbyt" as an interested party transaction.

The transfer of shares in the energy retail companies for trust management to the Territorial Generation Companies (TGCs) is due to the need to ensure financial stability of the energy retail companies and increasing their efficiency during the transition period.

The trustees, OAO "TGC-6" and OAO "Mosenergo", will receive the entire scope of powers to manage the shares in the energy retail companies owned by RAO "UES of Russia" in accordance with the contracts being concluded.

The Board of Directors resolved that, pursuant to the provisions of the Federal Law on Joint-Stock Companies, said resolution will enter into force after the Federal Agency for Federal Property Management approves the amount of remuneration for the Trustee.

Earlier, at the meeting held 1 July 2005, the Board of Directors approved the principal provisions of the contract of trust management. According to said resolution, the amount of the Trustee's remuneration is 100% of the dividends actually payable on all shares in the energy retail companies put into the trust management.

At today's meeting, the Board of Directors noted the procedure for the calculation of the Trustee's remuneration based on the number calendar days the Trustee manages the shares in the energy retail companies.

* On 24 June 2005, the Board of Directors of RAO "UES of Russia" approved the principal approach to organization of management at the energy retail companies to be used during the transitional period. This approach involves the transfer of shares in the energy retail companies established as a result of regional energos' restructuring into custody of the respective Territorial Generation Companies (TGCs) (based on their territorial configuration), for a term of one year.

* * *

The Board of Directors of RAO "UES of Russia" determined the Company's stance on the items of business of Shareholder meetings and Board meetings of the subsidiaries and dependent companies of RAO "UES of Russia".

Thus, the Board of Directors instructed representatives of RAO "UES of Russia" on the Boards of Directors of OAO "TGC-14", OAO "TGC-4", and OAO "Kubanenergo" to vote FOR putting proposals to terminate the powers of the current Boards of Directors and to election of new members of the Boards of Directors of the companies on the agenda of extraordinary general meetings of shareholders.

This is due, among other things, to the resignation of Alexander Negomedzyanov as Deputy Managing Director and Executive Director of Business Unit 1 at RAO "UES of Russia", who simultaneously was a member of the Board of Directors of OAO "TGC-14", OAO "TGC-4" and OAO "Kubanenergo".

The Board of Directors of RAO "UES of Russia" also instructed its representatives on the Board of Directors of OAO "Arkhenergo" to vote FOR approval of the following agenda to be considered by an extraordinary general meeting of shareholders of the company: Approval of transfer of the powers of the One-man Executive Body (CEO) [of OAO "Arkhenergo"] to the management company, OAO "North-West IDC".

Such decision takes into account the positive experience gained by RAO "UES of Russia" in transferring the functions of the One-man Executive Body (CEO) [to management companies] in other lines of business. It will help to ensure efficient and balanced management of the distribution company of OAO "Arkhenergo".

The Board of Directors approved the combination of positions on the management bodies of other organizations* by some members of the Management Board of RAO "UES of Russia".

In particular, the Board of Directors approved the combination:

 

- by Yury Udaltsov of the position of member of the Management Board, Head of Reform Management Center of RAO "UES of Russia" with the membership on the Board of Directors of OAO "Moscow City Electricity Distribution Company".

- by Pavel Smirnov of the position of member of the Management Board of RAO "UES of Russia" with membership on the Boards of Directors of OAO "Moscow City Electricity Distribution Company" and OAO "Moscow Regional Electricity Distribution Company".

 

The Board of Directors of RAO "UES of Russia" also approved its work plan for September-December 2005.

* Under Article 69 (3) of the Federal Law "On Joint-Stock Companies", the combining by members of the collective executive organ of the company (management board, directorate) of offices in the management organs of other organizations shall be permitted only with the consent of the Board of Directors of the company.

 

 

 

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