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RAO UES Reform : The Final Stage

RAO UES Reform : The Final Stage. Table of Contents. RAO “UES of Russia” today Reform: company transformation and market development Conclusions. 1. RAO “UES of Russia” today. Russia: 4 th Largest Power Producer in the world. RAO “UES of Russia” today. TWh. % Of World Total.

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RAO UES Reform : The Final Stage

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  1. RAO UES Reform: The Final Stage

  2. Table of Contents • RAO “UES of Russia” today • Reform: company transformation and market development • Conclusions

  3. 1. RAO “UES of Russia” today

  4. Russia: 4th Largest Power Producer in the world RAO “UES of Russia” today TWh % Of World Total 24.9% 10.2% 6.8% 5.5% 3.7% 3.7% 3.5% 3.5% 2.4% 2.1% Source: IEA

  5. RAO “UES of Russia” Other RAO “UES of Russia” today RAO “UES of Russia” Leading role in Russia’s electricity industry 4% 28% 32% 96% 72% 68% Installed capacity RAO: 156m kW Heat generation RAO: 469m Gcal Length of transmission lines RAO: 2,497 thousand km

  6. RAO “UES of Russia” today RAO “UES Russia” 1999 - 2004 RAO “UES of Russia” financial performance US$m (2) (1) Source: IAS Group financial results (1) Excludes doubtful debtors expense (2) As reported

  7. RAO “UES of Russia”Share price dynamics RAO “UES of Russia” today US cents 124.1% 87.5% 1.04.2003 3.06.2005 During the last two years shares of RAO “UES of Russia” outperformed broader RTS index by 37%

  8. RAO “UES of Russia”Relative valuation RAO “UES of Russia” today 2005 EV/EBITDA EV/Installed capacity, $/kW Average: 5.8x Average: 984$/kW Sources: Brokers’ Estimates, Bloomberg, companies reporting

  9. 2. Reform: companytransformation and market development

  10. 2006 2007 Finish is in sight FINISH 2005

  11. Company transformation and market development RAO “UES of Russia” Reform basics Reform Basics: Separation of Monopoly and Competitive Sectors Competitive sectors • Free price-setting • Stimulating market entry Market rules • Generation • Sales Monopolies • Securing equal access to grids • Establishing market infrastructure • Transmission • Distribution • Dispatching Regulated tariffs

  12. Company transformation and market development Legislative base of reforms: Key legislation, 2001-2004 Governmental decrees and orders July 2001 – Government Decree№526 «On reform of Russia’s power sector» December 2004: Meeting of Russian government. Key decision made: preparation for the unbundling of RAO «UES of Russia» to be completed in 2006 March 2003: Five laws on power sector reform signed by President Putin and entered into force (main– №35-FZ «On the power sector»)

  13. Central Dispatch High Voltage Grid + Grid Service 32 FederalPower Plants Company transformation and market development Pre-reform Sector Structure RussianFederation Minority Shareholders of the Parent Company IndependentRegional Energos: RosEnergoAtom 10 NuclearPlants 52% 48% Irkutskenergo Tatenergo Bashkirenergo RAO UES 73 Regional Energos Generation Transmission &Distribution Grids Sales

  14. Private shareholders Government Competitivemarket FGC (Transmission) <25% Other generating companies >75% On the base of independentRegional Energos Nuclear power generating company Company transformation and market development Target sector model Monopolies Competitive Generation System operator Wholesale GenCos (6) Hydro GenCo (1) Territorial GenCos (14) 75-85% <25% 51-60% <48% >75% >52% 25-15% 49-40% IDC (Distribution) (4) <48% >52% FGC – Federal Grid Company IDC – Inter-regional distribution grid company

  15. Company transformation and market development Formation of new generation companies Regional Energos Federal Power Plants Other assets: Grid, Dispatch, Sales, etc. Generation Assets (Regional GenCos) Territorial GenCos Wholesale GenCos HydroGenCo • Capacity of 22 GW • Annual sales at US$700m • Capacity ranges from 0.6 GW to 10.5 GW • Annual sales ranges from US$100m to US$1300m • Average capacity at 9 GW • Average annual sales at US$600m 10 of 14 registered 6 of 6 registered Registered Target Private Shareholder Stake:>50% Target Government Stake: >50% • Unbundling completed and Regional GenCos registered in 35 regions • Unbundling continues in 25regions * Some of the assets contributed from Regional Energos

  16. Company transformation and market development Market Progression Fully Regulated Market (prior to Nov 2003) Status Quo (Nov 2003 – 2005) Free Market (from 2009) Transition Market (2006 - 2008) Competitive Market Vesting Contracts Regulated Market Regulated Market • List of participants (buyers and sellers) established by the government • Regulator or RAO UES matches buyers and sellers • Tariffs are regulated • List of participants (buyers and sellers) established by the government • Regulator or RAO UES matches buyers and sellers • Tariffs are regulated • Regulated bi-lateral (vesting) contracts introduced (for the next 3-5 years) • Initial electricity volume of 85% of total electricity volumes and decreasing • Full liberalization Competitive Market (≥15%) (Spot) • Voluntary for generators and purchasers • No price cap Competitive Market (5 – 15%) • Free market segment trading 5 – 15% of electricity volumes • Self regulating trading floor - ATS • Price cap set by the Regulated Market Free market Regulated Market

  17. Private majority Wholesale GenCos Wholesale GenCos Formation Private majority Territorial GenCos Territorial GenCos Formation RAO UES unbundling Company transformation and market development The ReformProcess Finishing line in sight 2005 2006 2007 2008 Competitive Market (5 – 15%) Launch of vesting contracts and competitive market (spot)

  18. 3. Conclusions

  19. Conclusions Investing in Russian Power Sector: Investment Vehicles and Timing Currently/During Transition (2005-2006) Post RAO UES Unbundling (2007-2008) Vehicles RAO UES/Regional GenCos/ Federal Plants Wholesale and Territorial GenCos Pros Cons

  20. Conclusions Reform’s final stage: Lower risk investment

  21. Conclusions Reform of RAO “UES Russia” On a Corporate Mission… RAO “UES of Russia” is committed to… • … ensure a sustained GROWTH OF THE VALUE of its shares and the shares of the companies that will be established in the course of restructuring … and increased efficiency and transparency of its operations as well as the operations of the companies established in the restructuring process through a successful implementation of the reform…

  22. Conclusions Russian Power Sector: Key advantage for investors … By the end of 2006 they will be available amid competitive market conditions. Today, electric power assets are deep in the non-market environment ... 2005-2006: From the swamp to the firm ground

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