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RAO UES Reform:Investments, Market,
Structural Transformation
UBS Conference
Moscow
September 13, 2006
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This document is being presented to you solely for your information and may not be reproduced, further distributed to any other person, or published, in whole or in part, for any purpose.
This document has been prepared by RAO UES (the Company) and comprises the written materials/slides that have been prepared solely for use at a presentation concerning the Company.
The securities of the [Company and the] Company's subsidiaries have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States except in reliance on an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.
This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any shares in the Company or the Company's subsidiaries, nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment whatsoever.
This document is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of Section 21 of the Financial Services and Markets Act 2000 of the United Kingdom («FSMA»). To the extent that this document does constitute an inducement to engage in any investment activity, it is directed only at (i) persons outside the United Kingdom; or (ii) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) of the United Kingdom (the «Financial Promotion Order»); or (iii) persons who fall within Articles 49(2)(a) to (d) («high net worth companies etc.») of the Financial Promotion Order; and (iv) any other persons to whom this document for the purposes of Section 21 of FSMA can otherwise lawfully be made (all such persons together being referred to as «relevant persons»), and must not be acted on or relied upon by persons other than relevant persons. Any invitation or inducement to engage in any investment activity included within this document is available only to relevant persons and will be engaged in only with relevant persons. Anyone other than a relevant person must not rely on this document.
DISCLAIMER
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Generation
Transmission &
Distribution Grids
Sales
73 Regional Energos High VoltageGrids
+Grid
Service
Central Dispatch
32 FederalPower Plants
RussianFederation
MinorityShareholders
of the Parent Company
52% 48%
RAO UES
RAO UES: Pre-reform Structure
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MonopoliesMonopolies Competitive Power GenerationCompetitive Power Generation
Private shareholders
GovernmentFGC
(Transmission)Wholesale GenCos (6)
Territorial GenCos (14)
Hydro GenCo (1)
System
operator
IDC Holding
(Distribution)
Competitivemarket
Central North-West
Ural and
Volga
Siberiasales
services
FGC – Federal Grid CompanyATS – Administrator of Trading SystemIDC – Inter-regional Distribution Company
RAO UES Target Structure
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Source: RAO UES of Russia estimates
Capacity balance 2006-2010:Two options
Commissioning new capacity
Deficit will already develop in 2007 by 2010 deficit will reach:
In the European zone – 18,7 GW In Siberia – 2 GW
In Far East – 0,8 GW
will prevent future deficit
Capacity needs dynamic (GW)
Available capacity (GW)
Capacity deficit (GW)
With current capacity
202,5
202 202,7 203,7 204,1 204,9
226,4221,0
214,9
199,8
204,3
210,5
180
216
2005 2006 2007 2008 2009 2010
GW
227,2
217,3
211,1207,1
202,9
202,7
226,4221,0
214,9
199,8
204,3
210,5
180
216
2005 2006 2007 2008 2009 2010
GW
-21,5
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=
What should be done?
The only right answer
Is to launch a large-scale long-term investment program
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Investments: Approach and Requirements
Reform Concept
Approach to Investment Sources
Investments from state budget
Privateinvestments
Competitivesectors of the industry(primarily thermal generation)
Monopoly sectors of the industry
Large-scale investments should be attracted during the final phase of the reform! !
Investment
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New Power Construction Plan
In 2006-2010 commissioning capacity will reach 21,500 MW (for reference, in 2001-2005 commissioned capacity amounted to 7,000 MW)
It is planned to commission about 38,000 MW in 2011-2015
Capacity Commissioning Plan Investment Needs
12792059
3288
5062
9796
0
2000
4000
6000
8000
10000
2006 2007 2008 2009 2010
thsdMW
Investment Plan for 2006-2010: $81,5 billion (the largest investment program in Russia)
Investment
6,8
15,5
18,619
21,6
0
5
10
15
20
25
2006 2007 2008 2009 2010
Bn$
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Investment
Investment in the Monopoly Sectors:
Federal Budget Allocation starting from 2007
0,8
0,09
0,67
$ bnFGC System Operator Hydro GenCo
0,045
1,56
3,483
0
1
2
3
4
2006 2007 2008 2009
$ bn
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RAB System: Incentive for Investments in Distribution Networks
Cost-plus Regulatory Asset Base (RAB)
Market-based ROI with allowance for industry risk
No mechanisms to regulate the return on investments
Economic incentives and responsibility for reliable provision of services to consumers
5-year setting
Tariff indexation based on factors that are beyond the company control
No mechanisms to regulate the reliability of services
Short-term setting (1 year) Such risks are not acceptable for strategic investors
Tariff is indexed only for inflation
Investment
Transition to the RAB system provides incentives for:
• growth of the debt for the long-term modernization and development projects• growth of capitalization of distribution grids companies
The Regulatory Asset Base (RAB) system operates in more than 20 countries, including UK, Germany, Sweden, Canada, etc.
The RAB System is planed to be introduced in Russia in 2008
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Investments in Competitive Sectors:Basic Mechanisms
Thermal generation is the most important investment target
2/3 of electricity generation in Russia
Additional issue of sharesin
WGCs and TGCs
InvestmentsGuarantee Mechanism
Direct private investments in local projects
Private placement
Public placement
Investment
Up to 460 billion roubles (>$17,5 billion) *
* - 2006-2010
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0,000
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
11,853
31,715
$bn
Investment RAO UES of RussiaMarket capitalization dynamics
Statement of the Ministry of industry and power on the free access of private
investments into thermal generation
Positive outcome of the meeting with President Putin on the investments in power sector
Approve of the priority generating capacity projects
Decision on the maximum tariff growth in 2007 – 10%.Government approve investment program for 2006-2010
BoD decision on the pilot projects for additional shares issues of WGC/TGC
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217 239 268 276 277 283 331
590
1095 *
1917 **
0
500
1000
1500
2000
TGC-5 WGC-2 WGC-3 RAO UESof Russia
WGC-4 WGC-5 TGC-6 TGC-3 (Mosenergo)
Companiesinemergingmarkets
Companiesindevelopedmarkets
EV/IC (August 2006)
Undervaluation of Generation Assets:Comparative Analysis
* - Weighted average value for 10 companies from Brazil, the Czech Republic, China, India, Malaysia, and South Korea
** - Weighted average value for 11 companies from Spain, Finland, France, Germany, Italy, the United Kingdom, and the USA
Investment
Source: RAO UES of Russia estimates, company data
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EV/length (August 2006,weighted average)
Undervaluation of Distribution Grid Assets:Comparative Analysis
Investment
Source: RAO UES of Russia estimates, company data
4699 4829
28849
0
5000
10000
15000
20000
25000
30000
Russia Emergingmarkets
Developed markets
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Power Market Liberalization
Markets
Competitive Market Model (launched on Sep. 1, 2006)Competitive Market Model (launched on Sep. 1, 2006)
Spot market (no price cap) Balancing market New rules of the retail markets (wholesale competitive
prices included into retail prices)
Competitive Markets
One year long Long- run (starting from 2007)
Regulated Bilateral (Vesting) Contracts
Projected for 2007
Ancillary Services Market
Capacity Market
• Suppliers selected on a competitive basis
• Bilateral contracts • Auction held by System Operator
+
+
Starting from Sep.1, 2006
Mandatory and voluntary liberalization of power market
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Markets
Mandatory sales under regulated contracts
Voluntary liberalization (less electricity supplied under regulated contracts subject to a purchaser’s decision)
Mandatory liberalization
Ann
ual c
ons
umpt
ion
– 2
007
5%5%
5%
5%
52007+
[5-15%]2008
Ann
ual c
ons
umpt
ion
– 2
006
Ann
ual c
ons
umpt
ion
– 2
007
2006 2007 2008 …
+
around 75%(including
new generation and new
consumption)
95% 90%
Annually from 2008:
Mandatory liberalization –at least 5% of the 2007 annual
consumption
Voluntary liberalization –at least 5% of the 2007 annual
consumption.
All new capacity and consumption commissioned
after 2007go to the free market
Sources to extend liberalization
New generation and consumption
5-9%(next slide)
Liberalised purchase of deltas (see next slide)Retrading (see next slide)
11-16%
X% X%
X%
X%
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De facto liberalization of the market
(based on the results from first 13 days in September):
Purchase at spot prices of delta between day-ahead consumption and annual projections ~ 5% - 9% of total daily consumption
Producers retrade regulated contracts’ energy at competitive spot prices – 11 - 16 % of total daily production
TOTAL: Trading energy volumes at competitive spot market prices: 16 - 25%
Regulated contracts– financial contracts (not physical!)
Demand, supply and competitive price are formed by full production and consumption volumes
Efficient allocation of resourcesp
ric
e
volume
Market price
Efficient plantsPerform RC on their own + sell electric power over RC to “expensive” plants based on the market price
«Expensive» plantsIt is more profitable to buy based on the market price than generate on their own in order to meet RC obligations
Markets
Sources to further extend liberalization
+
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As a result of reorganization,
shareholders of RAO UES will own WGC,TGC, FGC and IDC shares in proportion to the amount of their shares in RAO UES
Structural Transformation
Restructuring of RAO UES of Russia: Two Steps in the Final Phase
First reorganization: pro-rata spin-off
(2006 - 2007)
Second reorganization:pro-rata unbundling
(2007 - mid-2008)
RAO UES Shareholders Meeting(November 30, 2006)
RAO UES Shareholders Meeting (2008)
• Spin-off of two generation companies(WGC-5 and TGC-5) with pro-rata distribution of shares
• Reorganization of RAO UES of Russia throughunbundling• Pro-rata distribution of the company assetsamong shareholders• Transfer of functions to the Government and infrastructural power industry entities
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