FINANCIAL MANAGEMENT

THE PRIORITY GOALS IN MANAGING THE COMPANY'S FINANCES ARE EFFICIENT PLANNING AND USE OF FINANCIAL RESOURCES IN ORDER TO BENEFIT THE SHAREHOLDERS

THE MOST IMPORTANT PRINCIPLES FOR STRUCTURING THE COMPANY'S FINANCIAL POLICY ARE:

• improved efficiency in managing Company assets;
• improved profitability in all areas of RAO "UES of Russia";
• improved management of the Company's financial resources in devel- oping a budgeting system and the imple- mentation of budgets by treasurers;
• efficient management of receivables and accounts payable;
• optimisation of the volume and structure of borrowing, minimisation of the cost of servicing borrowing.

• financial planning, budget setting, monitoring budget implementation, analysing the financial status of the Company, its subsidiaries and dependent companies;
• implementing the approved budgets of the Company, establishing a vertical system of treasurers within the Holding Company;
• managing the credit portfolio; optimising the structure of financial instruments;
• devising a system of tax planning for the Company and the Holding Company, restructuring the tax debt, procedures for managing and analysing tax risks;
• devising and implementing a Company accounting policy.

STRUCTURING A BUDGETING SYSTEM. The management of RAO "UES of Russia" sees the improvement of the budgeting system as one of the priority tasks in building a system for managing its finances. Due to the implementation of this system it has been possible to introduce financial flow planning and financial resource distribution based on the prioritisation of items of expenditure as well as achieving cost savings and strengthening financial discipline. The fundamental requirements for setting and implementing budgets are a balance between revenue and expenditure and the transition to cash as the exclusive form of settlements.

• the internal standardisation of the procedures and forms of budgeting;
• the definition of a long-term budgeting development strategy;
• the identification of areas of further integration of budgeting with the management accounting system;
• the establishment of a single financial commitments base for agreements and contracts.

MANAGING RECEIVABLES AND ACCOUNTS PAYABLE. In order to transform RAO "UES of Russia" into a financially efficient autonomous business,a working group has been set up to settle the receivables and accounts payable of the Company, the power companies (AO-Energos) and power station companies. A special programme was defined for the settlement of receivables and accounts payable and priorities for the work have been identified, a system for managing own and external debts is under development and programmes have been devised for improving the financial situation of the electric power sector using funds from settlements made by debtors.

The most substantial element of the Company and Holding Company's accounts payable consists of tax debts. In the year 2000 RAO "UES of Russia" met its current tax obligations in full. Work is ongoing with the Government of the Russian Federation on restructuring previously accumulated tax debts and writing off tax penalties and fines which essentially resulted from the debts of electricity consumers, including those financed from state budgets of all levels.

RAO "UES of Russia" ACCOUNTING POLICY FOR THE YEAR 2000 was defined in accordance with the statute on bookkeeping practice “Company accounting policy ” (PBU 1/98), approved by directive No.60n of the Ministry of Finances of the Russian Federation dated 9 December 1998.

The fundamental principles of RAO "UES of Russia" accounting policy are to provide information to interested users of the accounts and to provide an accurate assessment of the Company's financial position and financial results. Revenue from the sale of services via subscription charges, from export sales of electricity, from rent received on real estate and from other normal forms of business is reflected for purposes of the balance records as invoices are presented and for taxation purposes as payment is made and the money is credited to banks accounts.

Accounts of earnings and expenditure for normal forms of business have been kept separately with the results of each activity identified. The costs of maintaining power transmission lines and other costs of various types of activity are attributed to the accounting period in which they occurred, regardless of the actual time at which money was paid out and the circumstances of payment.

The valuation of property and other Company assets is based on actual costs at the time of their acquisition and origin. They are recorded,written off and liquidated at this valuation. The depreciation of fixed assets is applied in a linear fashion according to norms approved by resolution No.1072 of the Government of the USSR dated 22.10.90. The depreciation of non-material assets is applied in a linear fashion on the basis of the service life of the project. Production materials reserves are valued and written off to production at average cost price. Depreciation (wear and tear)on low- value items is applied using the “50% plus 50%”method.

The inventorisation of assets and finan- cial liabilities is carried out in accordance with the currently applicable Methodological Instructions of the Ministry of Finance of the Russian Federation dated 13.06.95 (No.49). All assets, settlements and liabilities are always inventorised before the annual report is drawn up. ZAO “PricewaterhouseCoopers Audit” has been the Company's external auditor since 1998 and carried out the audit of the Company's accounts for 1999 in accordance with IAS Financial Statements. For the year 2000 the Company prepared a full set of accounts: balance sheet, profit and loss statement, cash-flow report and capital flow report.