Dear Shareholders!

In 2002, OAO RAO "UES of Russia" marked its 10^th anniversary. Throughout the anniversary year, the Company operated stably, without emergency rushes or crises, ensuring electricity and heat supply to consumers.

At the same time, last year was a difficult one from the point of view of changes in the Company's market capitalization. In the middle of the year, when the Russian stock market was rising, stock prices of OAO RAO "UES of Russia" were falling, which was due to the delay in implementation of the electricity sector reform, and to the lack of understanding between the Company's management and minority shareholders. Nevertheless, after Management declared its program intended to balance the interests of all shareholders in the restructuring process (the "7 Steps Program") and the Federal Assembly passed the legislative package for electricity sector reform, the Company's stock prices grew more than twofold. I would like to emphasize that the Management Board views further growth of the Company's market capitalization as a priority.

Looking back on last year, I would like to draw attention to the Holding Company's steady and positive operating and financial performance. In 2002, the regional energy systems were able to collect the full amount of accounts receivable for current energy supplies, and ensured that consumers gradually pay off their accumulated arrears. The collection rate for electricity and heat payments in 2002 made 102% of the amounts charged (the figure includes collection of the previously accumulated debt). The receivables of the Holding Company's entities declined by nearly 15%, whereas the short-term payables decreased by over RUB 26 billion. In 2002, the sales of the enterprises within the Holding Company reached RUB 564.7 billion.

The ratings given to OAO RAO "UES of Russia" by Standard & Poor's: an international corporate credit rating of "B/stable” and a national scale rating of "ruA+", reflect the Company's stable financial position. To fund its current operations, OAO RAO "UES of Russia" placed RUB 3 billion of bonds in 2002, which were assigned the "ruA+" rating by S&P. These high ratings reflect the Company's improved financial position, relatively low debt burden, and high standard of corporate governance.

For the purpose of ensuring transparency of business processes and improving the Holding Company's corporate management system, the Company started installation of a resource planning and management system based on Oracle's E-Business Suite in RAO "UES of Russia" Headquarters in 2002. This system will subsequently be implemented in the SDCs.

The Holding’s enterprises paid RUB 87.1 billion in taxes to the consolidated budget of the Russian Federation in 2002. The Company meets its obligations relating to payments to the federal and local budgets under the debt restructuring program approved in 2001 fully. OAO RAO "UES of Russia" has practically no unsettled debts owed to suppliers and cooperating firms.

The average system frequency in 2002 was 50.00 Hz, with the UES of Russia operating 100% of calendar time at the frequency prescribed by the national standard (GOST). At present, the Management Board is taking measures to enhance the quality standards for our power supply in order to synchronise our energy system with those of Western Europe. Implementation of these plans would increase the reliability and quality of operation of Russia's energy system, helping to address dozens of challenges, such as streamlining the fuel and power balances, and developing competitive environment.

In 2002, we continued to carry out our priority investment projects. The following projects were put into commercial operation: the 2^nd generating unit at Zelenchuk HPPs in Karachay-Cherkessia; two generators at Mutnovskaya Geothermal TPP on the Kamchatka peninsula; Aushigerskaya HPP in Kabardino-Balkaria; and the 1^st start-up complex at Argunskaya CHPP-4 in the Chechen Republic. In 2003, we plan to commission two generating units at Bureyskaya HPP in Amurskaya Region. This should help solve the problem of electricity shortages experienced in the Far East of Russia for many years. Last year, the Company built over 1,500 km of power transmission lines.

The Management Board of the Company paid special attention to preparations for the autumn/winter peak season of 2002/2003. As a result, all enterprises of the Holding Company were able to fulfil their autumn/winter preparation programs fully and timely and build up fuel inventories meeting or exceeding the targets. For the second consecutive year, the Company has passed the winter peak without failures or regional energy crises. In conditions of abnormally low temperatures in some regions in winter and numerous accidents in the housing sector, the regional energy systems provided material, financial and technical assistance to housing sector entities in liquidating the consequences of these accidents. At the same time, the number of accidents at RAO "UES of Russia" enterprises decreased by 14% compared to 2001, whereas the number of industrial injuries fell by 34%.

The issue of tariffs in the electricity industry remained a serious problem in 2002. This primarily concerns the correlation between the rate of water usage tax introduced in 2002 and the existing tariffs for hydroelectric power plants. After 1 January 2002, the amount of water usage tax levied on many HPPs was greater than their sales revenues. Another problem was the increased revenue and expense imbalance on the Federal Wholesale Market of Electricity (Capacity) (FOREM), which exceeded RUB 14 billion at 1 January 2003. However, in 2002 its increase slowed down for the first time, falling by nearly two thirds. The management of OAO RAO "UES of Russia" views these problems as priorities and is consistently trying to solve them in conjunction with the government authorities.

In 2002, the enterprises of the Holding Company achieved cost saving of RUB 14.5 billion compared to the planned target. Implementation of cost reduction programs is one of the chief advantages the Company may offer in its effort to attract consumers in an environment of increasing competition between companies of OAO RAO "UES of Russia", Concern "Rosenergoatom", and independent generators.

Having sorted out its current problems in the areas of production, financial and business operations, the Company entered a period of major structural changes. I believe that today, as never before, a constructive dialogue is needed among the Company's owners so as to enhance transparency of its operations and develop a coordinated development strategy for the period of reform. The Management of OAO RAO "UES of Russia" will do everything in its power to ensure that the work in that direction is carried out taking into account the opinions of all parties concerned. I am confident that our joint efforts will help us transform the Russian energy sector into a dynamic industry that is attractive to investors.