Dear Shareholders,
During the reporting year, the Company's management bodies paid special attention to
implementing the industry reform, shaping the five-year investment programme for RAO UES
entities, and the current financial and production issues.
The key resolutions taken by the Board of Directors included the approval of the first
and final reorganization of the Company, the strategy for issuance of additional shares by
the generation companies, and the strategy for disposal of shares in the energy retail
companies. Before consideration by the Board, virtually all questions were reviewed by the
Management Board of RAO "UES of Russia" and the advisory bodies under the Board
of Directors the Strategy and Reform Committee, Audit Committee, Appraisal Committee, and
Human Resources and Remunerations Committee. In 2006, the Board of Directors created an
Investment and Fuel Supply Commission.
The relationships between the Company's managers and shareholders, the system of
accountability, responsibility and management actions were regulated by the Revised
Corporate Governance Code of RAO "UES of Russia" adopted in 2006.
After the AGM held in 2006, the Board of Directors and Management Board of RAO
"UES of Russia", together with the management bodies of the RAO UES
subsidiaries, continued the process to create the intended final structure of the
electricity industry. All thermal WGCs completed consolidation of their subsidiaries via a
share exchange. 9 out of the 14 TGCs completed the creation of their intended corporate
structure. To date, 66 out of the 72 regional energos have fully completed the functional
unbundling process, including 11 companies in 2006.
In the power grid and dispatching business, efforts were continued to consolidate the
UNEG facilities within OAO "UES FGC" and the dispatching operations within the
framework of OAO "UES SO-CDA".
In the reporting year, the Company's management bodies approved the reorganization of
RAO "UES of Russia" (the Parent Company) in two phases. The first reorganization
phase will be implemented in 2007 by divesting two companies—OAO "WGC-5" and
OAO "TGC-5". Shares in these companies will be distributed pro rata among the
shareholders of RAO "UES of Russia". The second reorganization phase is expected
to be completed by 1 July 2008. By that time, RAO "UES of Russia" will have spun
out all companies of the intended final sector structure, and the Parent Company will
discontinue operations. As a result of the reorganization, all shareholders in RAO
"UES of Russia" will receive shares in the spin off companies in proportion to
their holdings of the Parent Company shares.
After the reorganization is completed, the state will control OAO "UES FGC",
OAO "UES SO-CDA", OAO "HydroWGC", ZAO "INTER RAO UES",
"IDC Holding", and "Far East and Islanded Regional Energos Holding",
and the thermal WGCs and TGCs will become fully private companies.
Pursuant to the Russian Government resolution, the wholesale and retail electricity
markets were liberalized with effect from 1 September 2006. The new model for the
wholesale electricity market includes a system of regulated bilateral contracts and the
competitive spot and balancing markets. The share of electricity sold at unregulated
prices will increase stepwise to reach 100 percent by January 2011. The retail market will
be liberalized in parallel with the wholesale market.
The first results of the markets' operation suggest that they deliver improved
efficiency. Today, the wholesale market prices reflect the actual proportion between the
demand and supply. The market gives adequate price signals to both electricity producers
and consumers.
2006 saw an unprecedented growth in terms of electricity consumption during the entire
reform period, with the energy use nation-wide increasing 4.2 percent during the year.
This represents a 2.5-fold increase compared to the average annual growth rate of
electricity consumption over the past five years. In November 2006, the Russian Federation
Government released a basic forecast of electricity production for domestic consumption at
1,426 billion kWh by 2015. This means that the average annual growth rate of electricity
use until 2010 will be approximately 5 percent, and 3.6 percent in 2011-2015.
Such a dramatic increase in electricity consumption means that a lot of new generation
capacity will have to be constructed and brought on line very quickly. By 2011, we will
need to put into operation over 40,000 MW of generation capacity, of which about 34,000 MW
will be built by the companies which today form part of RAO UES Holding Company.
The RAO UES Investment Programme is designed to achieve those goals. By 2011, over
RUB3.1 trillion in funds will be allocated to finance the Investment Programme, including
RUB1.3 trillion to be used for the development of power grid facilities. The Programme
takes into account the needs of each region of Russia. Together with the regional
administrations, we have started to work out and implement five-year programmes designed
to ensure reliable power supply and develop energy facilities in the regions.
The key mechanism to attract investments in the generation segment by offering new
shares in WGCs and TGCs to private investors. To date, we have completed three public
offerings, which we consider were a great success. As a result of the offerings, the three
generation companies—WGC-5, WGC-3 and TGC-5—raised about RUB107 billion in funds for
their investment programmes.
In 2007-2008, seventeen generation companies are to hold IPOs. The Board of Directors
and the Management Board of RAO "UES of Russia" expect that these offerings will
generate at least RUB420 billion in cash, which will be used to implement the WGC and TGC
investment programmes. As a result, the total amount of investments to be made by the RAO
UES energy companies in 2007 will increase almost threefold to RUB520.5 billion compared
to 2006, and 4.5-fold over 2005.
During the year under review, we brought on line new generation facilities, including
power unit 2 of 450 MW at the Severo-Zapadnaya CHPP, new 180 MW power units at the
Khabarovskaya CHPP-3 of OAO "Far Eastern Generation Company", CHPP-5 of OAO
"TGC-1", and the Chelyabinskaya CHPP-3 of OAO "TGC-10". By end-2006,
the installed capacity of power plants of RAO UES Holding Company increased by 1,300 MW
reaching 159,200 MW. Electricity output grew by 4.4 percent, and heat output rose 2.7
percent.
The progress with the electricity reform, the current results of our financial and
production activities during the reporting year were hailed by the investment community.
In February 2007, international rating agency Standard & Poor's upgraded its corporate
credit rating on RAO "UES of Russia" to 'BB' from 'B+'. The national rating was
upgraded to 'ruAA' from 'ruA+'. From 28 June 2006, when the previous AGM of OAO RAO
"UES of Russia" was held, to 24 April 2007, the Company's market capitalization
grew by 96 percent to USD58 billion, outstripping the RTS Index by 57 percent.
The revenues of RAO UES Group in 2006 were in excess of RUB900 billion, an increase of
over RUB135 billion compared to 2005. Despite that, the Board of Directors recommends, for
the first time, that the shareholder meeting, which is the supreme management body of the
Company, vote to omit the dividend in respect of 2006. This recommendation is due to the
review of the market value of the Company's holdings in its subsidiaries, which resulted
in the accrual of a net "paper profit" of RUB717 billion. In such a situation,
we believe that dividend payment from the paper profit would not be advisable.
Next year, the management and shareholders of the Company will have to complete the
corporate restructure and vote on the resolution to implement the final reorganization
phase of OAO RAO "UES of Russia", as well as launch a large-scale investment
process in the energy sector. We are convinced that our joint efforts will help us meet
the challenges that the national economy presents to the electricity industry. Investments
in the sector will enable us to create an entirely new industry making use of cutting-edge
technologies and give an impetus to the development of the related sectors.
| Board Chairman |
 |
Alexander Voloshin |
| Chairman of the Management Board |
 |
Anatoly Chubais |
|
