Dear
shareholders!Dear
shareholders!The past year has in many respects been definitive for RAO UES of Russia. The transition from the development of plans and statements of intent to work on the key areas identified in 1998 had to be effected against a backdrop of political instability in Russia. But despite having to contend with repeated changes of government and the preparations for parliamentary elections, we were able to demonstrate that most of the long-standing problems of the power sector can be solved.
As has already been indicated, the first task to which we turned our attention was the introduction of strict budgeting practices for the management of the financial resources of RAO UES of Russia and its subsidiaries. During 1999 the parent company of the holding structure and a number of its subsidiaries introduced a precise planning system for all revenue and expenditure, which has resulted in a strengthening of financial discipline and economies of cost. At the same time RAO UES of Russia has now begun formulating its financial documentation in accordance with international financial accounting standards in order to improve the transparency of its cash flow.
Last year we were also successful in achieving a radical turn-around in another high priority area, the marketing of electricity. Significant organisational and staffing decisions taken by the management of the company made it possible to push through a fundamental reform of the entire system for the marketing of electricity, and as a result in 1999 RAO UES of Russia effectively abandoned the principles of a «supply» system and began to receive significant sums of «cash» for its product. During the 12 months of last year the proportion of «cash» in settlements from customers increased by a factor of 2.5, while the overall level of collection on payments due to RAO UES of Russia last year rose to almost 100 per cent, making it possible for the first time in many years to halt the increase in customer debt. We regard these achievements as evidence of the improved manageability of the company as a whole.
In the course of a single year RAO UES of Russia has been able to recover almost a billion dollars US from the shadow or semi-shadow economic realm of barter settlements, with the result that we now occupy a qualitatively different position among the largest companies in the country. From being a generator of defaulted payments RAO UES of Russia has been transformed into a source of «cash» for the budget, allied companies and suppliers. In 1999 UES radically improved its payments for current supplies of gas, coal and oil products and doubled the monetary component in settlements with nuclear generators of electricity. The terms of an Agreement with the Ministry of Taxes and Duties of the Russian Federation concerning payments to the Federal Budget have been met in full (and even exceeded if payments from subsidiaries are taken into account). Payments to the Pension Fund of the Russian Federation have increased substantially. The average period of delay in paying wages to employees of energy companies has been reduced by two thirds. In the course of the year not one new suit for bankruptcy was taken out against any of UES Russia RAO’s subsidiaries. In fact bankruptcy proceedings were dropped against two subsidiaries — Kuzbasenergo AO and Dalenergo AO. The number of regions where fuel supplies are in a «critical» condition has been halved. In autumn 1999 these results allowed RAO UES of Russia not only to hold its own in a period of crisis on the fuel oil market and declining deliveries of gas, but at the same time, together with the Rosenergoatom concern, actually to generate an increase in the consumption of energy, which since May 1999 has become a stable trend. As a result of a whole complex of measures taken by the company, since December 1999 companies RAO UES of Russia have been able to maintain the frequency of electric current within the limits set by the state standard.
Despite difficult financial conditions in 1999 the company was able to maintain the introduction of new turbine facilities at a rate 20 per cent above the level of the preceding year.
The first palpable results were also achieved in the area of export policy: we are expanding into the European electricity market, having signed agreements with the Finnish company PVO, the German companies RWE Energie and Bayernwerk, the Austrian company Verbund and the Polish company PSE. A start has been made on the settlement of debts for electricity supplied and the development of joint projects with a number of our immediate neighbours.
A continuing serious obstacle to the further development of RAO UES of Russia and its subsidiaries have been the unjustifiably low levels of the electricity tariffs, which are set in most of the regions of Russia. In 1999 prices for industrial products rose 2.5 times faster than the tariffs paid for electricity by industrial producers. The specific features of the political situation during the previous year prevented RAO UES of Russia from bringing about any fundamental changes in legislation relating to the rules governing pricing or the abandonment of the practice of cross-subsidisation. Nonetheless, in the year 2000 we intend to bring about a fundamental change in this situation.
Under the terms of the well-known Decree of the Government of the Russian Federation No. 829 of 19 July 1999 On development policy for purposes of the third loan for the structural adjustment of the economy RAO UES of Russia has begun the preparatory work for an increase in the share held in its subsidiaries by the private sector.
The improved manageability of the company has made it possible to start work on developing a Concept for the reform of RAO UES of Russia. One of the main goals of restructuring is to maintain and develop Russia’s potential as a producer of energy and thereby support the economic growth of Russia. Various experts have estimated that the achievement of this large-scale objective will require the investment of at least 25—30 billion dollars over the next 5 years. The restructuring of UES Russia will facilitate the raising of this sum.
The need for a transformation of the company in line with market requirements was supported by the Board of Directors of RAO UES of Russia at its meeting in the Kremlin on 4 April 2000. This was followed by discussion of the concept of restructruring by the Government of the Russian Federation, the Federal Assembly of the Russian Federation, the company’s shareholders and other interested groups. We plan to present the finalised version of the concept some time in mid-2000.
The opinions of all interested parties, above all the shareholders, are being taken into account in the development of the concept of reform. This same approach will be maintained during its implementation phase. In the final analysis the projected reforms are intended to transform RAO UES of Russia into a dynamically developing, profitable company.
Chairman of the Board of Management
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