We are pleased to present the final Annual Report of RAO “UES of Russia” for 2007 | The Report was approved by the Board of Directors of RAO “UES of Russia” on 25 April 2008 and submitted for approval to the Annual General Meeting of shareholders of RAO “UES of Russia” scheduled for 28 May 2008 Сontents 2007 CORPORATE MILESTONES 4 OPERATIONAL HIGHLIGHTS OF RAO “UES OF RUSSIA” 5 32 66 82 106 144 159 STATEMENT BY BOARD OF DIRECTORS CHAIRMAN OF RAO “UES OF RUSSIA” 6 CORPORATE GOVERNANCE REGULATORY ENVIRONMENT OPERATION OPERATIONAL RESULTS INTERNATIONAL ACTIVITIES APPENDIX SYSTEM AND MACROECONOMIC OF THE UES OF RUSSIA STATEMENT BY MANAGEMENT BOARD CHAIRMAN INDICATORS Generation 107 International Cooperation 145 RAO UES Corporate OF RAO “UES OF RUSSIA” 8 Shareholders Meeting 35 Governance Electricity Transmission Foreign Assets and Projects 147 Code Compliance Report for Balance Generation and Distribution 110 2007 160 Board of Directors 35 and Consumption of Electricity 67 COMPANY PROFILE. HISTORY OF THE REFORM 10 Electricity Exports and Imports 150 Information on Members Management Board 37 Factors Affecting Pricing of the Board of Directors, TEN YEARS OF THE REFORM: in Electricity Industry 70 Management Board, KEY EVENTS, HIGHLIGHTS, COMMENTS 14 Governance System 38 Сommittees and Сommissions Electricity Tariffs 71 under the Board of Directors Business Planning of RAO “UES of Russia” 169 SHARE CAPITAL OF OAO RAO “UES OF RUSSIA” 20 and Cost Control 42 Information on Stakes Dividend Policy 43 and Voting Shares Held by OAO RAO “UES of Russia” in Other Joint Stock Companies 178 RAO UES subsidiaries with shares traded on stock markets 192 Report on Financing of the Projects under the Investment Programme 46 74 84 112 152 of RAO “UES of Russia” 196 REFORMING OPERATIONAL RESULTS INVESTMENT FINANCIAL RESULTS ENVIRONMENTAL POLICY. Information on transactions THE COMPANY OF ELECTRICITY MARKETS ACTIVITIES CORPORATE SOCIAL made by OAO RAO “UES Company’s Financial Results 113 RESPONSIBILITY of Russia” in 2007 197 Objectives, Goals, and Phases Wholesale Electricity Market 75 Investment Programme 85 Auditor’s Report 120 Company’s Bylaws 202 of the Reform 47 Environmental Policy 153 Retail Electricity Markets 80 Sources of Investment 87 Statutory Financial Major Corporate Events Creation of the Sector’s Statements of the Company 124 Corporate Social in 2007 204 Intended Structure 52 Results of Investment Responsibility 155 Activities 88 Demerger Balance Sheet Glossary 213 Reorganization of OAO RAO “UES of Russia” 126 of OAO RAO “UES of Russia” 55 List of Sberbank branches Development acting as re-registration of Electricity Markets 57 agents for shares of RAO “UES of Russia” 218 Contact Information 232 2007 Corporate Milestones The first phase of reorganization At the Extraordinary General Meeting, The consolidation process is completed of RAO “UES of Russia” is completed. shareholders of RAO “UES of Russia” at six thermal WGCs and fourteen TGCs. Two generation companies — OAO approve key resolutions relating Shares of all the thermal generation “WGC-5” and OAO “TGC-5” — are spun to the final phase of the Parent Compa- companies created during the reform off from the Company. The Company’s ny’s reorganization. Pursuant to these float on the securities market. shareholders receive shares resolutions, RAO “UES of Russia” in OAO “TGC-5” and OAO “WGC-5” dissolves on 1 July 2008, and its share- in addition to their shares holders receive shares in 23 key energy in RAO “UES of Russia”. companies. Amendments are adopted to the The energy companies of RAO “UES The additional share offerings electricity legislation which enable to of Russia” launch large-scale construc- of 10 generation companies complete the sector reform, create the tion and modernization of their genera- and the sale of the “government stake” legal framework for the operation of the tion and network facilities envisaged by shares in 7 WGCs and TGCs owned companies of the post-reform sector the Company’s five-year investment pro- by RAO “UES of Russia” carried out structure to be spun off from OAO RAO gramme. By 2011, 29,000 MW of gen- in 2007 generate about RUB600 billion “UES of Russia”, and ensure reliable eration capacity and about 70,000 km of in direct private investments for the operation of the UES of Russia and un- transmission lines of different voltages sector development. interrupted power supply to customers. are to be brought on line nationwide. Government and corporate resolutions A schedule is set for the electricity RAO “UES of Russia” continues its drive are taken to change the configura- market liberalization which provides to divest its energy retail assets, sell- tion of the interregional distribution for deregulation of electricity prices ing its shareholdings in 22 companies companies. 12 IDCs are to be created on the wholesale market by 2011. through public auctions. RAO “UES of in the distribution sector, which will be By end-2007, electricity deliveries Russia” receives RUB13.2 billion in comparable in terms of assets value at unregulated prices made about proceeds from the sale of ERC shares, and will compete among themselves 20 percent of the total wholesale which exceeds the target by one third, for investments. market deliveries. succeeding in bringing private strategic investors to these ERC. 4 Operational Highlights of OAO RAO “UES of Russia” and RAO “UES of Russia” Holding Company UNIT OF INDICATORS MEASUREMENT 2005 2006 2007 Installed capacity of RAO UES power plants million kW 157.9 159.6 161.2 Electricity output by RAO UES energy companies billion kWh 665.4 695.0 706.0 Heat output by RAO UES entities million Gcal 465.2 477.8 459.1 Average annual headcount in RAO UES entities ‘000 persons 461.2 469.3 469.6 Length of RAO UES transmission lines ‘000 km 2,479.0 2,475.0 2,466.4* Total length of RAO UES bulk transmission lines of 220 kV and above ‘000 km 144.7 143.1 143.7 Total length of RAO UES 35-110 kV transmission lines ‘000 km 478.7 479.0 479.1 Total length of RAO UES 0.38-20 kV transmission lines ‘000 km 1,855.6 1,852.9 1,843.6 Company’s net revenues from sales of goods, products, RUB mln 32,579 40,297 works and services 29,131 Company’s earnings before taxes RUB mln 24,964 754,942 521,284 Company’s net income RUB mln 20,898 745,088 452,827 Company’s net income with no account of the revaluation of the financial investments in the subsidiaries traded on the RTS RUB mln 20,898 27,431 28,782 and MICEX stock exchanges Dividends per ordinary share of the Company RUB 0.0574 0 0** Dividends per preferred share of the Company RUB 0.1939 0 0** Holding Company’s revenues from the sale of goods, products, RUB mln 776,953 846,951 works and services*** 939,671 Holding Company’s earnings before taxes*** RUB mln 67,595 82,594 182,616 Holding Company’s net income*** RUB mln 51,812 53,823 82,171 * comments in the “Operational Results” section ** submitted for shareholder approval at the AGM of RAO “UES of Russia” scheduled for 28 May 2008 *** consolidated RAS statements 5 Statement by Board of Directors Chairman of RAO “UES of Russia” Dear Shareholders! 2007 was the last reporting year for the Board of on the financial markets, 2007 was a successful We can say today that the structural reform We can confidently state that all the results Directors and a year of the major decisions re- year in terms of attracting private investments has been a success. Establishment of all ther- of the large-scale process of corporate restruc- garding the Company’s reorganization. In mid- in the energy companies. Strategic investors mal wholesale generation companies — six turing mentioned above were achieved thanks 2008, RAO “UES of Russia” will cease to exist. came to the companies. The total amount of WGCs and fourteen TGCs — was completed, to the support from shareholders of RAO “UES In 2007, RAO “UES of Russia” successfully private investments raised through the issu- and mid 2008 will see the completion of estab- of Russia”. We highly appreciate the confidence completed the first phase of its reorganiza- ance of additional shares in thermal generation lishment of FGC, IDCs, and HydroWGC. All prin- and assistance both from the Company’s key tion and, as a result, two thermal generation companies in 2007 and Q1 2008 amounted to cipal relevant resolutions have been approved. shareholders — the state and strategic inves- companies, OAO “WGC-5” and OAO “TGC-5”, RUB411.5 billion. On 1 July 2008, the energy assets and isolated tors — and from the minority shareholders. were spun off from the Company. Sharehold- In 2007, the Government took a decision to energy systems in the Far East of Russia will ers of RAO “UES of Russia” received shares in divest the generation companies by selling the be consolidated into OAO “RAO Energy Systems OAO “WGC-5” and OAO “TGC-5” in proportion Company’s shares in WGCs and TGCs to private of the East”, and foreign assets and some com- to their holdings in RAO “UES of Russia”. The investors. All proceeds from the sale are to be bined-cycle power plants will merge with and model for the final phase of the Company’s re- used to finance the investment projects to de- into OAO “INTER RAO UES”. organization was approved by its shareholders velop the Unified National Energy Grid (UNEG) Like in the previous years, an important role at the Extraordinary General Meeting held on and hydropower generation facilities, which in the activities of the Board of Directors was 26 October 2007.