Investments and Innovations

Investment Policy

Investment activity goals, tasks, and directions.

The main goal of OAO RAO “UES of Russia” investment policy is maintenance of continuous investment process in the sphere of energy production in conditions of market relations introduction and reduction of state financing of energy industry investment projects. This requires formation of conditions and mechanisms of attraction of other than state investments, application of long-term forecasting and planning elements to working out of investment strategies, optimization of investment decisions approval procedures, and increase of the Company investment processes efficiency.

Main directions of OAO RAO “UES of Russia” investment policy include:

·        Transition to three-year period of investment programs planning;

·        Expanded use of borrowed funds, leasing mechanism;

·        Attraction of external financing for certain investment projects;

·        Development and introduction of guaranteeing investments mechanism.

While using elements of long-term forecasting and planning OAO RAO “UES of Russia” introduces the system of long-term forecasting of energy balance based on energy consumption forecasts and maximum of electric demand by regions with consideration of new equipment introduction forecasts, modernization and decommissioning of old equipment, which will improve the quality of investment solutions and form investment proposals meeting the highest demands.

Review of investment possibilities and     prospects

For the purpose of improvement of investment activity planning and implementation of the Russian Federation government resolution N 43 of November 20, 2003 OAO RAO “UES of Russia” Board of directors worked out a middle-term investment program. In March 2004 three-year investment programs projects of OAO RAO “UES of Russia”, OAO “FSN UES”, and OAO “SO-CDU UES” were approved by OAO RAO “UES of Russia” Board and submitted to the Russian Federation government.

RAO “UES of Russia” carries out activities aimed at increase of investment appeal of generation objects and attraction of external investments to energy industry sector together with equity financing of energy industry investment programs. Maximum amount of borrowed funds in2004-2006 – 8,5 billion rubles. Besides there is a 2,3 billion rubles leasing program for purchase of Kaliningrad HPP-2 equipment.

Besides, federal budget financing of energy industry objects is planned to increase in 2005-2006.

The main obstacle in the way of attraction of external investments in conditions of regulated energy tariffs that do not allow achieving the required profitability is lack of mechanisms of state or sector guaranteeing of investors' means payback.

OAO RAO “UES of Russia” suggested a special transition period mechanism of investments guaranteeing that will provide for new construction and completion of generative objects, which will guarantee that an investor profits from investment project.It is proposed to activate this mechanism in the form of creation a certain reserve of technological capacities and aimed at compensation of borrowed funds and other conditionally fixed costs as well as invested capital profit if there is a difference between energy market cost and cost of the project payback. Projects will be selected on competition basis and only for the zones of forecasted capacity deficit. In the 1 quarter of 2005 RF government plans to issue a resolution “On specifying of conditions and formation order of perspective technological capacity reserve, as well as formation of mechanism of guaranteed payback of investments channeled for this reserve creation”.

OAO RAO "UES of Russia" investment program for 2004 approved by Russian government and FEC of Russia regulation N 110-ý/13 of December 26, 2003 amounted to 15,10 billion rubles and considering amortization and other sources according to OAO RAO “UES of Russia” order N 85 of March 1, 2004 – 23,6 billion rubles, including 6,56 billion rubles of borrowed funds. Because of lack of investment amounts comparing to what has being planned by the Company for provision of timely beginning of capital construction objects, investment subjects attract borrowed funds against OAO RAO “UES of Russia” pledge as an additional source for Company’s investment program financing. Credits are to be paid back for account of target investment funds of future periods. The investment program includes first of all heat and hydro power plants, which construction was approved by RF government and regulation of RF President, objects that are almost ready for operation, and objects that provide current regularity of electrical supply.

Factual application of capital investments to set of most important construction sites according to OAO RAO “UES of Russia” investment program implemented at the Company’s cost amounted in 2004 to 19,7 billion rubles against 16,43 billion rubles in 2003.

Financing of OAO RAO “UES of Russia” investment program at the cost of all financing sources in 2004 amounted to 21,6 rubles.

Implementation of Company investment program in 2004 regarding the most important construction sites, approved by RF FEC N 110-ý/13 on December 12, 2003.

                                                                                                                                            mln rub.

Item	Approved by FEC Russia	Borrowed funds attracted	Implemented by January 1, 2005	Factual financing at the cost of all sources
Implementation of OAO RAO “UES of Russia” investment program, billion rubles	15100	6160	19686,8	21631,2
Including:
- heat power plants	4460	4250	8370,2	8750
- hydro power plants	10050	1910	10247,2	12140,3
Capacity for investment program objects, MW			379

New power plants construction projects and energy industry objects reconstruction in the frames of the Company investment project for 2004 (billion rubles)

Project name	Design capacity, MW	Project estimate cost in 1991 prices	Planned project life (MW – start-up year)
Hydro power stations
Bureyskaya HPP	2000	2090	300-2004, 333-2005
Boguchanskaya HPP	3000	1992
Zamaragskie HPP	352	257
Irganayskaya HPP	800	804	186-2006
Cascade of Nizhne-Cherekskie HPPs	120	229
Zelenchukskie HPP	160	585	Capacity increase in 2006
Heat power plants
Kaliningrad HPP-2	450	624	450-2005
Sochi HPP	79		79-2004
Ivanovo HPP	702	280	354-2006

Considering all financing sources in 2004 OAO RAO “UES of Russia” Holding placed into service 44 turbo generator sets with summed capacity of 980,1 MW, 379 MW of them – with OAO RAO “UES of Russia” funds participation.

Commissioning of new facilities for OAO RAO “UES of Russia” Company in 2004, at the expense of OAO RAO “UES of Russia” funds

Object name	Commissioned capacity
Heat power plants
Sochi HPP(1,2)	79,0 MW
Hydro power plants
Bureyskaya HPP( N3)	300,0 MW
TOTAL	379,0 MW

Starting from2003 OAO RAO“UES of Russia” in cooperation with affiliated and dependent Companies started to implement commercial, free-standing projects in the sphere of generation financed mostly through attraction of Russian banks loans against DZO property.

Externally financed projects at implementation stage

¹	Project name	Total amount of financing, including borrowed funds, million rubles	Current state of the project
	2003
1	ÎÀΫBerezovskaya HPP-1» (boiler reconstruction)	152,2 (143,8)	SBRF credit acquired. Boiler reconstructed. Credit payments are made regularly.
2	ÎÀΫRyazan HPP» (ACS of block N 6)	196 (132)	SBRF credit acquired. ACS of block N6 installed. Credit interest is paid regularly.
2	Saransk HPP-2 as part of OAO“Mordovenergo” (modernization)	100 (100)	Credit agreement for 100 million rubles is concluded. 60 million rubles already invested.
4	Dorogobuzhskaya HPP as part of OAO “Smolenskenergo” (modernization)	213,7 (137)	Competitive tendering is held. Credit agreement with SBRF is concluded. Equipment is being supplied.
5	OAO“Taymyrenergo” (reconstruction 6 ÊÐÓÝ)	210 (210)	Credit is acquired. Equipment supply agreement is concluded. Equipment is being supplied.
	2004
1	ÎÀÎ “Dzerzhinsk HPP” (reconstruction with CCP installation)	2300 (2300)	Credit agreement for 2300 million rubles is concluded. Construction started, 1000 million rubles invested: equipment purchased, gas pipeline constructed. Placing into service- August15, 2005.
2	ÎÀΓLenenergo” HPP-5 (completion of energy unit N 1)	1750 (1400 )	Credit agreement concluded, EBRD credit acquired.
3	Construction of CCP-HPP “Luch” in Belgorod 60 MW	1136 (1136)	Supplier tender is held. Credit acquired, 160 million rubles invested
4	Construction of Kaliningrad HPP-2	10050 (1693)	5-year leasing agreement on equipment supply concluded.
5	ÎÀΓNevinnomyssk HPP” (modernization)	290 (195)	Project approved by RAO UES Board of directors. SBRF credit agreement concluded, financing started, construction started.
6	Novocherkassk HPP. Turbine replacement 310 MW	416 (240)	Negotiations held on reduction of equipment cost by 15%. Credit agreement is at signing stage.

OAO RAO “UES of Russia” investment programs for 2005

In conditions of tariff regulation of investment program volume OAO RAO “UES of Russia” managed to protect Company’s investment programs for 2005, which are formed at the expense of target investment funds, as part of OAO RAO “UES of Russia” tariff payment.

According to the Russian Federation government regulation N 19 of January 19, 2004 the Company prepared and conciliated 2005 investment projects for OAO RAO "UES of Russia", OAO "FSN UES", and OAO "SO-CDU UES" with respect to borrowed funds with executive administration of the Russian Federation government.

“The list of capital construction objects in energy industry and relevant amount of target investment funds included into tariff payment for OAO RAO “UES of Russia” services as part of financing and development of Unified energy system of Russia for 2005" is approved by regulation N 318-ý/21 of December 17, 2004.

 In accordance with OAO RAO "UES of Russia” regulation N 31 of January 25, 2005 amount of the Company investment program considering all financial sources amounts to 26,6 billion rubles, including 8,5 billion rubles of borrowed funds. Payback of borrowed funds and interest is to be made at the expense of 2006 target investment funds.

Investment program financing should be concentrated on the objects at completion or pre-completion stage:

- Bureyskaya HPP with dam completion up to 265 meters;

- Kaliningrad HPP-2;

- Sochi HPP;

- Irganayskaya HPP;

- Zelenchukskaya HPP;

- Ivanovo HPP.

Nizhne-Cherekskie HPP, Boguchanskaya HPP, Zamaragskie HPP are to be financed according to leftover principle that allows preservation of mentioned objects and carrying out of activities preventing environmental and technogenic catastrophes.

One of the main factors of timely construction completion and placing of energy facilities into service at large hydro power plants such as Bureyskaya HPP and Irganayskaya HPP is timely preparation of the flooding zone up and filling it up to design mark. 2005 OAO RAO "UES of Russia" investment program allocated 450 million rubles for development of Irganayskaya HPP flooding zone and same amount for development of Bureyskaya HPP flooding zone. 450 million rubles for development of Irganayskaya HPP flooding zone and 450 ely preparation of the zone.

Besides, resolutions of RF President and Government, and OAO RAO “UES of Russia” management introduced certain amendments into the structure of OAO RAO “UES of Russia” investment funds distribution. For instance, the Company’s investment program included 400 million rubles for Sangtudinskaya HPP financing. 100 million rubles out of OAO RAO “UES of Russia” target investment funds will be allocated to completion of Kambaratinskie HPP. The Company’s investment program also included means necessary for construction of Ingushskaya HPP in the sum of 50 million rubles.

Total deficit of capital investments for commissioning of new facilities according to OAO RAO “UES of Russia” investment program requires the use of up to 8,5 billion rubles of borrowed funds in 2005.

Forecast-prognosis of commissioning of generative capacities of OAO RAO “UES of Russia” for 2005, at the expense of OAO RAO “UES of Russia” funds

Object name	Commissioned capacity
Heat power plants
Kaliningrad HPP-2	450,0 MW
Hydro power plants
Bureyskaya HPP ( N4)	333,0 MW
TOTAL	783,0 MW

The Company has been actively cooperating with foreign partners in connection with several projects of mutual interest:

1. In 2004 management company OOO “ENEL ESN Energo” (consortium of the largest Italian company “ENEL” and Russian company “ESN”) joined the management of OAO "North-Western HPP" with the purpose of sharing foreign experience in the sphere of energy objects management and attraction of foreign investments to the sector.

2. In 2003 Danish energy Agency, RAMBØLL company, ÎÀÎRAO “UES of Russia”, and OAO “SRIES” concluded four-party agreement on implementation of “Sea Windpark” project with 50 MW in Kaliningrad region of Russia. In order to attract foreign investments on parity conditions, Danish and Russian parties allocated over 1 million US dollars for development of technical project in accordance with international standards. Presently complex research works have been done in water area of Kaliningrad and Baltic gulfs, meteo-measuring 60-meters towers for yearly monitoring were constructed.

OAO RAO “UES of Russia”, Danish energy Agency, and RAMBØLL company also cooperate in the sphere of further development of ecologically clean and renewable energy sources in Russia.

3. In 2003 OAO RAO “UES of Russia” and “Sumitomo Corporation” concluded Protocol on cooperation in connection with Energomost project "Sakhalin-Japan". Preliminary updating of TES project has been made, which includes construction of modern steam-gas power plant with capacity of up to 1000 MW in Southern Sakhalin. The project will also include construction of converting stations, ground electric DC power line and placing of 47 km long cable along the sea bottom up to Hokkaido for further transfer of energy along the updated power lines of "Hokkaido Electric" company to major consumers in Sapporo region. Totalsumofinvestmentamountsto1100 millionUSdollars. Up to 5,5 billion kW/hour of electrical energy is to be sold at Japanese market.

4. Hungarian company “Transelectro” and Russian ZAO “Urban” established joint-venture company “Russian-Hungarian energy company” engaged in the project of construction of Astrakhan steam-gas power plant with capacity of 110 MW and cost of 100 million euros. Conclusion of joint Agreement between OAO RAO "UES of Russia” and ZAO “Russian-Hungarian energy company” and Memorandum with Astrakhan region Administration has significantly helped further project's promotion, providing project financing agreement with Hungarian Eksimbank, 49 year land lease agreement with regional Administration, 15 year agreement on supply of limited natural gas, agreement on purchase of energy and heat by “Astrakhancommunenergo”. In 2005 Companies plan to finish TES development in cooperation with foreign consultants, attract financing and start power plant construction.

5.In order to speed up the process of financing investment projects OAO RAO “UES of Russia” presently considers the issue of creation a leasing company. After preliminary negotiations the Company has already achieved an agreement of Siemens and Federal State Unitary Enterprise Foreign-economic organization (FGUP VO) “Tekhnopromexport” to participate in authorized capital of a new leasing company.