Investment activities

SOURCES OF INVESTMENT

ATTRACTING INVESTMENTS

In 2007, the total amount funds provided to finance the RAO UES energy companies' investment programmes made RUB356.3 billion, an increase of 113 percent compared to 2006.

The total amount of funds spent on the generation companies' programmes (including the companies which will become part of OAO "RAO Energy Systems of the East") made RUB166.9 billion. The investments made by the grid companies totalled RUB187 billion. The Investment Programme of OAO "UES SO" is estimated at RUB2.4 billion.

AMOUNTS OF FUNDS SPENT ON THE INVESTMENT PROGRAMMES OF COMPANIES CREATED AND BEING CREATED AS A RESULT OF RAO UES REORGANIZATION IN 2007, BILLIONS OF RUB

New Share Issues of Generation Companies and Sale of "Government Stake" Shares

In 2006 and 2007, the Board of Directors of RAO "UES of Russia" took key decisions aimed at attracting investments through issuance of additional shares by the thermal generation companies and sale of the shares in the generation companies owned by RAO "UES of Russia" attributable to the "government stake" after the reorganization of the Parent Company.

In 2007, WGC-2, WGC-3, WGC-4, WGC-6, TGC-1, TGC-5, TGC-8, TGC-9, "Mosenergo", and "Kuzbassenergo" carried out share offerings to private investors. The total amount of funds raised in 2007 and Q1 2008 was RUB737.5 billion, including RUB338 billion from the sale of the "government-stake" shares held by RAO "UES of Russia" and RUB411.5 billion in proceeds from the share offerings (2006: RUB12 billion). The new shares were sold on a competitive basis to the companies which offered the highest bids.

The funds raised by the WGCs and TGCs are to be used to finance the construction of new and modernization of the existing generation capacity in 2007 and the subsequent years.

In 2007, OAO "FGC UES ", OAO "HydroWGC", and OAO "SO UES" placed additional shares to the Russian Federation. The amount of funds from this source allocated for investment totalled about RUB28 billion.

The total amount of funds spent in 2007 to finance the energy companies' investment programmes amounted RUB110 billion. These funds include money raised by generation and grid companies through additional share offerings, the allocations from the federal budget, and proceeds from the sale of the SDC shares owned by RAO "UES of Russia".

Payment for Connection of New Users to Power Grids

Network companies are engaged in two kinds of regulated activities—electricity transmission services and grid connection services.

Connection services are provided by grid companies both to electricity consumers and producers. Owners of power plants under construction are required to enter into connection agreements with the grid companies in their areas and pay the cost of network construction to the point of connection (i.e. substation). In this way, the grid companies may raise the funds needed to build the network facilities to deliver the power generated.

In 2007, OAO "FGC UES" allocated RUB795.3 million in funds to finance its capital construction projects in the grid sector. These funds came from connection charges.

In 2008-2012, the amount of investment funds received by the grid companies as connection payments from customers and electricity producers will increase significantly to about 20 percent of the grid companies' investment resources.

Investment Guarantee Mechanism

In light of the need to ensure investments in the electricity industry during the transitional period, the Russian Federation Government approved the use of an "investment guarantee mechanism" ("IGM") as an instrument to stimulate investments during the transitional period, which provides additional guarantees and incentives to investors. Such a mechanism is intended as a measure to safeguard investors from most market risks.

Under the IGM, investors are guaranteed a certain return on their investments in the construction of new capacity in Russia by setting a special fee for the services aimed at the creation of the long-term technological reserve of capacity under a long-term agreement with OAO "SO UES".

In 2008, the Federal Energy Agency of the Russian Federation (Rosenergo), which acts as organizer of IGM tenders, announced two tenders for contracts to build TPPs with 1,200 MW of capacity near the Tarko-Sale Substation in the Tyumen Region and TPPs with 580-660 MW of capacity near the Serovskaya TPP in the Sverdlovsk Region.

The amount of investments expected to be raised by the companies established after the RAO UES Holding Company reorganization in 2008-2012 is estimated at over RUB4.5 trillion.

AMOUNTS OF FUNDS NEEDED FOR THE INVESTMENT PROGRAMMES OF COMPANIES CREATED AS A RESULT OF RAO UES REORGANIZATION, BILLIONS OF RUB

The companies' investment programmes funding is expected to peak in 2009 and 2010, when the amount of investments will exceed RUB1 trillion.

The key sources of funds will be the tariffs (32 percent) and borrowings (19 percent). 11 percent of the investment programmes will be financed with the proceeds from additional share offerings carried out by thermal generation companies. Connection charges will account for about 7 percent of the total investment allocations.

RAO UES Investment portfolio by sources of finance