Reforming the Company

CREATION OF THE SECTOR'S INTENDED STRUCTURE

RESTRUCTURING RESULTS

In 2007, the restructuring was completed at OAO "Ingushenergo" and OAO "Tyvaenergo", with the unbundling partially implemented at OAO "Kalmenergo". The final unbundling of OAO "Kalmenergo" involving the carve-out of the UNEG facilities is scheduled for 2009.

In February 2008, the restructuring plan was approved for OAO "Yantarenergo". According to the agreement entered into between RAO "UES of Russia" and the Kaliningrad Region Government, the restructuring of the Kaliningrad energy system will be implemented in two phases. During the first phase, OAO "Yantarenergo" will spin-off two entities, an energy retail company and a generation company. These companies' shares will be auctioned off and the auction proceeds will be used to develop the power grids of OAO "Yantarenergo". During the second phase, OAO "Yantarenergo" is to issue additional shares in favour the Kaliningrad Region Government. As a result of this placement, the regional government's stake in the company may make over 25 percent plus one share.

The energy system in the Far East of Russia is peculiar in that there are islanded territorial energy systems, OAO "Kamchatskenergo", OAO "Sakhalinenergo", OAO "Yakutskenergo", OAO "Chukotenergo", OAO "Magadanenergo", and OAO "Kolymaenergo", resolutions on which were taken on a case-by-case basis.

By now, the restructuring has been completed at OAO "Kamchatskenergo", OAO "Yakutskenergo", and OAO "Kolymaenergo".

For OAO "Magadanenergo", the Development Strategy for the Magadan Region has been approved for the period until 2015.

OAO "Sakhalinenergo" has produced an Energy System Development for the Sakhalin Region for the period from 2006 to 2014 and, on a longer-term basis, until 2020.

The restructuring of OAO "Chukotenergo" will be started after the Administration of the Chukotka Autonomous Okrug approves the resolution on the matters relating to the integration of energy assets.

Thermal WGCs

In 2007, all six thermal WGCs completed their establishment after the AO-power plants merged with and into the respective WGCs. Today, all thermal WGCs work as consolidated operational companies. Shares of all thermal WGCs are traded on Russian stock exchanges.

HydroWGC

The Board of Directors of RAO "UES of Russia" took a resolution on the model of accelerated consolidation of OAO "HydroWGC" and achieving the company's intended structure.

The consolidation of the SDCs of OAO "HydroWGC" (merger of OAO "Cascade of Nizhne-Chereksky HPPs" and OAO "Irganayskaya HPP" with and into HydroWGC) is scheduled to be completed not later than 15 June 2008.

In January 2008, 20 SDCs of OAO "HydroWGC" merged with their parent company, thus completing the first phase of the consolidation process at HydroWGC.

The second phase will see the merger of the remaining subsidiaries with OAO "HydroWGC". As provided by Federal Law No. 36, the Russian Federation is to hold at least 50 percent plus share in the capital of OAO "HydroWGC".

In February 2008, the ordinary shares of OAO "HydroWGC" were admitted to trading on the Russian stock exchanges.

Creation of Territorial Generation Companies (TGCs)

By the beginning of 2007, plans had been approved for the establishment of all 14 TGCs. The intended corporate structure was created at OAO "Mosenergo" (TGC-3), OAO "TGC-4", OAO "TGC-5", OAO "TGC-14"; OAO "TGC-6" was established as a holding company; and the first phase of establishment was completed at OAO "TGC-1", OAO "TGC-2", OAO "SGC TGC-8", OAO "TGC-9", OAO "TGC-10" and OAO "Eniseyskaya TGC (TGC-13)"

In 2007, the creation of intended structure was completed at OAO "TGC-1", OAO "TGC-2", OAO "TGC-6", OAO "Volzhskaya TGC" (TGC-7), OAO "SGC TGC-8", OAO "TGC-9" OAO "TGC-10", OAO "TGC-11", OAO "Eniseyskaya TGC (TGC-13)", and OAO "TGC-12" was created on the basis of the generation assets of OAO "Kuzbassenergo".

Thus, all the 14 TGCs completed their establishment in 2007, and their shares were admitted trading on the Russian stock exchanges.

In March 2007, the Board of Directors of RAO "UES of Russia" approved the road map for the second phase of the Company's reorganization and the decision on the merger of TCs and ITCs with and into OAO "FGC UES" as a single-step transaction. As a result, the state will hold at least 75 percent plus one share in OAO "FGC UES".

In December 2007, the shareholders of OAO "FGC UES" at the EGM took a decision on the reorganization of OAO "FGC UES". As a result of the reorganization, OAO RAO "UES of Russia", OAO "State Holding", OAO "FGC UES Minority Holding", 56 transmission (trunk grid) companies and 7 ITCs are to merge with and into OAO "FGC UES". This step is designed to complete the consolidation of the bulk transmission grid in line with the model for the final phase of the reorganization of OAO RAO "UES of Russia". It is planned that OAO "FGC UES" will consolidate its control of the UNEG assets not later than 1 July 2008.

The Russian Government took a decision that it is necessary for the state to secure direct participation in OAO "FGC UES" in 2007-2009 by acquiring additional shares in the company. The transaction is to be financed with federal budget funds. In Q1 2007, the federal government for the first time allocated funds for the implementation of the FGC's priority investment projects. In 2007, the state held 10.19 percent of OAO "FGC UES".

In April 2002, the Board of Directors of RAO "UES of Russia" approved the basic plan for the restructuring of the distribution grids. It was resolved that the distribution companies spun off from regional energos would be consolidated on a cross-regional basis to create interregional distribution companies (IDCs).

In 2004, the Board of Directors of RAO "UES of Russia" approved the participation of RAO "UES of Russia" in four IDCs. During the same year, the IDCs were registered with the authorities.

In August 2006, RAO "UES of Russia" created another wholly-owned subsidiary, OAO "South Grid Company" to operate the grid and energy retail companies in the South of Russia during the transitional period of the sector reform.

In April 2004, the Board of Directors of RAO "UES of Russia" approved the transfer of the right to vote the Company's shares in the IDCs to OAO "FGC UES" on a fiduciary basis.

The Board of Directors of RAO "UES of Russia" took a further decision on 27 April 2007 to increase the number of IDCs to 11 (without taking into account the Far East IDC). The new configuration of the IDCs will be based on the principle of territorial adjacency and comparable book value of assets of the DCs which will become part of the respective IDCs.

The new IDC configuration provides that the existing technological links among the DCs within the framework of the IDCs will be preserved, with the companies requiring special control to be carved out to form separate companies.

According to the resolution of the Board of Directors of RAO "UES of Russia", the new interregional distribution companies, OAO "Center and Privolzhye IDC", OAO "South IDC" and OAO "Volga IDC" were established in June 2007 as wholly-owned subsidiaries of RAO "UES of Russia". The name of OAO "Center and North Caucasus IDC" was changed to OAO "Center IDC", OAO "Urals and Volga IDC" to OAO "Urals IDC", and OAO "South Grid Company" to OAO "North Caucasus IDC".

In October 2007, the Board of Directors of RAO "UES of Russia" approved the establishment of an IDC on the basis of the power grid assets of the city of Moscow and the Moscow Region. This transaction was provided by the Agreement on the interaction among the Moscow City Government, RAO "UES of Russia" and Gazprom Group signed on 27 July 2007, which provided, among other things, for the consolidation of the distribution grids in the Moscow Region.

The intended corporate structure of the IDCs (except for OAO "Tyumenenergo", OAO "Lenenergo" and the IDC on the basis of the Moscow City and Region grid facilities) is expected to be achieved in 2008 after the DCs merge with the respective IDCs.

As a measure to prepare for the consolidation of the DCs into IDCs, asset appraisals were conducted in October 2007 at the DCs to be reorganized in order to determine the DC share prices for the purpose of repurchase. The general meetings of shareholders were held at the DCs comprising the OAO "Center and Privolzhye IDC", OAO "North-West IDC", and OAO "Siberia IDC" to consider matters relating to the companies' reorganization.

The merger of the DCs with and into IDCs is scheduled to take place in H1 2008.

In 2007, the provisions of the laws on the electricity industry came into force which envisage that, after the sector restructuring is completed, the state is to own 100 percent of OAO "SO UES".

In September 2007, the Board of Directors of RAO "UES of Russia" approved the plan designed to increase the government's stake in the capital of OAO "SO UES" to 100 percent. At present, the state holds 30.44 percent of shares in OAO "SO UES". The Federal Budget for 2008 earmarks funds intended for the purchase of additional shares in OAO "SO UES". These funds will be used to finance System Operator's investment programme. This is due to the important role of System Operator as an infrastructure entity in supporting the current and future functioning of the electricity market and ensuring reliable operation of the UES of Russia.

In December 2006, the Board of Directors of RAO "UES of Russia" approved the Company's Strategy for the disposal of its shares in the energy retail companies (ERC). According to the Strategy, the principal arrangement is the sale of ERCs shares through a public auction, with the reserve price not lower than the market value determined by an independent appraiser.

57 energy retail companies were created as a result of regional energos' restructuring. By March 2008, shareholdings in 33 ERCs were sold at public auctions. The proceeds from the sale of ERC shares totalled in excess of RUB17 billion. The divestiture of its energy retail business by RAO "UES of Russia" will help significantly increase the number of independent retailers.

The increasing competition among energy retailers on the retail marketplace will stimulate them to introduce new methods of organizing retailing operations, constantly expand the range of services provided and improve the services offered to customers.

In the course of the restructuring, as many as 187 repair and maintenance companies were spun off from regional energos and AO-power plants and completed their official registration.

The procedure for the approval and implementation of resolutions relating to the phase-out of the Company's participation in the R&M and services businesses was laid down in the resolutions taken by the Board of Directors of RAO "UES of Russia" on 31 October 2003 and 25 November 2005, and the Standard for the arrangement of sale of the shares in the R&M and services companies owned by RAO "UES of Russia" and its SDCs.

On 9 February 2007, the Board of Directors made a number of changes to its previous resolutions governing the procedure for the sale of shares in R&M and services businesses. The new resolutions are designed to shorten the timeframe for the preparation and approval of the terms and conditions of sale of companies' shares, as well as to increase the transparency of the auctions being held. All decisions on the terms of sale of the R&M and services companies are taken by the Commission for the Sale of Assets of RAO "UES of Russia".

As of 31 December 2007, the Company sold 103 services-related companies through auctions.