Reforming the Company

REORGANIZATION OF OAO RAO "UES OF RUSSIA"

The reorganization of the Parent Company, OAO RAO "UES of Russia", is the final phase of the sector restructuring which will result in the creation of the intended corporate structure of the electricity industry in Russia, comprised of independent companies that are attractive for investors and are able to efficiently operate in a competitive marketplace.

As a result of the reorganization, the shareholders of RAO "UES of Russia" will receive shares in spin-off companies.

As provided by the laws in force and the resolutions of the Board of Directors of RAO "UES of Russia", the Company will be reorganized in two phases.

The two-phase model was chosen due to the need to assess, in the course of the first phase, the ability of large private generation companies to independently raise investments, manage their development processes, participate in the wholesale electricity market, and, in the case of territorial generation companies, to participate in the heat market segment.

During the first phase (late 2006 to September 2007), RAO "UES of Russia" spun off two thermal-based generation companies, OAO "WGC-5" and OAO "TGC-5", whose shares were distributed among RAO UES shareholders on a pro rata basis. As a result of the companies' spin-off, the shareholders (the state and minority shareholders) directly acquired stakes in two generation companies that are independent from RAO "UES of Russia".

For each ordinary share in RAO "UES of Russia" held, shareholders will receive 0.41 of an ordinary share in OAO "WGC-5" and 13.59 ordinary shares in OAO "TGC-5". For each preferred share in RAO "UES of Russia" held, shareholders will receive 0.37 of an ordinary share in OAO "WGC-5" and 12.45 ordinary shares in OAO "TGC-5".

These companies were selected primarily because WGC-5 and TGC-5 had completed building their intended corporate structures and are ready to start independent operation and implement challenging investment projects.

As a result of the first phase of the reorganization of RAO "UES of Russia", the stakes held by the Russian Federation in the OAO "WGC-5" and OAO "TGC-5" made 26.43 percent and 25.09 percent, respectively (this figure takes into account the additional share issues carried out by the companies to raise investments).

OAO "WGC-5" and OAO "TGC-5" were the first two private generation companies in Russia to be established in the course of the electricity reform.

During the second phase of the reorganization of OAO RAO "UES of Russia" (2007 to 1 July 2008), the electricity industry restructuring will be completed, all companies of the intended sector structure will be spun off from OAO RAO "UES of Russia", and the Parent Company, RAO "UES of Russia", will cease to exist as a legal entity.

During the second phase of the reform, the state is to divest its holdings in the thermal generation companies (WGCs and TGCs).

All assets owned by OAO RAO "UES of Russia", according to the spin-off balance sheet, were provisionally divided into two groups:

• assets to be distributed to the state: about 52 percent of the shares held by RAO "UES of Russia" in each of the companies forming the intended sector structure;
• assets to be distributed to the minority shareholders: about 48 percent of the shares held by RAO "UES of Russia" in each of the companies of the intended sector structure.

The final phase of the Company's reorganization provides for the spin-off of holding companies which will receive the respective shareholdings in the companies comprising the intended sector structure and simultaneous merger of the holding companies with and into the respective companies of the intended sector structure, i.e. FGC, WGCs and TGCs.

One group of holding companies includes companies whose shares are to be distributed both to the state and the minority shareholders (OAO "IDC Holding", OAO "RAO Energy Systems of the East", OAO "INTER RAO UES Holding").

Shares in the second group of holding companies will be mostly distributed to the state. These will include OAO "State Holding" and OAO "HydroWGC State Holding". These holding companies will receive, under the demerger balance sheet, the respective parts of shares in FGC and DCs attributable to the state, and shares in OAO "HydroWGC" and some AO-HPPs. In addition, these companies will receive part of shares in the thermal-based WGCs and TGCs.

OAO "Centrenergoholding", OAO "Sibenergoholding" and OAO "Intergeneratsiya" are to be established as a measure to exercise the shareholders' right to create special-purpose holding companies in the course of the reorganization of RAO "UES of Russia" whose share will be distributed only to specific shareholders. These special-purpose holding companies are to receive the shares in WGCs, TGCs, FGC, HydroWGC, attributable to the stake held by a particular shareholder.

One more group of holding companies will include the companies whose shares are to be distributed only to those minority shareholders who do not use their right to create special-purpose holding companies. This list will include OAO "FGC UES Minority Holding", OAO "HydroWGC Minority Holding" and 18 minority holding companies of WGCs and TGCs. These holding companies will receive part of the shares in FGC and transmission (trunk grid) companies, part of the shares in OAO "HydroWGC" and some AO-HPPs, as well as part of the shares in relevant thermal generation companies which the minority shareholders are entitled to.

Most of these spin-off holding companies will simultaneously merge with the respective companies forming the intended sector structure. The exception will be OAO "IDC Holding", OAO "RAO Energy Systems of the East", OAO "Intergeneratsiya", OAO "Centrenergoholding", and OAO "Sibenergoholding". These companies will continue to exist as holding companies.

OAO "State Holding", OAO "FGC UES Minority Holding", 56 regional TCs and 7 ITCs will merge with and into OAO "FGC UES".

OAO "HydroWGC State Holding" and OAO "HydroWGC Minority Holding", as well as HPP subsidiaries will merge with and into OAO "HydroWGC".

OAO RAO "UES of Russia", which will, after the holding companies' spin-off, hold the remaining part of the assets not related to the technological operations of the post-reform companies, will merge with and into OAO "FGC UES ".

In the course of the reorganization, the spin-off company OAO "INTER RAO UES Holding" will receive shareholdings in OAO "Ivanovskie PGU", OAO "Severo-Zapadnaya CHPP", OAO "Kaliningradskaya CHPP-2", OAO "Sochinskaya TPP", and ZAO "INTER RAO UES".

It is planned that, as a result of the restructuring the state will hold:

• over 76 percent of shares in OAO "FGC UES";
• 100 percent of shares in OAO "SO UES";
• over 59 percent of shares in OAO "HydroWGC";
• over 50 percent in OAO "INTER RAO UES";
• over 52 percent of shares in OAO "IDC Holding";
• over 52 percent of shares in OAO "RAO Energy Systems of the East".

The minority shareholders and private investors will hold:

• up to 100 percent shares in thermal generation companies;
• up to 100 percent of shares in energy retail companies;
• less than 24 percent of shares in OAO "FGC UES ";
• up to 40 percent of shares in OAO "HydroWGC";
• less than 50 percent in OAO "INTER RAO UES";
• up to 48 percent of shares in OAO "IDC Holding";
• up to 48 percent of shares in OAO "RAO Energy Systems of the East".

The final phase of the reorganization of OAO RAO "UES of Russia" is scheduled to be completed on 1 July 2008.