Restructuring - Plans

According to RF Government Regulation N 1254-ðof September 1, 2003 and RF Government Regulation N 1367-ðof October 25, 2004 Russian energy industry will consist of seven wholesale market generative companies (WGC). Six WGCs will include heat power plants, and the last WGC will be established on the basis of hydro-generative assets.

In 2004 OAO RAO “UES of Russia” Board of directors resolved to establish OAO “WGC-1”, OAO “WGC-2”, OAO “WGC-3”, OAO “WGC-4”, OAO “WGC-5”, OAO "WGC-6” and OAO “Federal hydro-generative company” (OAO “HydroWGC”). By February 21, 2005 the following companies have been officially registered: OAO “WGC-1”, OAO “WGC-2”, OAO “WGC-4”, and OAO “WGC-6”. In January 2005 the first establishment step* for OAO “WGC-3” and OAO “WGC-5” was completed.

Plans for 2005 – 1 quarter of 2006 include a set of activities aimed at incorporation of AO-plants separated from AO-energo into WGC AO-plants by transferring shares of corresponding AO-plants that belong to OAO RAO "UES of Russia" as payment for additional WGC shares.

The process of conversion to single share in OAO “WGC-1”, OAO “WGC-2”, OAO “WGC-4”, and OAO “WGC-6” is expected to start in the 1 quarter of 2006 and finish in the IV quarter of 2006.

At present the Company chooses the investment bank to start single share conversion of OAO “WGC-3” and OAO “WGC-5” by exchanging of head WGC company shares for shares of its daughters companies that belong to minority shareholders of WGC daughters companies (further – single share conversion). Single share conversion in OAO “WGC-5” is planned to be finished in August of 2005, and OAO “WGC-3” – in November of 2005.

The reforming of regional energy systems via horizontal integration of generative capacities will result in establishment of 14 territorial generative companies (TGC) in the European part of Russia, the Urals, and Siberia. By February 21, 2005 RAO “UES of Russia” Board of directors has approved of establishment projects for TGC N 1, 5, 8, 9, 10, 13, and 14. OAO “TGC-9” and OAO “TGC-14” were officially registered at the end of 2004. OAO “TGC-1”, OAO “TGC-5”, OAO “TGC-8”, and OAO “TGC-10” are planned to be registered in the 1 quarter of 2005. OAO “TGC-3”, OAO “TGC-9”, and OAO “TGC-14” are expected to start on September, 2005 their leasing scheme operational activities.

On April 23, 2004 OAO RAO “UES of Russia” approved of configuration for interregional distribution network companies (IDNC). Plans include establishment of 5 IDNCs that will incorporate distribution network companies established as a result of AO-energo reorganization. In October 2004 the Board of directors approved of RAO “UES of Russia” participation in 4 IDNC: "Center and North Caucasus IDNC”, “North-West IDNC”, “Urals and Volga IDNC”, “Siberia IDNC”**. 2 of these will be registered in the 1 quarter of 2005 ("Center and North Caucasus IDNC" and "North-West IDNC" were registered at the end of 2004).

By February 21, 2005 24 AO-energo out of 48 projects of basis variant reforming of energy systems that was approved by OAO RAO “UES of Russia” Board of directors have been separated. During 2005 23 more AO-energo are to be separated according to basis variant.

By February 21, 2005 OAO "Pskovenergo", one of 4 projects of non-basis reforming of energy systems that was approved by OAO RAO “UES of Russia”, has been separated.

On April 1, 2005 “5-15%” market is expected to be launched in Siberia. This requires certain alteration in Government Regulation N 643 regarding price zone for Siberia that are planned to be introduced in March. The RF Prime-minister is expected to sign RF Government Regulation on 5-15% market launch in Siberia. Balancing market is expected to be launched on September 1, 2005 after RF Government issued a corresponding Regulation (Balancing market addendum). During 2005 a model for two-sided agreements that will be used starting from 2006 is going to be developed.

* At the first stage WGCs are established as 100% OAO RAO “UES of Russia” daughters companies with power plants property and AO-plants shares that belong to OAO RAO “UES of Russia” used as WGC authorized capital. At the second stage OAO RAO “UES of Russia” acquires additional WGC shares for shares of AO-plants that belong to OAO RAO “UES of Russia” and were separated during AO-energo reorganization. For heat WGCs minority shareholders of corresponding AO-plants are supposed to join single share conversion process.

**Establishment of the Far East IDNC-5 will be resolved later.