RAO UES Reform: The Final Stage

2  RAO “UES of Russia” today  Reform: company transformation and market development  Conclusions Table of Contents

1. RAO “UES of Russia” today

4 Russia: 4 th Largest Power Producer in the world 24.9%10.2%6.8%5.5%3.7%3.7%3.5%3.5%2.4%2.1% % Of World Total Source: IEA TWh RAO “UES of Russia” today

5 RAO “UES of Russia” Leading role in Russia’s electricity industry Installed capacity RAO: 156m kW Heat generation RAO: 469m Gcal RAO “UES of Russia” Other 4%4% 96% 68% 32% 28% 72% Length of transmission lines RAO: 2,497 thousand km RAO “UES of Russia” today

6 RAO “UES Russia” RAO “UES of Russia” financial performance Source: IAS Group financial results (1) Excludes doubtful debtors expense (2) As reported US$m RAO “UES of Russia” today (2) (1)

7 During the last two years shares of RAO “UES of Russia” outperformed broader RTS index by 37% RAO “UES of Russia” Share price dynamics % 87.5% US cents RAO “UES of Russia” today

8 RAO “UES of Russia” Relative valuation 2005 EV/EBITDAEV/Installed capacity, $/kW Average: 5.8x Average: 984$/kW RAO “UES of Russia” today Sources: Brokers’ Estimates, Bloomberg, companies reporting

2. Reform: company transformation and market development

Finish is in sight FINISH

11 Competitive sectors Monopolies RAO “UES of Russia” Reform basics  Free price-setting  Stimulating market entry Market rules Regulated tariffs  Securing equal access to grids  Establishing market infrastructure  Generation  Sales  Transmission  Distribution  Dispatching Reform Basics: Separation of Monopoly and Competitive Sectors Company transformation and market development

12 Legislative base of reforms: Key legislation, July 2001 – Government Decree №526 «On reform of Russia’s power sector» March 2003: Five laws on power sector reform signed by President Putin and entered into force (main– №35-FZ «On the power sector») Governmental decrees and orders December 2004: Meeting of Russian government. Key decision made: preparation for the unbundling of RAO «UES of Russia» to be completed in 2006 Company transformation and market development

13 Russian Federation Minority Shareholders of the Parent Company Independent Regional Energos: Irkutskenergo Tatenergo Bashkirenergo RosEnergoAtom 10 Nuclear Plants Company transformation and market development Pre-reform Sector Structure Generation Transmission & Distribution Grids Sales 73 Regional Energos High Voltage Grid + Grid Service Central Dispatch 32 Federal Power Plants 52% 48% RAO UES

14 Target sector model Private shareholders Government Monopolies FGC (Transmission) <25% >75% Competitive Generation Other generating companies On the base of independent Regional Energos Nuclear power generating company Hydro GenCo (1) Wholesale GenCos (6) Territorial GenCos (14) 51-60%<48% 75-85% 49-40% 25-15% >52% System operator <25% >75%>75% IDC (Distribution) (4) <48% >52% Competitive market FGC – Federal Grid Company IDC – Inter-regional distribution grid company Company transformation and market development

15 Unbundling completed and Regional GenCos registered in 35 regions Unbundling continues in 25 regions Regional Energos Other assets: Grid, Dispatch, Sales, etc. Generation Assets (Regional GenCos) Territorial GenCos 10 of 14 registered HydroGenCo Formation of new generation companies Target Private Shareholder Stake: >50% Target Government Stake: >50% * Some of the assets contributed from Regional Energos Federal Power Plants Company transformation and market development Capacity ranges from 0.6 GW to 10.5 GW Annual sales ranges from US$100m to US$1300m Average capacity at 9 GW Average annual sales at US$600m 6 of 6 registered Wholesale GenCos Capacity of 22 GW Annual sales at US$700m Registered

16 Transition Market ( ) Status Quo (Nov 2003 – 2005) Market Progression  List of participants (buyers and sellers) established by the government  Regulator or RAO UES matches buyers and sellers  Tariffs are regulated  Regulated bi-lateral (vesting) contracts introduced (for the next 3-5 years)  Initial electricity volume of 85% of total electricity volumes and decreasing Regulated Market Competitive Market (5 – 15%)  Free market segment trading 5 – 15% of electricity volumes  Self regulating trading floor - ATS  Price cap set by the Regulated Market  Voluntary for generators and purchasers  No price cap Vesting Contracts Free Market (from 2009)  Full liberalization Fully Regulated Market (prior to Nov 2003)  List of participants (buyers and sellers) established by the government  Regulator or RAO UES matches buyers and sellers  Tariffs are regulated Regulated Market Competitive Market (≥15%) (Spot) Free market Regulated Market Company transformation and market development Competitive Market

17 The Reform Process Finishing line in sight Company transformation and market development Launch of vesting contracts and competitive market (spot) Competitive Market (5 – 15%) Wholesale GenCos Formation Territorial GenCos Formation Private majority Wholesale GenCos Private majority Territorial GenCos RAO UES unbundling

3. Conclusions

19 Currently/During Transition ( )Post RAO UES Unbundling ( ) RAO UES/Regional GenCos/ Federal PlantsWholesale and Territorial GenCos Pros Cons Vehicles Investing in Russian Power Sector: Investment Vehicles and Timing Conclusions

20 Reform’s final stage: Lower risk investment Conclusions

21 Reform of RAO “UES Russia” On a Corporate Mission…  … ensure a sustained GROWTH OF THE VALUE of its shares and the shares of the companies that will be established in the course of restructuring RAO “UES of Russia” is committed to… Conclusions through a successful implementation of the reform… … and increased efficiency and transparency of its operations as well as the operations of the companies established in the restructuring process

22 Conclusions Russian Power Sector: Key advantage for investors : From the swamp to the firm ground Today, electric power assets are deep in the non-market environment... … By the end of 2006 they will be available amid competitive market conditions.