RAO UES of Russia : Towards Economy Of Growth Through Reform Of Energy Sector

1. RAOUESof Russia: Towards Economy Of Growth Through Reform Of Energy Sector Presented by A. B. Chubais Chairman of the Board, RAOUES of Russia Brunswick UBS «Russia: Investing into Economy of Growth» September 28, 2004

2. Nationwide energy consumption growth in Russia Increase in power generation by power plants comprising the RAO UES of Russia holding RAOUES of Russia: Growth Dynamics Source: RAOUES ofRussia Forecast for further growth of energy consumption in Russia 4 3 - Optimistic scenario: 1290 bln kWt.h towards2020 (on average, 2,76% a year beginning from 1998) - Moderate scenario: 1110 bln kWt.h towards 2020 (on average, 1,54% a year beginning from 1998) Source: Energy strategy of Russia 2 1 % 0 -1 -2 1999 2000 2001 2002 2003 2004 RAO UES of Russiaprovides for approximately 70% of power generation and consumption in Russia

3. RAO UES of Russia Group: Financial Showing For The Past Years (IAS) 25 20,1 25 % 20,14 Mln$ 20 20 15 10,9 15 10 5,06 8,015 10 5 4,2 2,2 0 5 -5 0,4 0 -10 - 11 - 0,87 -15 -5 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Revenues EBITDA margin Income (loss) from operations Operating margin EBITDA

4. Corporate Center Reform Management Center Business Unit 1 Business Unit 2 Business Unit «Grids» Business Unit «Hydro Generation» Business Unit «Service» time is pressing Management Board Improvement of Management: New Corporate Configuration of RAO UES SO-CDU Thermal WGCs (3), TGCs (8), Corresponding Regional Energos Thermal WGCs (3), TGCs (6), Corresponding Regional Energos Federal Grid Сompany, IDCs, Export-import, Foreign assets Hydro WGCs (4), Hydro Power Stations under construction Repair and Service Companies The new organizational structure of RAO UES of Russia must stimulate the reform progress in the electric power sector of Russia

5. time is pressing Transition to a new management system based on Key Performance Indicators (KPI). Increase in motivation and personal responsibility of the company management (including the system of KPI-based bonuses and RAO UES share options). 2004 planned (approved by the RAO UES Management Board on Sept 20, 2004) 38.34 New Corporate Configuration of RAO UES: Growth in Efficiency Profit before taxation: Results of 2003; Forecast and dynamics for 2004 BlnRoubles Planned effect from introduction of modern management techniques: 2003 actual 2004 planned (initial business plans of subsidiary companies) 12,87 23.96 25.47 (prior to establishment of business units) (updated 3 months into functioning of business units)

6. time is pressing Purchase of Energy Assets in Other Countries Georgia: about 20% of generating plants and 35% of distribution facilities have been purchased or assumed under trust management; Armenia: Assets comprising about 85% of that country’s power generating facilities have been purchased or assumed under trust management; Kirghizia, Tadjikistan: Talks are unfolding about purchasing assets (completion of energy facilities). Kazakhstan: Consummation of a deal on purchase of a share in a large power plant.

7. time is pressing «Lesser Energy Business»: Results and Perspectives JSC «RKS» Established in May 2003 Facts Perspectives Concentration of the core business in 14 cities of Russia. Gradual expansion of core business geography (up to 30 cities). Increase in sales volume up to $1 billion in 2005. Chief objective: break-even business plan for 2005, generation of net profit starting from 2006. Sales volume for the first year of operation: 14 billion roubles Net loss: 117 million roubles

8. Growth and Investment Factors in RAO UES: Pros and Cons - + Reform as the key factor of a competitive energy market Slow pace of reform High potential of capitalization increase due to undervaluation of company stocks High-capacity and ever-growing consumption market Cross funding Risks associated with imperfect legislation on company restructuring

9. Energy Sector Reform: Latest events + + Territorial Generation Companies (TGC) Establishment of new industry units Wholesale Generation Companies (WGC) Establishment of Territorial Generation Companies started: - RAO UES of Russiaestablishes a 100% owned subsidiary joint-stock company (TGC) - Pays for 50%+1 shares of the new company’s charter capital. - Unpaid shares pass into the ownership of the TGC. - Shareholders of “Energo” joint-stock companies, except for RAO UES of Russia obtain the right of purchasing 50% - 1 shares at par value. Charter capital of «TGC-9» JSC: 4 200 000 roubles (generating assets of«Permenergo» and «Sverdlovskenergo» to be leased to the concern). Charter capital of «TGC-14»: 3 100 000 roubles (generating assets of «Buryatenergo» and «Chitaenergo» to be leased to the concern). Establishment of Wholesale Generation Companies started: - Charter capital of«WGC-5» JSCcomprises 29 407 170 459 roubles; - Initially, 100% of company shares remain in the ownership of RAO UES of Russia. - Shares are paid for by material assets and money(4 228 964 180 roubles).

10. Establishment of Interregional Distribution Companies started: - IDCs will be established as 100% owned subsidiary concerns of RAO UES of Russia. - Charter capitals of the IDCs will be paid for by shares of distribution grid companies, assigned at the time of restructuring the regional energy systems. - For transition period the IDC shares will be passed under trust management of the Federal Grid Company. - Functional division was initiated in 46 energy enterprises («Energos»). - Shareholders approved of the reform program in 32 energy systems. - Three new «Energo»-based companies completed state registration. Exchange floor of the trading system administrator (ATS): - Started operation on November 1, 2003. - Entered the Top 10 list of world’s largest energy exchanges. - Unites over 80 participant companies - Expected sales volume for 2004 – around $850M. Energy Sector Reform: Latest events + + Establishment of new industry units: Interregional Distribution Companies (IDC) Reform of regional energy systems Creation anddevelopmentof a competitive energy market

11. + Energy Market: A Positive Trend Source: ATS World Top 10 Exchange Floors Free Market of Energy 180 600 Mln MWth Total (forecast) for year 522 1327 2616 3781 4383 3987 3580 3605 3844 4217 Spot Market # 160 517,55 508,8 490,85 498,93 493 500 1 OMEL (Spain) 229 2003 140 491,47 494,40 481,44 2 NEM (Australia)* 184 (2004) 477,79 120 3 PJM (USA) 119 2003 400 431,43 100 4 Nord Pool (Scandinavia) 118 2003 Mln KWt/h 393,59 Roubles/MWth 80 Free trade volume 5 NYISO (USA) 104 2002 300 276,94 60 6 GME (Italy)* 67 (2004) Free market prices 264,25 40 7 AESO (Canada)* 62 (2004) 200 251,95 Regulated market prices 20 8 EEX (Germany)* 56 (2004) 9 ATS (Russia)* 45 (2004) 0 100 10 33,7 2003 NEPOOL (USA) February December November January April August July June March May *Forecasted volumes

12. 940 538 473 160 116 EV/EBITDA (2004 Forecast) Mcap/kW (Beginning of Septemberof 2004) RAO UES Discount in relation to foreign companies’ EV/EBITDA average value –from 43% to 62% RAO UES capitalization per 1 KWt of installed capacity is several times lower than that of foreign energy companies RAO UES of Russia: Potential for Capitalization Increase + Source: RAOUES of Russiabased onIBES, Nelson, JCF estimates 7,5 8 1000 900 6,5 6,6 7 5,9 800 6 ENDESA 700 E.ON 5 E.ON 600 CEZ 4 500 2,9 400 3 CEMIG CEMIG 300 2 ENDESA 200 RAO UES 1 100 CEZ RAO UES 0 0

13. + Previous decisions on energy system reform andinterregional framework of new companies are not to be reviewed. Slow pace of reform Quality of reform still preferred over pace of reform Making it legal by creating a system of action grants. Cross funding Elimination of cross funding within several years Amending the legislation (Tax Code, Law on Joint-stock Companies, other legislative acts). Risks associated with imperfect reform legislation Elimination of conflict betweencorporate and legislative norms Removing the «Cons» -

14. New Initiative of RAO UES: Concept of «Managed Expansion» of the Energy Market Proposals Measures Effects • Transformation of the federal wholesale energy market (FOREM) into a system of bilateral agreements. • Transfer of the entire regional power generation system to the FOREM • Gradual reduction of the total contractual supply volumes through governmental decisions (within 3 to 5 years). • Employment of bilateral agreements for protection of selected consumer groups • Controlling energy price upsurge risks. • Smooth accommodation of consumers and producers • to market conditions. • Retaining control • over energy supply • to the two most vulnerable • consumer groups: • major energy-intensive • industrial plants • and the residential sector. Withholding from immediate transition to the target model of market and its substitution with managed expansion of the energy market.

15. Thank you for your attention