Moscow. 20 July 2007. RAO "UES of Russia" has released the consolidated financial statements of RAO UES Group* prepared in accordance with the International Financial Reporting Standards (IFRS) for the year ended 31 December 2006.

Consolidated Balance Sheet as at 31 December 2006

During 2006, the Group's total assets increased by RUB325,537 million to RUB1,543,436 million as at 31 December 2006. Of that amount, the Group's non-current assets amounted to RUB1,259,017 million, up RUB266,821 million, and the current assets amounted to RUB279,536 billion, an increase of RUB53,833 million on 2005.

As at 31 December 2006, the property, plant and equipment of RAO UES Group stood at RUB1,217,526 million, an increase of RUB262,394 million from RUB955,132 million in 2005. The increase in the book value of PP&E was chiefly due to the recovery of the impairment reserve in the amount of RUB189,629 million**, increase in the capital expenditures on the construction of new and modernization of the existing power grid and generation facilities, and the acquisition of control over OAO "Heat Energy Company" (currently the Belgorod Regional Generation branch of OAO "TGC-4"), and the recovery of control over OAO "Kurganenergo".

Beginning from 2007, the Group adjusted its accounting policies to reflect the revaluation of PP&E in its financial statements, which will lead to an increase in the value of the Group's PP&E and net assets.

The reporting period saw an improvement in the Group's current ratio, with the current assets exceeded the current liabilities by RUB24 billion as of 31 December 2006.

The accounts payable in 2006 totalled RUB112,128 million, which represents an increase of RUB9,680 million from 1 January 2006. The increase in payables was largely driven by the increase in debts owed to suppliers and contractors.

As at 31 December 2006, the non-current and current debt of RAO UES Group amounted to RUB209,712 million, up RUB82,219 million on 31 December 2005. The increase was due to new loans and credit facilities raised by the Group's entities, as well as bond issues (specifically, Mosenergo, FGC, MOESK, OAO "HydroWGC", WGC-5, and WGC-3) to finance the construction and modernization of the energy facilities.

Consolidated Statement of Operations for year ended 31 December 2006:

The Group's revenues in 2006 amounted to RUB894,896 million, an increase of RUB130,241 million (or 17%) compared to 2005. The Group's operating expenses in 2006 grew by RUB124,116 million (18%) to RUB820,556 million.

Such dynamic of revenues and expenses was attributable, on the one hand, to the increased power consumption across the country, which led to an increase in the electricity and heat sales, and on the other hand, to the growing fuel prices and fuel consumption.

EBITDA (without the accounting for the recovery of the impairment reserve**) of RAO UES Group in 2006 amounted to RUB165,590 million, an increase of RUB18,567 million on 2005. This was due to the fact that the operating income grew faster than operating costs (without depreciation), as well as the reversal of the tariff imbalance*** after the NOREM launch.

Over the reporting period, the Group's operating profit grew in year-on-year terms by RUB209,655 million to RUB282,269 million. The profit before profit tax declined by RUB211,545 million to RUB266,080 million.

In 2006, the Group's net profit (less profit tax expense) in 2006 grew by 5.9 times (or RUB124,141 million) to RUB149,518 million. The increase in the net profit was due to the recovery of the impairment reserve (by RUB189,629 million)**, the tariff imbalance of 11,708 million***, and to proceeds from the sale of their non-core assets and assets that are not part of the Group's intended structure. This growth was compensated by the increase in the amount of the deferred profit tax in respect of recovery of the impairment reserve (by RUB47,733 million)** and the investments in some of the Group's subsidiaries (by RUB36,314 million).

Specifically, the net profit of RAO UES Group attributable to the shareholders of RAO "UES of Russia" grew 4.3-fold during 2006 to RUB83,371 million. The net profit attributable to the minority interest of the Group grew almost 10.8-fold to RUB66,147 million, which was due to a significant increase in earnings of the Group's companies which have a considerable minority interest.

Consolidated Cash Flow Statement for the year ended 31 December 2006

The cash flow from operating and financing activities in 2006 totalled RUB154,543 million, an increase of RUB45,346 million from 2005 (RUB109,197 million). As a result of the launch of a large-scale investment programme, RAO UES Group companies spent RUB137,567 million in investments, up RUB29,651 compared to 2005.

Consolidated Statement of Changes in Equity for the year ended 31 December 2006

In October 2006, OAO "WGC-5" issued RUB11,919 million of new shares which were sold in an IPO. After the IPO, the Group's interest in WGC-5 declined from 87.7% to 76%, and the Group's IFRS Consolidated Statement of Changes in Equity for 2006 showed a decrease in the minority interest by RUB4,099 million. In the course of the Group restructuring in 2007, the Group's interest in most WGCs and TGCs will decline after the sale of stakes in these companies or public offerings of their shares. According to the Group's accounting policy, all effects of changes in minority interests will be reflected in the Statement of Changes in Equity.

The statements have bee audited by ZAO "PricewaterhouseCoopers Audit", approved as the Group's external auditors by the AGM of RAO "UES of Russia" shareholders.

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* RAO UES Group consists of RAO "UES of Russia" and its subsidiaries and dependent companies. The Group's IAS/IFRS financial statements have been prepared since 1997.

** In accordance with the IFRS Accounting Policy of RAO UES Group, the property, plant and equipment is stated at the depreciated cost lest impairment. The deemed (historical) cost of the Group's PP&E under the IAS was initially determined by a third party valuation as at 31 December 1997 performed by a appraisers' consortium led by Ernst & Young and Deloitte & Touche. In 1998, the Group recognized impairment loss of approximately 50% of the deemed cost of PP&E.

The impairment provision as at 31 December 2005 was RUB593,298 million. At each reporting date the Group management assesses whether there is any indication of impairment of property, plant and equipment.. If any such indication exists, management estimates the recoverable amount of the property, plant and equipment. According to the IFRS requirements, an impairment loss recognised in prior years is reversed if there has been a positive change in the estimates used to determine an asset's recoverable amount.

As of 31 December 2006, the Group's management, for the purposes of assessing the impairment, reviewed the following positive changes in the estimates:

·         anticipated increase in the electricity and heat consumption;

·         significant increase in the market capitalization of OAO RAO "UES of Russia";

·         favourable changes in the regulation of the competitive electricity trading segment and the planned increase in the share of electricity sold in this segment;

·         forecasts of increases in electricity and heat tariffs.

From the above, the Group management concluded it was necessary to calculate the recoverable value of property, plant and equipment.

The recoverable value is calculated using the appraisal of the property, plant and equipment as of 1 January 2007 prepared by a consortium consisting of Ernst & Young and Deloitte & Touche, as well as the Scenario Conditions for Development of the Electricity Industry and RAO UES Holding for 2007-2011 and the preliminary long-term price forecast until 2030.

Based on the calculation of the recoverable value of PP&E as of 31 December 2006, the Group recognized a net reversal of RUB189,629 million of a previously recognized impairment. The additional deferred profit tax relating to the reversal of the impairment was recognized in the Group's financial statements at RUB47,733 million.

*** FOREM, the Federal wholesale electricity market (for the period prior to 1 September 2006) had different tariffs for contractors selling, when compared to those purchasing. An imbalance was generated between the FOREM participants since 1997. Considerable uncertainty surrounded the operation of the market and the Group considered it probable that an outflow of economic benefits would be required for the tariff imbalance. As a result the Group recorded a liability for the unbalanced settlements in respect the electricity the Group had purchased from outside contractors.

As at 1 September 2006, a new liberalized model of the wholesale and retail electricity (power) markets (NOREM) has been launched. The Group management has re-assessed the likelihood that the Group might be held responsible to make payments to contractors for the imbalance coming from FOREM, and has concluded that the outflow of economic benefits was unlikely in connection with the liabilities that arose in connection with the tariff imbalance. Consequently, the previously recognised liability in the amount of RUB11,708 million as at 1 September 2006 was de-recognised as a liability and the reversal recognised in the statement of operations as a "reversal of tariff imbalance".