Research Notes

The extraordinary meeting of UES's shareholders (EGM), at which issues of the final stage of the reorganization are to be addressed, is slated for October 26, 2007. It is to be held in the form of voting in absentia. The cut-off date was August 23, 2007. Those listed as UES shareholders as of August 23 will be entitled to cast votes and present shares for the buyback, if a negative vote is cast at least on one issue on the agenda or a shareholder abstains from voting.

The power holding's shareholders became entitled to abstain from voting and present shares for the buyback after the Russian President had made amendments to the utilities legislation. Even if a UES shareholder abstains from voting, such shareholder will be entitled to present UES shares for the buyback on the same terms as a shareholder that cast a negative vote at least on one issue on the agenda. According to the statutory provisions, shareholders that abstained from voting on the power holding's reorganization will receive shares in newly established industry entities according to the same procedure as shareholders who cast positive votes.

After the company's reorganization is complete a UES shareholder will obtain shares in 23-28 companies, depending on the voting option. Based on the results of the valuation of asset baskets, which a UES shareholder will receive depending on the voting option, we have come to the following conclusions that could be helpful in decision-making on the voting option:

1. According to our estimates, in the event of an affirmative vote, stakes of liquid WGC-TGC shares to be received by a UES shareholder will be valued nearly 3 times higher than in the case of a negative vote: 65-68% of the current value of UES shares vs. 21-22%, respectively.

2. In the event of a negative vote, Hydro-WGC and FGC will generate around 60% of the entire asset basket which a UES shareholder will receive. This option has one important disadvantage: minority shareholder stakes in Hydro WGC and FGC will be diluted, as the Russian government will contribute WGC and TGC shares to the charter capitals of these companies, which is necessary to secure the state's stake at 75% in FGC and 50% in Hydro WGC. We view the repercussions of an upcoming increase in the state's equity positions in the two companies as negative for minority shareholders and an excess share of Hydro WGC and FGC in portfolios of investors, which cast a negative vote, looks less appealing.

3. The choice of the right voting option is not at all trivial – we are inclined to advise shareholders to save efforts and abstain from voting. The value of an asset basket, which a UES shareholder will receive after the power holding is spun off in July 2008, is comparable under the various voting options. However, if an affirmative vote is cast, liquid assets (generators, Hydro WGC and FGC) will account for 79-80% of the basket, while in case of a negative vote - 72-75% of the basket. We believe that at present this is an acceptable criterion for most minority shareholders of the national power utility.

Shareholders willing to present UES shares for the buyback are required to complete the form which they received along with the voting documents (sent out in late September: http://www.rao-ees.ru/ru/investor/sobran/material/material261007/material261007_treb.doc), and send it by registered mail to the following address: Status Registrar Society, 1/64, Dobrovolcheskaya St., Moscow, 109544 or by registered mail to UES at: Bld. 3, 101, Vernadskogo Prospect (Ave), Moscow, 119256.

We reiterate our estimated fair price for UES at $1.84 per common share and $1.66 per preferred share. Our recommendation on UES shares is Buy.

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Simon Birg

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