initiation 06_25_2008_glitnir
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Russian power utilitiesUncertainty means opportunityJune 25, 2008
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Utilities
Initiation
Sector report
June 25, 2008
Russian power utilities: Uncertainty means opportunity
Over the last several months, the stock performance of utility companies has been heavily
impacted by acquisition activity and the restructuring of UES. Once these factors have been played
out (which, for most stocks, we expect by autumn), the companies’ underlying fundamentals
should become the main driver of their share price performance.
Just a week before UES will cease to exist, the future earning potential of utility companies is
hardly more certain than it was when the reform began back in 2001. The government has yet to
decide on key issues that will determine cash flow to shareholders: namely, the capacity market for
generation companies, and the parameters of regulatory asset base (RAB) regulation for grid
companies.
These crucial decisions essentially involve political will. The state is facing a trade-off between
keeping electricity tariffs low, which would help restrain inflation, and switching to market-based
pricing methods, which would imply a rise in the effective electricity price paid by consumers. The
latter would create stimulus for investment, power saving, and improved efficiency at utility
companies.
While the government is likely to create all the conditions necessary to attract new investments,
existing assets face the highest regulatory risk in our view. In the generation segment the major
risk is discrimination between old and new generators; in the grid segment, the major risk is the
initial value of the regulatory asset base, which is to be determined by the regulator.
We expect the generation segment’s revenues to be fully liberalised by 2014 and RAB regulation
to be completely introduced in the distribution and transmission segments by 2011 and 2012,
respectively. Our assumptions imply an 18.8% CAGR in 2008-2014 of the total price received by
generators, and an average tariff CAGR through the RAB introduction date of 14.9% in both the
distribution and transmission segments.
Under these assumptions we are initiating coverage on 51 currently listed utility stocks with 36
BUY, 6 HOLD, and 9 REDUCE recommendations.
Upside is distributed unevenly across the companies, with a 58% average for generation
companies and a 38% average for distribution companies. At current OTC forward prices, we see
a modest upside of 10% for the Federal Grid Company (FSK).
We expect the following events to become potential triggers for utility stocks through the end of this
year:
Announcement of capacity market rules for generation companies
Announcement of RAB regulation parameters for several pilot distribution companies
TOP PICKS
Ticker
Market
price,
Jun 19 12m TP Upside
Generation
OGKB RU 0.088 0.172 95%
OGKD RU 0.080 0.166 108%
OGKE RU 0.128 0.209 64%
MSNG RU 0.177 0.278 57%
TGKE RU 0.00078 0.00165 112%
TGKG RU 0.090 0.168 87%
TGKK RU 0.00112 0.00215 92%
KZBE RU 0.0235 0.0490 109%
TGKM RU 0.0083 0.0198 140%
KRSG RU 4.0 10.1 153%
Distribution
MRKC RU 0.0519 0.0840 62%
MRKK RU 11.5 28.1 145%
MRKP RU 0.0141 0.0226 61%
MRKS RU 0.0183 0.0291 59%
MRKV RU 0.0073 0.0191 162%
MRKZ RU 0.0111 0.0218 96%
Integrated
BEGY RU 1.59 4.04 155%
IRGZ RU 0.88 2.14 143%
NVNG RU 71 159 125%
CONTACT
Ilya Koupreyev
+7 495 545 0535
Dmitry Astakhov
+7 495 545 0535
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CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 2/183
Table of contents
Executive summary ....................................................................................... 4
Target prices and investment recommendations ....................................... 9
Overview: Russian utilities at a glance ..................................................... 16
Lack of capacity: Main driver behind the reform ...................................... 18
The reform .................................................................................................... 21
Restructuring .......................................................................................................................... 21
Formation of target sector structure ........................................................................................ 23
UES breakup .......................................................................................................................... 31
Privatisation ........................................................................................................................... 36
The switch to market-based pricing ........................................................................................ 41 Generation: The road to the free market ............................................................................ 43
Distribution: The switch to RAB .......................................................................................... 51
Fuel supply ................................................................................................... 54
Valuation ....................................................................................................... 58
Macro assumptions ................................................................................................................ 58
Generation companies ........................................................................................................... 60 Power consumption ........................................................................................................... 60
Production.......................................................................................................................... 62
Electricity prices ................................................................................................................. 64
Heat revenues ................................................................................................................... 70
Costs ................................................................................................................................. 71
Capex ................................................................................................................................ 73
Taxation of hydroelectric plants .......................................................................................... 74
Discount rate and terminal growth ...................................................................................... 74
Valuation results ................................................................................................................ 75
Sensitivity analysis ............................................................................................................. 79
Distribution companies ........................................................................................................... 81 Depreciated replacement cost (DRC) estimate................................................................... 81
Capex ................................................................................................................................ 84
Discount rate ...................................................................................................................... 85
Valuation results ................................................................................................................ 87
What do our valuation assumptions imply by 2011? ........................................................... 88
Sensitivity analysis ............................................................................................................. 89
Foreign peer comparison ................................................................................................... 90
Transmission companies ........................................................................................................ 92 Depreciated replacement cost (DRC) estimate................................................................... 92
Capex ................................................................................................................................ 92
Discount rate ...................................................................................................................... 93
Valuation results ................................................................................................................ 93
What do our valuation assumptions imply by 2012? ........................................................... 94
Sensitivity analysis ............................................................................................................. 95
Foreign peer comparison ................................................................................................... 95
Independent AO-energos ....................................................................................................... 97
Far East Energy Company ..................................................................................................... 97
UES ....................................................................................................................................... 98
MRSK Holding ..................................................................................................................... 100
Far East Energy Holding ...................................................................................................... 100
InterRAO .............................................................................................................................. 101
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 3/183
Appendix 1: Company-specific issues ................................................... 102
Appendix 2: Selected financials, distribution companies .................... 104
Appendix 3: Company profiles ................................................................ 105
OGK-1 .................................................................................................................................. 106
OGK-2 .................................................................................................................................. 109
OGK-3 .................................................................................................................................. 112
OGK-4 .................................................................................................................................. 115
OGK-5 .................................................................................................................................. 118
OGK-6 .................................................................................................................................. 121
TGK-1 .................................................................................................................................. 124
TGK-2 .................................................................................................................................. 127
Mosenergo (TGK-3) ............................................................................................................. 130
TGK-4 .................................................................................................................................. 133
TGK-5 .................................................................................................................................. 136
TGK-6 .................................................................................................................................. 139
TGK-7 .................................................................................................................................. 142
TGK-8 .................................................................................................................................. 145
TGK-9 .................................................................................................................................. 148
TGK-10 ................................................................................................................................ 151
TGK-11 ................................................................................................................................ 154
Kuzbassenergo (TGK-12) .................................................................................................... 157
TGK-13 ................................................................................................................................ 160
TGK-14 ................................................................................................................................ 163
Bashkirenergo ...................................................................................................................... 166
Irkutskenergo ....................................................................................................................... 168
Novosibirskenergo ............................................................................................................... 170
RusHydro ............................................................................................................................. 172
Krasnoyarsk GES ................................................................................................................. 175
Appendix 4: List of figures....................................................................... 177
Disclosures ................................................................................................. 181
Disclaimer ................................................................................................... 182
Contact Information ................................................................................... 183
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 4/183
Executive summary
The reform
Historically, the utilities sector was heavily dependent on the state. This is because almost the
entire sector was controlled by state-owned corporations, and revenues were completely
regulated by the government.
The need to construct new capacities and modernize old power plants has forced the
government to implement a thorough reform of the sector. The reform started in 2001 and
focused on three types of tasks: restructuring, privatisation, and the switch to market-based
pricing.
Restructuring
The restructuring process involves the separation of potentially competitive companies
(generation and supply) from natural monopolies (distribution and transmission grids).
Restructuring is nearly complete: 72 vertically-integrated companies have been broken up and
regrouped into new entities that operate in separate segments: 21 generation companies, 11
interregional distribution companies, and one transmission company (the Federal Grid Company,
or FSK). The restructuring process will be completed on July 1, 2008. On this date, UES, the
largest utility company in Russia, will cease to exist.
Privatisation
According to the reform, thermal generation companies are to be privatised. The privatisation
option remains open for distribution grids; however, hydroelectric and nuclear power plants as
well as the transmission grid are to remain under state control for the foreseeable future.
Generation companies are privatised in two ways:
1. Through additional share issues and the sale of state-attributed stakes (stakes in
generation companies that are owned by UES and correspond to the state’s interest in
UES). To date, 19 of the 20 thermal generation companies have completed additional
share issues or have had a state-attributed stake in them sold by UES. The remaining
company, OGK-1, is expected to be privatised by the end of 2008.
2. Through the UES breakup, during which UES’s three largest minority
shareholders Gazprom, Norilsk Nickel, and SUEK will receive stakes in selected
generation companies
To date, 44% of the Russian generation sector has been privatised.
Market liberalisation
The outdated cost-based tariff regulation system is to be replaced with market-based
mechanisms that would encourage investments in the sector. These principles involve the
creation of free markets for the potentially competitive segments: generation (wholesale market)
and supply (retail market). For naturally monopolistic segments distribution and transmission
grids tariff regulation is to be switched to an asset-based method such as the regulatory asset
base (RAB) method, which would provide shareholders with market return on invested capital.
Generation
Currently, compensation for generators is composed of two parts: electricity price and capacity
payment. The system is designed in such a way that the electricity price covers the generators’
variable costs (mainly fuel costs) while the capacity payment covers fixed costs and the cost of
capital. Theoretically this system implies that nearly 100% of generators’ free cash flow depends
solely on capacity payments.
The reform envisages the creation of free markets for both electricity and capacity. To date,
however, the government has made decisions regarding the liberalisation of the electricity market
only. The New Wholesale Market of Electricity and Capacity (NOREM) was launched in
September 2006. According to the schedule approved by the government, the portion of
electricity produced by existing generators that is sold at free prices will gradually increase from
0% in 2006 to 100% in 2011 (on July 1, 2008, this share will reach 25%).
The capacity market is to be liberalised at the same pace as the electricity market. However, the
government is still discussing the rules for the capacity market, and 100% of capacity payments
(the most important source of earnings for generators) is still regulated. Given that in the current
market model, capacity payments determine the free cash flow of generators, the fundamental
value of generation companies is still fully dependent on the state’s will.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 5/183
Heat revenues, which make up to 62% of the top line for territorial generation companies (TGKs),
are not affected by the reform of the electricity sector. However, the government may start to
make changes in heat segment regulation similar to those it has made in electricity generation.
Grid segment
On June 18, 2008, the government signed Decree No. 459, which sets the general framework for
the introduction of the regulatory asset base (RAB) tariff-setting approach in the grid segment.
The RAB approach implies that shareholders earn a market-based return on invested capital; it
also has imbedded mechanisms to encourage cost-cuts and improvements in operational
efficiency.
Prime Minister Vladimir Putin recently announced that the transition to the RAB method is
expected to be made for several pilot distribution companies beginning July 1, 2008, and will be
completed for all distribution companies by 2011. The government has not yet announced the
parameters of the RAB method, such as an appraisal of the distribution companies’ assets and
regulatory WACC.
There have been no official announcements regarding the introduction of the RAB method for
transmission companies, but it seems logical they will undergo changes similar to those in the
distribution segment.
Our view and valuation
The short-term stock performance of wholesale generation companies (OGKs), TGKs, and UES
is impacted by temporary and technical factors, including the sale of UES’s generation assets to
strategic investors and the UES breakup. We expect these factors to disappear by autumn of this
year; afterwards we expect investors to shift their focus to cash flow and the fundamental value
of assets.
We used the DCF method to value generation companies, and an assets-based approach to
value distribution and transmission grids. We valued vertically integrated independent energy
companies as the sum of the parts of their respective generation and grid assets.
Generation segment
Supply and demand of electricity
We forecast electricity consumption would advance at a CAGR of 2.7% through 2020, which is
one-third below the government’s forecast of 4.1%. The government’s estimates seem overly
aggressive to us, as over the last 10 years (which have been characterized by strong GDP
growth), electricity consumption has shown an annual growth rate above 4.1% only once.
Furthermore, the Russian economy is one of the most energy intensive in the world, and we feel
it has unrealized energy-saving potential.
Figure 1: Power consumption, government forecast vs. Glitnir
Source: Ministry for Industry and Energy, Glitnir estimates
Unfortunately, the government’s plans for construction of new capacity are directly related to its
forecast of electricity consumption. The government has developed a general scheme for
allocating power facilities up to 2020, which envisages a 65% increase of installed capacity.
Based on this scheme, UES has required that the new owners of OGKs and TGKs sign special
capacity-delivery contracts obliging them to fulfil their respective investment programs. We
expect that commissions of new capacity will outpace growth of electricity demand in the near
term; this would put pressure on existing generators’ load factors within two to seven years.
600
800
1 000
1 200
1 400
1 600
1 800
2 000
TW
h
Government base scenario Glitnir forecast
CAGR base 5.2%
CAGR base 3.6%
CAGR base 3.7%
CAGRGlitnir 3.4%
CAGR Glitnir 2.4%
CAGR Glitnir 2.5%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 6/183
We believe the generators will finish projects that have already been started, but projects that
have not been started are likely be amended or even cancelled if the observed electricity
demand falls short of the government’s forecast. Under our growth assumptions for electricity
demand, we expect commissions of new power plants to virtually stop in 2014-2016 and existing
generators’ load factors to recover by 2017-2018.
Figure 2: Load factors, generation companies
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
Electricity tariffs
We modelled electricity prices and capacity payments separately for each generator. Our
assumptions are as follows:
1. The amount of electricity sold at free prices will expand in line with the government-
approved schedule (i.e. it will reach 100% by 2011).
2. The capacity market will start to function in 2009. The amount of capacity sold at
market prices will increase according to the same schedule established by the
government for the electricity market (i.e. 30% starting January 1, 2009, to reach 100%
in 2011).
3. Free electricity prices will move towards levels that correspond to the fuel cost of a
new entrant.
4. Free capacity payments will move towards levels that correspond to the sum of the
fixed cost and cost of capital of a new entrant.
5. In European Russia, a new entrant is a gas power plant (assumed construction cost of
USD 1 060/kW). In Siberia, a new entrant is a coal power plant (assumed construction
cost of USD 1 380/kW).
However, we estimate there is a gap between the current average regulated capacity payment
and the theoretical market-based capacity payment (related to a new entrant’s costs) of 3.2x for
European Russia and 6.7x for Siberia. This means that, assuming 30% of capacity is sold at free
prices in 2009, an immediate unrestricted switch to market-based pricing for capacity would drive
the effective total price received by generators up 60% in European Russia and up 122% in
Siberia in one year. We believe the state would find such a sharp hike unacceptable, and
therefore we expect it to put a temporary price cap on free capacity payments for existing
generators in order to ease the transition to unregulated prices. We expect that the market-based
capacity payment for existing generators will be discounted 65-70% in 2009 relative to new
generators, and that this discount will gradually be reduced to 0% by 2014, which would signify
the complete liberalisation of the generation segment’s revenues.
Overall, our assumptions on the electricity and capacity markets imply a total effective electricity-
price CAGR of 17.7% in European Russia and 26.1% in Siberia in 2009-2014.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Hydro existing Nuclear existing
CHP existing GRES existing
New generation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Hydro existing CHP existing
GRES existing New generation
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 7/183
Figure 3: Effective electricity prices
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
Heat regulation
For valuation purposes we assumed the heat segment would remain under state regulation for
the foreseeable future; however we expect the operating profitability of the heat segment will
gradually expand from an average of 8.4% in 2006 to 13.0% in 2011. The probability of
deregulation of the heat market or the switch to a regulatory approach that allows for adequate
return on invested capital creates upside risks to our valuation.
Taxation of hydroelectric power plants
We expect the government will extract the huge profits that otherwise would be earned by
hydroelectric generators in the liberalised market through taxation. For valuation purposes we
assumed hydro assets would be taxed at a corporate profit tax rate of 60% in 2012 (vs. the
normal rate of 24%).
Cost of equity
Due to the high degree of uncertainty regarding the future rules of the capacity market and the
probability of government intervention, we consider generation a risky industry. We estimate the
cost of equity of generation companies at 13.4-16.9% (10.9% market risk + company-risk
premium), depending on corporate governance and liquidity risks specific to each company.
We applied a RROE of 12.4-13.9% in the valuation of distribution companies, and 12.4% for FSK
Valuation results
Our per-kilowatt valuation of generation companies implies the following relationships (based on
averages for respective asset groups):
1. OGKs’ coal-fired power plants (USD 760/kW) have a 10% premium over gas-fired
power plants (USD 689/kW), mainly because gas prices are expected to outperform
coal prices going forward.
2. OGKs’ power plants located in Siberia (USD 705/kW) have a 12% premium over those
in European Russia (USD 627/kW), mainly because of the difference in new entrants’
construction costs between those regions.
3. RusHydro (USD 1 038/kW) has a 64% premium over OGKs (USD 633/kW) as
hydroelectric power plants receive the same electricity prices as thermal plants but
bear no fuel costs.
4. TGKs (USD 771/kW) have a 22% premium over OGKs (USD 633/kW), as they
produce significant volumes of heat in addition to electricity, while OGKs have
relatively small heat capacities.
Distribution and transmission grids
We expect the RAB model will be implemented by 2011 for all distribution companies, and by
2012 for FSK.
0
20
40
60
80
100
120
US
D/M
Wh
Average effective capacity payment
Average effective electricity price
0
10
20
30
40
50
60
70
80
90
100
US
D/M
Wh
Average effective capacity payment
Average effective electricity price
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 8/183
A key issue determining the fair value of grids is the initial valuation of existing assets for tariff-
setting purposes: the ―initial RAB.‖ We based our valuation on an independent appraiser’s
estimates of grid-replacement cost and cross-checked these estimates against foreign peers for
validity. To get the current fair value of grid assets, we estimated the RAB for each company as
of the RAB introduction date (we assumed it would equal the company’s fair enterprise value as
of that date) and discounted it back to the present. We did not include in the RAB assets
financed by connection fees, which is in line the government’s recently approved Decree No.
459; therefore this source of short-term profit appears to have virtually no impact on the fair
values of electricity grid companies.
The state and UES are going to pump about USD 18.3 bn into the charter capital of FSK in a
series of additional share issues; the bulk of this is cash proceeds from the sale of state-
attributed stakes in generation companies. These funds will be spent on FSK’s massive capex
program. However, as the current regulatory framework does not provide FSK shareholders with
an adequate return on invested capital, we believe the capex presents significant value-erosion
risks. We estimate FSK’s target price could have been 26% higher if the company had not made
any capital expenditures until switching to the RAB model.
Independent energy companies
Investors should take into account that independent energy companies own distribution and
transmission grids in addition to power plants. We estimate grids add some USD 76-227/kW to
the value of the generation assets controlled by independent energy companies.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 9/183
Target prices and investment recommendations
Figure 4: Valuation summary, Russian generation
Source: RTS, Glitnir estimates
2008e 2009e 2010e 2008e 2009e 2010e
Cur-
rent
Tar-
get
Cur-
rent
Tar-
get
Russian thermal generation companies
OGK-1 Russia OGKA RU common Buy USD 0.115 0.132 0.0903 46% 4 029 4 228 18.0 8.8 3.9 39.8 16.2 5.9 444 631 84 120
OGK-2 Russia OGKB RU common Buy USD 0.149 0.172 0.0880 95% 2 880 2 488 44.8 9.7 4.9 neg 28.5 11.1 286 582 52 105
OGK-3 Russia OGKC RU common Buy USD 0.141 0.161 0.116 39% 5 520 2 386 13.5 9.8 9.7 27.5 24.0 27.1 281 471 74 125
OGK-4 Russia OGKD RU common Buy USD 0.146 0.166 0.080 108% 5 041 3 593 20.5 7.0 2.9 89.3 18.4 6.2 416 1 005 66 160
OGK-5 Russia OGKE RU common Buy USD 0.186 0.209 0.128 64% 4 528 4 409 20.0 11.6 6.5 67.9 26.6 11.5 509 826 115 187
OGK-6 Russia OGKF RU common Buy USD 0.0885 0.102 0.078 30% 2 516 2 071 49.8 26.3 13.5 neg neg neg 229 300 60 79
TGK-1 Russia TGKA RU common Hold USD 0.00132 0.00151 0.00134 13% 5 141 4 322 35.3 7.1 3.5 neg 16.6 7.2 688 757 166 182
TGK-2 Russia TGKB RU common Buy USD 0.00120 0.00136 0.00100 36% 1 461 1 249 16.5 4.8 2.9 65.5 10.1 5.6 484 664 123 169
TGK-2 Russia TGKBP RU preferred Hold USD 0.000734 0.000832 0.000725 15%
Mosenergo
(TGK-3)Russia MSNG RU common Buy USD 0.244 0.278 0.177 57% 7 036 6 840 9.2 5.4 4.6 23.0 10.4 8.8 615 966 107 169
TGK-4 Russia TGKD RU common Buy USD 0.00125 0.00142 0.00105 35% 2 044 1 879 18.3 6.8 3.7 136.5 16.4 7.2 567 763 148 198
TGK-4 Russia TGKDP RU preferred Buy USD 0.000623 0.000707 0.000555 27%
TGK-5 Russia TGKE RU common Buy USD 0.00145 0.00165 0.00078 112% 953 559 420.9 7.0 2.5 neg 36.7 7.4 227 628 51 140
TGK-6 Russia TGKF RU common Buy USD 0.00089 0.00102 0.00073 39% 1 357 972 62.7 13.3 8.5 neg 178.7 40.0 309 454 78 114
TGK-7 Russia TGKG RU common Buy USD 0.148 0.168 0.090 87% 2 698 2 431 15.9 8.4 5.6 119.7 22.2 11.6 353 676 91 174
TGK-8 Russia TGKH RU common Reduce USD 0.00128 0.00146 0.00167 -12% 3 433 2 771 52.6 18.1 6.7 neg 62.4 15.2 769 606 188 148
TGK-9 Russia TGKI RU common Buy USD 0.000390 0.000439 0.000300 46% 2 347 1 867 11.8 7.0 6.7 34.1 16.1 16.3 569 877 115 177
TGK-10 Russia TGKJ RU common Buy USD 5.87 6.65 4.61 44% 4 051 2 335 18.1 7.1 4.3 107.6 24.8 13.3 718 1 179 113 185
TGK-11 Russia TGKK RU common Buy USD 0.00184 0.00215 0.00112 92% 574 583 5.1 4.9 5.7 9.7 9.7 13.9 288 535 72 134
Kuzbassenergo
(TGK-12)Russia KZBE RU common Buy USD 0.0428 0.0490 0.0235 109% 1 656 1 433 24.6 12.5 8.2 neg 122.2 45.1 327 716 62 135
TGK-13 Russia TGKM RU common Buy USD 0.0173 0.0198 0.0083 140% 1 313 1 157 24.1 11.1 9.5 neg 38.8 16.8 467 765 100 164
TGK-14 Russia TGKN RU common Buy USD 0.000434 0.000501 0.000325 54% 253 245 6.8 6.5 6.7 13.4 13.4 14.2 381 578 104 157
Kuban Gen. Co. Russia KBGR RU common Buy USD 16.8 19.1 11.5 66% 205 213 304.3 18.2 1.8 neg neg 2.8 306 494 40 65
Russian thermal gen. co. average 44.4 9.7 6.0 61.2 36.4 15.0 446 699 98 151
WA 28.6 9.5 5.6 62.0 29.3 13.4 497 755 105 156
Russian hydro generation companies
RusHydro HYDR RU common Buy USD 0.096 0.110 0.085 29% 22 521 19 562 11.9 8.4 5.9 22.3 15.4 10.6 780 1 038 234 298
Krasnoyarsk GES KRSG RU common Buy USD 8.5 10.1 4.0 153% 1 555 1 541 39.2 6.8 3.4 65.6 9.6 4.6 257 634 74 183
Russian hydro gen. co. average 25.6 7.6 4.6 44.0 12.5 7.6 518 836 154 241
WA 13.9 8.3 5.7 25.1 15.0 10.2 742 1 008 222 290
FV per
share 12m TP
EV /
Capacity,
USD/kW
EV /
Output
2007,EV / EBITDA P/E
Company Country BB ticker
Share
type
MCap,
USD
mn
EV,
USD
mnRating
Curr-
ency
Mid-
market
price as
of Jun
19, 2008
Upside
to TP
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 10/183
Figure 5:Summary, foreign generation
Source: Bloomberg, Glitnir estimates
2008e 2009e 2010e 2008e 2009e 2010e
Cur-
rent
Tar-
get
Cur-
rent
Tar-
get
GEM generators with major share of thermal capacity
Huaneng Power
International China 902 HK common HKD 6.56 6.69 -2% 14 113 19 884 8.8 7.7 6.8 21.6 18.0 17.2 552 542 124 122
Huadian Power
International China 1071 HK common HKD 2.59 2.47 5% 3 887 8 424 8.7 7.5 6.6 25.9 19.8 20.6 460 481 160 168
China Resources Power China 836 HK common HKD 25.0 21.8 15% 11 576 14 270 14.2 11.0 8.7 22.8 18.1 14.6 1 141 1 312 162 186
National Thermal Power
Corporation Ltd. India NATP IN common INR 212 169 26% 31 863 34 957 14.0 12.3 11.2 17.9 16.6 15.2 1 278 1 607 185 233
Kot Addu Power Co. Pakistan KAPCO PA common PKR 51.3 48.9 5% 642 750 n/a n/a n/a 8.1 7.8 n/a 469 492 92 96
Zorlu Enerji Ele Turkey ZOREN TI common TRY 7.94 5.53 44% 370 701 11.4 4.7 3.0 neg 5.8 3.8 1 669 2 397 284 408
GEM thermal gen. co. average 11.4 8.7 7.2 19.2 14.4 14.3 928 1 139 168 202
WA 12.1 10.3 9.0 20.0 17.2 15.8 979 1 162 163 190
Developped markets generators with major share of thermal capacity
TransAlta Corporation Canada TA CN common CAD 35.6 36.8 -3% 7 232 10 103 9.6 9.1 9.0 24.1 20.5 26.7 939 907 210 202
Drax Group UK DRX LN common GBp 617 745 -17% 4 986 5 651 7.5 7.5 6.8 10.6 11.1 9.8 1 413 1 171 210 174
International Power UK IPR LN common GBp 461 423 9% 12 560 22 075 8.9 8.3 8.2 14.8 13.5 13.0 708 772 n/a n/a
NRG USA NRG US common USD 51.9 43.5 19% 10 256 18 792 8.4 7.6 7.1 17.0 14.1 12.4 779 930 393 469
Calpine Corp USA CPN US common USD 22.6 22.9 -1% 9 627 19 432 11.3 10.9 9.3 26.7 21.6 16.6 816 807 215 213
Developped markets thermal gen. co. average 9.1 8.7 8.1 18.6 16.2 15.7 931 917 257 265
WA 9.4 8.8 8.2 18.9 16.2 15.5 836 868 276 296
Foreign Hydro
Cia Energetica de
Sao Paulo Brazil CESP BR common BRL 35.7 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Jaiprakash Hydro
Power Ltd India JHPL IN common INR 48.0 55.4 -13% 629 854 13.7 14.5 14.9 18.1 20.8 20.9 2 846 2 467 708 614
Tractebel Energia SA Brazil TBLE3 BZ common BRL 27.4 23.6 16% 9 668 10 196 8.7 7.9 7.3 15.1 14.0 12.1 1 740 2 017 478 554
AES Tiete Brazil GETI3 BZ common BRL 22.1 19.0 17% 4 251 4 538 6.4 6.1 6.0 10.9 10.5 10.0 1 712 1 996 364 424
International hydro gen. co. average 9.5 9.4 14.7 15.1 14.3 2 099 2 160 517 531
WA 7.7 7.3 14.0 13.3 11.9 1 792 2 036 457 519
Bloomberg consensus target prices and earnings estimates used for foreign peers
Mid-
market
price as
of Jun
19, 2008
Upside
to TP
FV per
share 12m TP
EV / EBITDA P/EMCap,
USD
mn
EV,
USD
mn
EV /
Capacity,
USD/kW
EV / Output
2007,
USD/MWh
Company Country BB ticker
Share
type Rating
Curr-
ency
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 11/183
Figure 6: Valuation summary, integrated
Source: Bloomberg, Glitnir estimates
Cur-
rent
Tar-
get
Cur-
rent
Tar-
get
Russian integrated uilities
Bashkirenergo Russia BEGY RU common Buy USD 3.52 4.04 1.59 155% 1 730 1 780 1.9 43.9 neg 346 831 70 168
Bashkirenergo Russia BEGYP RU preferred Hold USD 1.50 1.72 1.56 11%
Irkutskenergo Russia IRGZ RU common Buy USD 1.84 2.14 0.88 143% 4 195 4 217 4.9 14.3 48.9 327 776 72 171
Novosibirskenergo Russia NVNG RU common Buy USD 138 159 71 125% 1 071 1 294 2.1 36.6 neg 513 1 022 126 250
Novosibirskenergo Russia NVNGP RU preferred Buy USD 78.1 89.7 46.0 95%
Far East Energy Company Russia DVEC RU common Buy USD 0.105 0.119 0.073 64% 1 249 2 091 1.7 14.3 868.0 358 450 108 135
Russian integrated utilities average 2.6 27.3 458.4 386 770 94 181
WA 3.2 23.0 236.8 363 748 87 173
Russian integrated utilities expected to be listed in 2H08
InterRAO Russia common USD 0.00222 0.00252
Far East Energy Holding Russia common USD 0.0596 0.0672 0.0600 12%
Far East Energy Holding Russia preferred USD 0.0417 0.0471
GEM integrated uilities
KEPCO South Korea 015760 KS common KRW 29 300 30 875 -5% 19 214 33 590 1.1 13.7 11.5 557 529 88 84
CEZ Czech Republic CEZ CP common CZK 1 425 1 364 5% 51 991 57 309 6.7 15.2 25.4 4 010 4 191 777 812
Cia Energetica de Minas Gerais Brazil CMIG3 BZ common BRL n/a 33.2 n/a 11 276 14 767 2.8 8.0 12.7 2 211 n/a 459 n/a
Cia. Paranaense de Energia Brazil CPLE3 BZ common BRL n/a 29.6 n/a 5 197 5 597 2.0 5.4 9.2 1 230 n/a 540 n/a
Endesa Chile Chile ENDESA CI common CLP 882 768 15% 13 132 18 204 5.5 12.4 35.6 3 809 4 375 970 1 114
HongKong Electric Holdings Hong Kong 6 HK common HKD 45.5 47.7 -5% 13 014 13 182 8.2 10.5 13.6 3 510 3 351 731 698
CLP Holdings Ltd Hong Kong 2 HK common HKD 68.3 66.0 4% 20 284 26 655 4.1 13.3 14.9 2 999 3 106 998 1 034
Tata Power Co Ltd India TPWR IN common INR 1 496 1 299 15% 6 657 7 608 6.3 26.4 39.7 3 275 3 774 553 638
Tenaga Nasional Bhd Malaysia TNB MK common MYR 9.70 8.03 21% 10 759 16 107 2.4 6.7 9.3 1 399 1 691 n/a n/a
GEM integrated utilities average 4.3 12.4 19.1 2 556 3 003 640 730
MCap weighted average 4.5 13.0 20.1 2 751 3 015 652 710
Developed markets integrated uilities
EDF France EDF FP common EUR 87.5 63.4 38% 179 412 226 135 2.8 10.6 23.3 1 785 2 463 370 511
Endesa SA Spain ELE SM common EUR 37.3 33.3 12% 54 779 94 980 3.9 10.6 15.0 1 932 2 169 516 580
Energias de Portugal SA Portugal EDP PL common EUR 4.69 3.60 30% 20 418 40 265 2.9 11.4 16.4 2 572 3 351 828 1 079
Fortum Oyj Finland FUM1V FH common EUR 32.2 31.4 3% 43 298 52 892 8.6 19.4 20.4 4 844 4 969 1 013 1 040
Iberdrola SA Spain IBE SM common EUR 10.6 8.84 20% 68 568 114 476 4.7 15.1 21.3 2 693 3 235 927 1 114
RWE AG Germany RWE GR common EUR 90.8 81.2 12% 69 821 72 177 1.3 6.8 19.2 1 621 1 813 334 374
Scottish & Southern Energy PLC Britain SSE LN common GBp 1 614 1 442 12% 24 728 31 958 1.0 11.6 14.1 3 190 3 572 686 768
Union Fenosa SA Spain UNF SM common EUR 47.5 39.8 19% 18 830 36 178 4.4 12.8 14.0 3 107 3 712 737 881
Developed markets integrated utilities average 3.7 12.3 18.0 2 718 3 161 677 793
WA 3.6 11.9 20.1 2 371 2 855 596 717
* OTC forward price for Far East Energy Holding
Bloomberg consensus target prices and earnings estimates used for foreign peers
FV per
share 12m TP
Market
price as
of Jun
19, 2008*Company Country BB ticker
Share
type Rating
Cur-
rency
Upside
to TP
MCap,
USD mn
EV /
Capacity,
USD/kW
EV / Output
2007,
USD/MWhEV /
Sales
2007
EV /
EBITDA
2007
P/E
2007
EV,
USD mn
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 12/183
Figure 7: Valuation summary, distribution
Source: Bloomberg, Glitnir estimates
2006 2011e 2006 2011e 2006 2011e
Cur-
rent
Tar-
get
Cur-
rent
Tar-
get
MRSK Center Russia MRKC RU common Buy USD 0.0744 0.0840 0.0519 62% 2 191 2 303 2.5 0.9 13.1 2.0 33.3 4.6 1.5 38 60 6.3 9.8
MRSK South Russia n/a common n/a USD 0.0270 0.0306 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 50 n/a 9.9
MRSK North Caucasus Russia MRKK RU common Buy USD 24.8 28.1 11.5 145% 340 358 1.2 0.4 37.2 1.0 neg 2.1 0.7 26 60 3.4 8.0
MRSK Center and Volga Russia MRKP RU common Buy USD 0.0201 0.0226 0.0141 61% 1 583 1 600 2.0 0.8 11.7 2.0 72.1 4.7 1.4 27 42 6.4 10.1
MRSK North-West Russia MRKZ RU common Buy USD 0.0192 0.0218 0.0111 96% 1 063 1 103 1.6 0.7 9.3 1.8 40.9 4.0 1.1 26 50 6.8 12.9
MRSK Siberia Russia MRKS RU common Buy USD 0.0257 0.0291 0.0183 59% 1 635 1 768 1.7 0.7 11.8 2.0 neg 4.5 1.5 19 31 6.8 11.0
MRSK Urals Russia MRKU RU common Buy USD 0.0211 0.0239 0.0191 26% 1 666 1 722 1.6 0.7 15.5 2.5 58.9 5.5 1.5 20 27 12.2 16.6
MRSK Volga Russia MRKV RU common Buy USD 0.0168 0.0191 0.0073 162% 1 304 1 325 1.5 0.6 10.1 1.4 64.2 3.0 1.2 22 55 6.3 15.9
Moscow Unified Dis. Co. Russia MSRS RU common Hold USD 0.0795 0.0898 0.0885 1% 2 500 2 789 3.0 1.3 10.3 2.9 23.9 7.0 1.4 41 41 37.7 38.1
Moscow City Dis. Co. Russia MGRS RU common Hold USD 0.0576 0.0650 0.0630 3% 1 780 1 705 4.6 1.5 12.9 2.4 18.0 6.6 2.3 47 48 28.2 28.5
Lenenergo Russia LSNG RU common Reduce USD 1.372 1.549 1.745 -11% 1 754 1 635 4.2 1.5 14.9 2.7 104.3 7.3 1.4 55 47 31.4 26.9
Lenenergo Russia LSNGP RU preferred Reduce USD 1.084 1.224 1.375 -11%
Kurganenergo Russia KRGE RU common Buy USD 0.627 0.710 0.460 54% 74 89 0.5 n/a 6.0 n/a n/a n/a 0.3 22 27 3.3 4.0
Kurganenergo Russia KRGEP RU preferred Buy USD 0.475 0.539 0.428 26%
Tomsk Dis. Co. Russia TORS RU common Reduce USD 0.0172 0.0195 0.0255 -24% 111 111 1.4 n/a 11.5 n/a 403.0 n/a 1.0 18 13 7.0 5.2
Tomsk Dis. Co. Russia TORSP RU preferred Reduce USD 0.0151 0.0172 0.0245 -30%
Kubanenergo Russia KUBE RU common Reduce USD 19.7 22.4 27.8 -19% 496 611 1.4 n/a 12.4 n/a 203.2 n/a 1.6 38 32 7.2 6.1
Russian dis. co. average 2.4 0.9 14.7 2.1 52.0 4.9 1.4 32 46 14.5 15.6
WA 2.6 1.0 12.8 2.2 49.7 5.4 1.5 34 45 17.1 16.8
Russian distribution companies expected to be listed in 2H08
MRSK Holding Russia common USD 0.282 0.318 0.230 38%
MRSK Holding Russia preferred USD 0.197 0.223
Foreign distribution companies
ELMU Rt. Hungary ELMU HB common HUF n/a 23 473 n/a 939 1 077 1.1 n/a 6.8 n/a 13.6 n/a 2.1 146 n/a 48.4 n/a
EMASZ Hungary EMASZ HB common HUF n/a 20 320 n/a 409 474 1.1 n/a 8.9 n/a 19.6 n/a 2.0 163 n/a 21.3 n/a
Prazska EnergetikaCzech
RepublicPREN CP common CZK n/a 6 350 n/a 1 584 1 541 2.5 n/a 11.5 n/a 20.8 n/a 3.1 266 n/a 133.5 n/a
Eletropaulo Metropolitana
Eletricidade de Sao
Paulo SA
Brazil ELPL6 BZ common BRL 39.96 38.08 5% 3 664 4 029 1.0 0.8 6.1 4.0 21.4 9.0 3.6 127 134 95.3 100.0
Vakaru Skirstomieji Tinklai Lithuania RST1L LH common LTL n/a 3.82 n/a 853 929 2.7 n/a 12.4 n/a 94.5 n/a 1.2 252 n/a 16.3 n/a
CegedelLuxem-
bourg VST1L LH commonLTL
n/a 753 n/a 1 254 1 293 3.8 n/a 11.4 n/a 57.9 n/a 2.3 278 n/a 180.1 n/a
International dis. co. average 2.0 9.5 38.0 2.4 205 82.5
WA 1.8 8.6 32.8 2.8 187 96.3
Russian Dis. Co. premium / (discount) to foreign peers 39% 49% 52% -48% -82%
* OTC forward price for MRSK Holding
Bloomberg consensus target prices and earnings estimates used for foreign peers
Company Country BB ticker
Share
type Rating
FV per
share
Cur-
rency
Market
price
as of
Jun 19,
2008*12m TP
Up-
side
to TP
EV,
USD
mn
MCap,
USD
mn
EV / EBITDA
EV /
Through-
put 2006,
USD/MWhEV/Sales
P/B,
2007e
P/E
EV / Grid
length,
USD th/km
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 13/183
Figure 8: Valuation summary, transmission
Source: Bloomberg, Glitnir estimates
Company Country BB ticker
Share
type Rating
Cur-
rency
FV per
share,
USD
12m
TP
Market
price as
of Jun
19,
2008*
Up-
side
to TP
MCap,
USD
mn
EV,
USD
mn
EV /
Sales
2006
EV /
EBITDA
2006
P/E
2006
P/B
2006
EV / Grid
length,
USD
thous.
/km
EV /
Through-
put 2006,
USD/
MWh
Russian trans. co.
FSK n/a common n/a USD 0.0229 0.0258 0.0235 10% 12 414 10 323 3.0 5.5 n/a 2.7 86 23.0
Vologda Trans. Co. VOMS RU common Hold USD 1.56 1.75 1.70 3% 36 n/a
Kuban Trans. Co. KNMS RU common Reduce USD 0.288 0.323 0.475 -32% 8 n/a
Tomsk Trans. Co. TOMS RU common Reduce USD 0.0102 0.0114 0.0158 -28% 59 66
Tomsk Trans. Co. TOMSP RUpreferred Reduce USD 0.0093 0.0105 0.0135 -23%
Foreign trans. co.
Terna Rete Elettrica
Nazionale SpAItaly TRN IM common EUR 3.05 2.88 6% 8 991 13 156 8.5 11.9 18.4 3.2 317 41.6
Cia de Transmissao
de Energia Eletrica PaulistaBrazil
TRPL3 BZ common BRL n/a 46.99 n/a 4 394 4 609 7.6 43.6 81.2 2.5 380 35.5
Interconexion Electrica SALatin
AmericaISA CB common COP n/a 7 710 n/a 5 029 5 027 5.6 10.1 78.9 1.7 134 96.0
Lietuvos Energija Lithuaniua LEN1L LH common LTL n/a 3.55 n/a 1 086 1 106 3.1 16.0 159.6 1.3 166 89.6
Red Electrica de Espana Spain REE SM common EUR 49.87 43.43 15% 9 117 n/a n/a n/a 36.3 6.8 n/a n/a
International trans. co. avg. 6.2 20.4 84.5 2.2 249 65.7
WA 7.5 17.8 56.0 2.6 284 54.1
Russian FSK premium / (discount) to foreign peers -60% -69% n/a 5% -70% -57%
* For FSK - OTC forward price
Bloomberg consensus target prices and earnings estimates used for foreign peers
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 14/183
Figure 9: Price performance
Source: Bloomberg, Glitnir estimates
high low 5-day 1m 3m 6m 12m YTD 5-day 1m 3m 6m 12m YTD 5-day 1m 3m 6m 12m YTD
Generation companies
OGK-1 OGKA RU common 0.0903 0.123 0.080 0% -2% -17% -24% -19% -26% -3% 0% -33% -27% -35% -29% -2% -2% -11% -4% n/a -5%
OGK-2 OGKB RU common 0.0880 0.175 0.071 22% -2% -25% -37% -40% -42% 19% 0% -39% -40% -52% -45% 19% -2% -19% -21% n/a -26%
OGK-3 OGKC RU common 0.116 0.175 0.105 5% 12% 0% -23% -31% -23% 2% 14% -19% -27% -45% -26% 3% 12% 8% -3% n/a -1%
OGK-4 OGKD RU common 0.0800 0.134 0.079 -10% -10% -36% -40% -33% -40% -12% -8% -48% -43% -47% -43% -12% -10% -32% -25% n/a -24%
OGK-5 OGKE RU common 0.128 0.180 0.096 16% 13% 10% -26% -17% -26% 13% 16% -11% -30% -34% -30% 14% 13% 18% -7% n/a -6%
OGK-6 OGKF RU common 0.0780 0.166 0.070 -7% -15% -29% -46% -53% -46% -10% -13% -43% -49% -63% -48% -9% -15% -24% -32% n/a -30%
TGK-1 TGKA RU common 0.00134 0.00160 0.00120 0% -2% 6% 5% -8% 5% -3% 0% -14% 0% -27% 0% -2% -2% 13% 32% n/a 34%
TGK-2 TGKB RU common 0.00100 0.00122 0.00083 0% 5% -6% 1% -19% -1% -3% 8% -24% -4% -35% -6% -2% 5% 1% 27% n/a 27%
TGKBP RU preferred 0.000725 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Mosenergo (TGK-3) MSNG RU common 0.177 0.263 0.170 0% 3% -18% -27% -22% -24% -3% 5% -34% -30% -38% -28% -2% 3% -12% -8% n/a -3%
TGK-4 TGKD RU common 0.00105 0.00125 0.00100 0% 0% -14% -13% -5% -15% -3% 2% -30% -17% -24% -19% -2% 0% -8% 10% n/a 8%
TGKDP RU preferred 0.000555 0.00090 0.00051 0% 0% -12% -24% -22% -15% -3% 2% -29% -28% -37% -19% -2% 0% -6% -4% n/a 9%
TGK-5 TGKE RU common 0.000775 0.00140 0.00071 13% 7% -5% -13% -38% -12% 10% 9% -23% -17% -51% -16% 10% 7% 2% 9% n/a 13%
TGK-6 TGKF RU common 0.000730 0.00132 0.00070 -3% -18% -28% -37% -36% -37% -5% -16% -42% -40% -49% -40% -5% -18% -23% -21% n/a -19%
TGK-7 TGKG RU common 0.090 0.1285 0.0850 -1% -11% -15% -19% n/a -19% -3% -9% -31% -23% n/a -22% -3% -11% -9% 2% n/a 4%
TGK-8 TGKH RU common 0.00167 0.01350 0.00100 8% 4% 14% 28% 51% 19% 5% 6% -8% 21% 20% 13% 6% 4% 22% 61% n/a 52%
TGK-9 TGKI RU common 0.000300 0.00033 0.00026 0% 0% 14% 10% 10% 3% -3% 2% -8% 5% -12% -2% -2% 0% 22% 38% n/a 32%
TGK-10 TGKJ RU common 4.61 4.61 3.50 0% 2% 6% 15% 21% 13% -3% 4% -14% 10% -3% 8% -2% 2% 14% 45% n/a 44%
TGK-11 TGKK RU common 0.00112 0.00160 0.00110 0% -21% -15% -31% n/a -31% -3% -20% -31% -35% n/a -34% -2% -21% -9% -14% n/a -12%
Kuzbassenergo (TGK-12) KZBE RU common 0.0235 0.0365 0.0250 n/a 0% 0% -9% -28% -9% n/a 2% -19% -14% -42% -13% n/a 0% 7% 14% n/a 16%
TGK-13 TGKM RU common 0.00825 0.0117 0.0080 -2% -1% -5% -24% -27% -24% -5% 1% -23% -28% -41% -27% -4% -1% 2% -4% n/a -2%
TGK-14 TGKN RU common 0.000325 0.00040 0.00030 0% 0% 0% 0% 0% 0% -3% 2% -19% -5% -20% -5% -2% 0% 7% 26% n/a 28%
Kuban GC KBGR RU common 11.500 18.000 12.000 0% 0% -11% -17% -22% -23% -3% 2% -28% -21% -37% -26% -2% 0% -5% 4% n/a -1%
RusHydro HYDR RU common 0.0848 0.0930 0.0687 -2% -1% 12% n/a n/a n/a -4% 1% -9% n/a n/a n/a -4% -1% 20% n/a n/a n/a
Krasnoyarsk GES KRSG RU common 3.98 4.60 4.00 0% 0% -1% -2% -1% -2% -3% 2% -20% -7% -21% -7% -2% 0% 6% 23% n/a 25%
Integrated companies
Bashkirenergo BEGY RU common 1.59 2.15 1.50 -13% -13% -26% -29% -25% -29% -15% -11% -40% -33% -40% -33% -15% -13% -21% -11% n/a -9%
BEGYP RU preferred 1.56 1.22 1.15 0% 0% 0% 0% -6% 0% -3% 2% -19% -5% -25% -5% -2% 0% 7% 25% n/a 28%
Irkutskenergo IRGZ RU common 0.88 1.19 0.82 0% -4% -9% -22% -18% -28% -3% -2% -27% -26% -35% -31% -2% -4% -3% -2% n/a -7%
Novosibirskenergo NVNG RU common 70.5 70.0 50.0 0% 6% 6% 38% 15% 38% -3% 8% -14% 31% -8% 32% -2% 6% 14% 73% n/a 77%
NVNGP RU preferred 46.0 46.0 37.0 0% 14% 14% 24% 15% 24% -3% 17% -7% 18% -8% 19% -2% 14% 22% 56% n/a 59%
Far East Energy Co. DVEC RU common 0.073 0.124 0.065 3% 11% -28% -37% -38% -36% 0% 13% -42% -40% -51% -39% 1% 11% -23% -20% n/a -18%
Relative to RTS Electric Utilities
IndexRelative to RTS IndexPrice performance (absolute)
Company BB ticker
Share
type
1 year
Price as
of Jun
19, 2008
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 15/183
Price performance (continued)
Source: Bloomberg, Glitnir estimates
high low 5-day 1m 3m 6m 12m YTD 5-day 1m 3m 6m 12m YTD 5-day 1m 3m 6m 12m YTD
Distribution companies
MRSK Center MRKC RU common 0.0519 0.0523 0.0510 3% n/a n/a n/a n/a n/a 0% n/a n/a n/a n/a n/a 0% n/a n/a n/a n/a n/a
MRSK North Caucasus MRKK RU common 11.5 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
MRSK Center and Volga MRKP RU common 0.0141 0.0142 0.0114 8% 23% n/a n/a n/a n/a 5% 25% n/a n/a n/a n/a 6% 23% n/a n/a n/a n/a
MRSK North-West MRKZ RU common 0.0111 0.0128 0.0100 -2% n/a n/a n/a n/a n/a -4% n/a n/a n/a n/a n/a -4% n/a n/a n/a n/a n/a
MRSK Siberia MRKS RU common 0.0183 0.0183 0.0160 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
MRSK Urals MRKU RU common 0.0191 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
MRSK Volga MRKV RU common 0.0073 0.0075 0.0074 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Moscow Unified Dist. Co. MSRS RU common 0.0885 0.1190 0.0655 -1% 9% -2% -11% -26% -16% -4% 12% -20% -15% -41% -19% -3% 9% 5% 13% n/a 8%
Moscow City Dist. Co. MGRS RU common 0.0630 0.0940 0.0495 -3% 4% -8% -23% -24% -32% -6% 7% -25% -27% -39% -35% -5% 4% -1% -3% n/a -12%
Lenenergo LSNG RU common 1.75 2.00 1.60 0% 0% -3% -8% 3% -10% -3% 2% -22% -13% -18% -14% -2% 0% 3% 16% n/a 16%
LSNGP RU preferred 1.38 1.65 1.24 0% 0% -15% -1% 6% -19% -3% 2% -31% -6% -15% -23% -2% 0% -9% 24% n/a 3%
Kurganenergo KRGE RU common 0.460 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
KRGEP RU preferred 0.428 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Tomsk Dist. Co. TORS RU common 0.0255 0.0325 0.0210 0% 0% -3% -3% -23% -3% -3% 2% -22% -8% -38% -8% -2% 0% 4% 22% n/a 24%
TORSP RU preferred 0.0245 0.0330 0.0225 0% 0% 12% 27% 47% 27% -3% 2% -9% 21% 17% 21% -2% 0% 20% 60% n/a 63%
Kubanenergo KUBE RU common 27.8 38.0 28.0 0% 22% -4% -14% 3% -13% -3% 25% -23% -18% -18% -17% -2% 22% 2% 9% n/a 12%
Transmission companies
Vologda Trans. Co. VOMS RU common 1.70 3.30 1.65 0% 6% 3% -13% -31% -13% -3% 8% -17% -17% -45% -17% -2% 6% 10% 10% n/a 12%
Kuban Trans. Co. KNMS RU common n/a 0.700 0.455 0% 0% -24% n/a n/a n/a 1% 4% -36% n/a n/a n/a -4% 1% -22% n/a n/a n/a
Tomsk Trans. Co. TOMS RU common 0.0158 0.0300 0.0100 0% 55% -23% -14% -50% -47% -3% 58% -37% -18% -60% -49% -2% 55% -17% 8% n/a -32%
Tomsk Trans. Co. TOMSP RU preferred 0.0135 0.0215 0.0150 0% 0% -6% -17% -25% -17% -3% 2% -24% -21% -40% -20% -2% 0% 0% 5% n/a 7%
Relative to RTS Electric Utilities
IndexRelative to RTS IndexPrice performance (absolute)
Company BB ticker
Share
type
1 year
Price as
of Jun
19, 2008
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 16/183
Overview: Russian utilities at a glance
Russia’s utilities sector is the fourth largest in the world in terms of both installed capacity and
electricity production.
Figure 10: Capacity and generation by country
Installed capacity Electricity generation
Source: EIA Source: EIA
The generation segment is dominated by thermal power plants; hydroelectric and nuclear plants
contribute 34% to total installed capacity and electricity production. On average, nuclear plants
have the highest load factors, while hydroelectric plants have the lowest.
Figure 11: Capacity and generation by type, 2007
Installed capacity Electricity generation
Source: UES, Glitnir estimates Source: UES, Glitnir estimates
Figure 12: Average load factor by type of capacity, 2007
Source: UES
The main fuel used by thermal power plants is gas, followed by coal; fuel oil is usually used only
as a reserve and kindling fuel.
0
200
400
600
800
1 000
1 200
US
A
Ch
ina
Ja
pa
n
Ru
ssia
Ind
ia
Ge
rma
ny
Ca
na
da
Fra
nce
Bra
zil
Ukra
ine
Ita
ly
Sp
ain
GW
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
4 500
US
A
Ch
ina
Ja
pa
n
Ru
ssia
Ind
ia
Ca
na
da
Ge
rma
ny
Fra
nce
Bra
zil
UK
S. K
ore
a
Ita
ly
k G
Wh
Thermal66%
Hydro22%
Nuclear12%
Thermal67%
Hydro17%
Nuclear16%
78%
43%
55%50%
0%10%20%30%40%50%60%70%80%90%
Nuclear Hydro Thermal GRES
Thermal CHP
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 17/183
Figure 13: Fuel balance in Russia, 2006
Source: UES
The majority of power is consumed by industry; residential consumers account for only about
20% of total supplied electricity.
Figure 14: Electricity consumption breakdown, 2007
Source: UES
Russia’s grid assets are broken down into transmission and distribution. Transmission is
classified as a high-voltage grid (220 kV and above), while distribution is classified as a low-
voltage grid (110 kV and below).
Russia’s transmission assets encompass 120 530 km of high-voltage power grids with a total
transformer capacity of 295 691 MVA. In 2006, transmission companies transferred 448 TWh of
electricity.
Distribution assets are represented by 1 970 000 km of low-voltage grids and 336 000 MVA of
transformer capacity. In 2006 distribution companies transferred 672 TWh of electricity to
consumers.
Gas70%
Coal26%
Fuel oil3%Other
1%
Industrial consumers
62%
Agriculture2%
Transportation6%
Non-industrial consumers,
other
10%
Households20%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 18/183
Lack of capacity: Main driver behind the reform
Starting from the 1980s, construction of new plants began to lag behind growth in demand for
electricity. Reserve margins began to shrink, hitting bottom in 1990.
The political transition process of the 1990s caused a sharp drop in industrial output and an
overall economic slowdown. This in turn triggered a rapid reduction in power consumption, and
power plants had excess capacity for some time. This fact coupled with the overall uneasy
political situation explains why new additions of capacity reached a low in the 1990s.
However as the Russian economy revitalized, in early 1999 power consumption started to grow,
demonstrating a healthy and accelerated CAGR of 2.3% over 1999-2007. Consumption
increased at a record high of 4.5% in 2006.
Figure 15: GDP and power consumption
Source: Rosstat, Glitnir calculations
Figure 16: Installed electric capacity, maximum load, reserve margin, Russia total
Source: UES
Power consumption peaked during the unusually cold winter of 2005-2006, revealing the true
extent of the country’s power supply deficit. Unified Energy Systems (UES), the largest Russian
utility provider, was forced to introduce limits on power consumption in 16 regions across Russia.
1.4%-5.3%
6.4%
10.0%5.1%
4.7%
7.3%7.2%
6.4%
7.4%
8.1%
-1.5% -0.8%2.3%
3.7%1.5%0.0%
2.8% 1.7% 2.3%4.5%
2.0%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1996 1998 2000 2002 2004 2006
Cumulative GDP growth, % Cumulative power consumption, %
0
40
80
120
160
200
240
GW
Maximum load
Installed electric capacity
0%
20%
40%
1992 1994 1996 1998 2000 2002 2004 2006
Reserve margin, %
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 19/183
Figure 17: Peak consumption, January 23, 2006
Source: UES
As over the last 20 years only marginal volumes of new capacity were commissioned, most
Russian power plants are heavily worn out, with an average age of 30.5 years. Over half of
currently operating power plants were built in the 1960s and ’70s. Given the total government
regulation and state ownership in the sector, utilities were underfinanced for decades.
Depreciation of assets reached 50-70% across various segments.
Figure 18: Split of capacity by period of commissioning
Source: UES
Figure 19: Asset depreciation by segment
Source: UES
Another consequence of the underfinancing was that Russia’s electricity and utility assets have
remained at more or less the same technological level since the Soviet era, meaning they are
much less efficient and less reliable than modern technology. This low technological level is
reflected in high fuel burn rates, high rates of loss in the power grid, and frequent breakdowns.
0
10
20
30
40
50
Volga Siberia South North-West
Urals Center
GW
Reserve Maximum load
0
10
20
30
40
50
60
70
Before 1950
1950s 1960s 1970s 1980s 1990s-2000s
GW
Nuclear Hydro Thermal
0%
10%
20%
30%
40%
50%
60%
70%
80%
Electricity and heat
generation
Electricity transmission
Electricity distribution
Heating grid
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 20/183
Figure 20: Average fuel burn rate, Russia total
Source: UES, Glitnir estimates
In order to meet the growing economy’s electricity needs, the government has outlined a strategy
to build new power stations and secure reliable power supply. This strategy was documented in
the ―General Scheme for Power Facility Allocation,‖ which was first drafted in 2007 and finally
approved by the government in February 2008. The strategy envisages an astronomical USD
880 bn to be spent on overhauling the power sector in from 2006 to 2020. As a comparison, the
Russian GDP in 2007 was USD 1 290 bn; as of YE07, combined national savings and
investment funds (which accumulate tax proceeds from oil and gas exports) held USD 157 bn in
assets and the Central Bank of Russia’s international reserves were USD 476 bn.
Figure 21: Capex requirements, government base scenario
Source: Ministry of Industry and Energy
When faced with the looming capex needs, UES and state decision-makers had no choice but to
implement a reform in order to attract private money and stimulate improvements in reliability and
operational efficiency in the sector.
200
220
240
260
280
300
320
340
360
1998 2007
g/k
Wh
New coal-f ired plant
New gas-f ired plant
0
100
200
300
400
500
600
2006-2015 2016-2020
US
D b
n
Hydro Nuclear Distribution
Transmission Thermal
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 21/183
The reform
The goals and tasks of the power-sector reform were first outlined in Government Decree No.
526 on July 11, 2001, and subsequently altered and detailed in 2003 in UES’s 5+5 Strategy for
2005-2008, as well as in various legislative documents.
The main goals established in these documents were:
1. To increase the efficiency of power companies
2. To promote development by stimulating investments
3. To secure reliable and uninterruptable power supply
The reform documents also outlined several tasks for achieving these goals, which can be fit into
three main groups:
1. Restructuring by business type, meaning the separation of naturally monopolistic from
potentially competitive businesses. Power grids (transmission and distribution) are
considered natural monopolies, while generation and power supply companies are
considered competitive.
2. Privatisation of companies deemed ―competitive‖ (with the exception of hydroelectric
generation)
3. Switch to market-based pricing
Restructuring
Pre-reform structure
Prior to the reform, the structure of the Russian utilities sector had remained virtually unchanged
since the early 1990s. The sector consisted of the giant holding UES, four vertically integrated
utility companies that were independent from the state (Bashkirenergo, Irkutskenergo,
Novosibirskenergo, and Tatenergo), and a sole nuclear-stations operator 100% controlled by the
state (Rosenergoatom).
UES held 45-100% stakes in 72 vertically integrated regional joint-stock energy companies (AO-
energos) and 50-100% stakes in 44 stand-alone power stations. Each AO-energo owned
generation, transmission, distribution, and supply assets in a particular region of Russia.
The restructuring process
Given the pre-reform structure of the sector, the division of assets into competitive and non-
competitive was a complicated task. Before the reform, most utility companies were AO-energos,
each of which provided a complete electricity-delivery chain from generation to distribution and
sales to end consumers. The restructuring involved the breaking up of all 72 AO-energos into
several individual companies, each of which represented a separate line of business:
1. Regional generation companies and large stand-alone condensing power plants
(GRESs), which represented electricity and heat generation
2. Regional transmission companies, which represented transmission (high-voltage
power grids of 220 kV and above)
3. Regional distribution companies, which represented distribution (low-voltage power
grids of 110 kV and below)
4. Supply companies, which bought electricity from generators, and sold electricity to
end consumers
5. Other companies, which represented service, engineering, and other non-core areas
The AO-energos conducted pro-rata spinoffs of several companies that represented generation,
transmission, supply, and service assets; after the spinoffs, the companies typically maintained
only distribution assets.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 22/183
Figure 22: UES reorganization
UES structure before reorganization UES restructuring process Industry structure after reorganization
Source: UES, Glitnir estimates
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 23/183
The restructuring scheme stipulated that the spun-off entities and assets controlled directly by
UES were to be merged into companies of the sector’s target structure as follows:
1. 32 GRESs spun off from AO-energos and those controlled by UES directly
were to be merged into six wholesale generation companies (OGKs). The
OGKs were designed to own large condensing power stations, each located
in a different region of the country; the size and quality of assets for the
OGKs was to be as equal as possible in order to promote fair competition
among the companies in the future.
2. 57 regional generation companies spun off from AO-energos were to be
merged into 14 territorial generation companies (TGKs). TGKs have smaller
cogeneration power plants relative to OGKs, which produce heat in addition
to electricity. All of the TGKs’ power stations operate in the same
geographical region (or neighbouring regions); TGKs can differ vastly in size.
3. Hydroelectric generation plants spun off from AO-energos and those owned
by UES directly were to be merged into RusHydro (also known as
HydroOGK).
4. 56 regional transmission companies were to be merged into the Federal Grid
Company (FSK).
5. 57 regional distribution companies were to be merged into nine interregional
distribution companies (MRSKs).
Exceptions to the typical restructuring scheme
Mosenergo and Kuzbassenergo maintained generation assets after the spinoffs and became
TGKs.
Tomskenergo maintained generation assets and after the merger with Omsk Generation
Company became TGK-11.
TGK-1 and TGK-8 did not transfer their hydroelectric plants to RusHydro.
Lenenergo and Tyumenenergo will not be merged with any other regional distribution companies,
and therefore can be treated as interregional distribution companies.
Samaraenergo, Ulyanovskenergo, and Saratovenergo spun off generation, transmission, and
distribution assets but maintained their supply businesses.
Utility companies in the Far East district and AO-energos that are isolated from the united power
grid have a different restructuring scheme (see ―Formation of target structure: Far East power
utilities‖ for details).
Overall, the restructuring process involved an increase in the number of utility companies from
about 90 to about 230, with their subsequent consolidation into about 50 companies of the target
sector structure.
As of the date of this report, all six OGKs, all 14 TGKs, RusHydro, InterRAO, and 10 MRSKs
have completed restructuring. Regional transmission companies are expected to be consolidated
into FSK simultaneously with the UES breakup on July 1, 2008.
Formation of target sector structure
Generation companies
As a result of a series of mergers in 2006, 32 large condensing power plants (GRESs) controlled
by UES and AO-energos were fully consolidated into six OGKs. All six OGKs were listed on
Russian stock exchanges in 2005-2006.
All 14 TGKs were formed and listed on Russian stock exchanges in 2005-2007. The majority of
TGKs have the fully consolidated generation assets of former AO-energos, with a few
exceptions: there is a certain minority interest in Murmansk CHP, Kuban Generation Company,
and Kurgan Generation Company, which are subsidiaries of TGK-1, TGK-8, and TGK-10,
respectively.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 24/183
Figure 23: Map of generation companies
Source: Company data
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 25/183
RusHydro
RusHydro (also known as HydroOGK) was established in 2004 as a 100% subsidiary of UES.
UES contributed its stakes in hydroelectric generation plants as well as cash to the charter
capital of RusHydro. In January 2008, RusHydro fully consolidated its 20 subsidiaries.
RusHydro plans to conduct an additional share issue in June 2008, which will be paid for with
certain UES assets, including Irganaiskaya GES, Kaskad Nizhnecherekskikh GES,
Kolymaenergo, and Krasnoyarskenergosbyt.
In July 2008, RusHydro plans to hold another additional share issue related to the UES breakup
procedure. The purpose of the issue is to:
1. Distribute UES’s stake in RusHydro among former UES shareholders
2. Increase the state’s ownership in RusHydro by contributing a certain portion of cash
proceeds from the sale of state-attributed stakes in OGKs and TGKs to RusHydro’s
charter capital. (For details on the breakup procedure, see ―UES breakup") As a result,
the state is expected to receive a controlling stake in RusHydro.
The state will inject cash into the charter capital of RusHydro at USD 0.073 (RUB 1.73) per
share.
Figure 24: Consolidation of RusHydro
Source: Company data
Distribution companies
After the spinoffs of generation, transmission, and other assets, AO-energos were typically left
with distribution assets only, and were subsequently called regional distribution companies
(RSKs).
The government-approved target structure for the distribution segment envisioned 11
interregional distribution companies (MRSKs), which were to be controlled by the state through
MRSK Holding. The MRSKs were designed to be of relatively the same size.
Fifty-three of the total 57 RSKs have been consolidated into nine larger MRSKs. Two large
regional distribution companies in the Moscow region are to be merged to form MRSK Moscow
(see ―Consolidation of Moscow distribution grids‖), and two other large RSKs (Lenenergo and
Tyumenenergo) will remain separate companies.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 26/183
Figure 25: Interregional power distribution companies (MRSKs)
Source: UES
So far consolidation has been completed for all MRSKs except Moscow MRSK. In the majority of
cases, RSKs were merged into MRSKs, meaning their shares were swapped into MRSK shares.
The exceptions are Kurganenergo, whose shareholders blocked the company’s merger into
MRSK Urals, and Kubanenergo and Tomsk Distribution Company, the mergers of which into
MRSK South and MRSK Siberia, respectively, were prohibited by the court (for details, see
―Appendix 1: Company-specific issues‖). Kurganenergo, Kubanenergo, and Tomsk Distribution
Company will continue to function as separate subsidiaries of their respective MRSKs.
After the consolidation is complete UES is expected to hold a controlling 45-100% stake in each
MRSK. When UES breaks up in July 2008, it will create the Interregional Distribution Company
Holding (MRSK Holding), a special entity that will inherit all of UES’s shares in the MRSKs. The
holding will be created on a pro-rata basis such that MRSK Holding’s shareholder structure will
mirror UES’s.
Figure 26: Distribution segment restructuring
Pre-consolidation Current After UES breakup
Source: UES, Glitnir estimates
Shares of all MRSKs except MRSK South are currently trading on Russian exchanges; MRSK
South is expected to list its shares in June 2008. Also, MRSKs plan to launch GDR programs in
3Q08. Therefore investors can gain exposure to Russia’s distribution segment either through
shares of MRSKs or through shares of MRSK Holding, which is expected to be listed in 3Q08.
Consolidation of Moscow distribution grids
In November 2007, UES released the latest consolidation scheme for Moscow grids, according
to which consolidation will proceed in two stages. First, Moscow City Distribution Company
(MGESK) will merge into Moscow United Distribution Company (MOESK). Second, MOESK will
conduct an additional share issue, which will be paid for with distribution assets owned by the
Moscow city government. The consolidated company will be called MRSK Moscow.
MOESK and MGESK were appraised for the merger at USD 0.083 (RUB 1.96) and USD 0.060
(RUB 1.42) per share, respectively.
RSK 1
RSK 2
RSK 3
...
RSK 61
MRSK Holding
MRSK 1
MRSK 2
...
MRSK 11
43 - 100 %
stakes
50 - 70 %
stakes
UES
UES
52% 48%
State Minorities
52% 48%
State Minorities
MRSK 1
MRSK 2
...
MRSK 11
45 - 100 % stakes
UES
52% 48%
State Minorities
MRSK 1
MRSK 2
...
MRSK 11
MRSK Holding
MRSK 1
MRSK 2
...
MRSK 11
52% 48%
State Minorities
45 - 100 % stakes
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 27/183
Once all the consolidation procedures are complete UES’s heir, MRSK Holding, will be the
largest shareholder in MRSK Moscow, while the Moscow city government will hold roughly a
25% stake.
Lenenergo share issue in favour of St. Petersburg government
In August 2007, Lenenergo’s board of directors approved an additional share issue in favour of
the St. Petersburg city government. The issue will amount to 240 mn new common shares
(25.8% and 23.4% of enlarged common and total equity, respectively) at a price of RUB 37.44
(USD 1.52) per share. The issue was initiated on November 14, 2007, and is expected to end in
4Q08.
Figure 27: Lenenergo shareholder structure, post-additional share issue
Source: Company data, Glitnir estimates
Transmission
Before the industry reform began, transmission-grid assets were divided into those controlled by
UES directly and those owned by AO-energos. As part of the reform process, the AO-energos’
transmission assets were spun off on a pro-rata basis into 56 separate transmission companies
(MSKs).
The principles of the reform stipulate that all Russian transmission assets are to be consolidated
into the Federal Grid Company (FSK), of which a stake of at least 75% + 1 share is to be owned
by the state. Before the reform began, the state’s effective ownership in transmission assets was
45%. In order to increase its ownership of transmission assets to the required level, the state
plans to pump cash from the state budget and proceeds from the sale of UES’s state-attributed
stakes in thermal generation companies into FSK’s charter capital through a series of additional
share issues in 2006-2009. Proceeds from these issues are expected to finance FSK’s capex
program, which amounts to USD 39.7 bn for 2008-2012.
Figure 28: Additional share issues
Source: FSK, Glitnir estimates
FSK was established in 2002 as a wholly owned subsidiary of UES. Upon FSK’s establishment,
UES contributed the assets of the United National Power Grid, which were appraised at USD 5
bn.
In August 2006, FSK executed its first additional share issue under closed subscription in favour
of UES and the state. UES contributed cash and its remaining assets (including the United
National Power Grid and its stakes in 42 transmission companies spun off from AO-energos),
which totalled USD 15 bn. The state contributed USD 900 mn in cash. As a result, UES’s stake in
FSK decreased to 87.6% and the state received 12.4%.
FSK conducted a second additional share issue under closed subscription in favour of UES and
the state from August 2007 to March 2008. UES contributed cash and its stakes in the remaining
eight transmission companies; the state injected RUB 18.8 bn (USD 780 mn) from the budget.
UES44%
St. Petersburg government
23%VTB22%
Other minorities
11%
Start
date
End
date
New
shares,
mn
Placement
price,
USD
Initial issue 243 214 0.019
1st additional issue Jul 28, 2006 Mar 20, 2007 118 168 0.019
2nd additional issue Aug 24, 2007 Mar 17, 2008 114 965 0.025
3rd additional issue 2H08 2H08 698 170 0.024
4th additional issue 2009 2009 90 169 0.024
Current 476 347
Total expected after UES breakup 1 264 687
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 28/183
FSK’s third additional share issue is planned for June-July 2008. This issue will facilitate FSK’s
consolidation with the MSKs as well as procedures related to the UES breakup. In the process,
several transactions will take place simultaneously:
1. Minorities’ shares in 56 transmission companies will be swapped for shares in FSK.
2. UES shareholders will receive pro-rata stakes in FSK.
3. The state will pump additional funds into FSK (specifically, UES’s state-attributed
stakes in OGKs and TGKs or proceeds from the sales of these stakes).
4. UES will be merged into FSK. Assets remaining in UES after the breakup or proceeds
from the sales of such assets will be transferred to FSK.
The price of the third additional share issue is expected to be set at USD 0.0025 (RUB 0.59) per
share, which is equivalent to FSK’s appraised value as of April 1, 2007.
UES expects that following FSK’s fourth additional share issue, which is planned for 2009, state
ownership in FSK will increase to a stake of at least 75% + 1 share.
Figure 29: FSK consolidation
Source: UES, Glitnir estimates
FSK shares are expected to be listed following UES’s breakup in July 2008.
Figure 30: Restructuring scheme, timeline
Source: FSK, UES
Far East power utilities
Before the reform, power utilities in the Far East and North East regions of Russia were
represented by AO-energos that were separated from the united power grid of the rest of Russia.
Furthermore, some of these companies were completely isolated, and only a few in the Far East
region had the limited capability of free floating electricity.
2Q07 3Q07 4Q07 1Q08
Jun - Jul 2007MSK
appraisals
approvementPreparation of
fairness
opinion
Jul - Oct 2007UES BoDUES EGM
Oct 15-30, 2007FSK BoDMSK EGM
Dec 2007FSK EGM
MSK EGMs
Dec 07 - Mar 08MSK share
buyout
June 2008FSK
additional
share issue registration
June 2008Conversion of MSK shares
into FSK shares
3Q082Q08
JulyFSK local share
listing
FSK DRs issue
Jul - Aug 2008Registration of FSK additional
share issue report
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 29/183
Figure 31: Far East Energy Company and isolated AO-energos
Source: UES
In 2005, UES’s board of directors approved a scheme to create a 100%-subsidiary holding
company Far East Energy Company on the basis of the assets of Khabarovskenergo,
Amurenergo, Dalenergo, Lutek, and Southern Yakutskenergo. In 2007, Far East Energy
Company made an additional share issue and fully consolidated the aforementioned entities.
Figure 32: Reorganization of Far East and isolated AO-energos
Source: UES, Company data
Figure 33: Target structure of Far East and isolated AO-energos
Source: UES, Company data
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 30/183
Far East Energy Company established two 100%-owned subsidiaries which are distinguished by
type of activity: Far East Generation Company, which handles electricity and heat production,
and Far East Grid Company, which handles distribution.
Far East Energy Company’s transmission assets are to be contributed to FSK’s charter capital;
Far East Energy Company will thus swap them for shares in FSK.
Isolated energy companies do not fall under the requirements of the legislation to separate
assets by type of activity. Therefore these companies will remain vertically integrated for the time
being.
InterRAO
Figure 34: InterRAO Russian power plants
Source: InterRAO
As of YE07, InterRAO was a closed joint-stock company owned by UES (60%) and
Rosenergoatom (40%). The restructuring of InterRAO is proceeding in two stages. In the first
stage, which was completed on May 1, 2008, InterRAO, North-West CHP, and Ivanovo CCGT
were merged into Sochi TPP. In the second stage, which coincides with the UES breakup
procedure, Kalinigrad CHP-2 and InterRAO Holding (an interim holding spun off from UES) will
be merged into Sochi TPP. Sochi TPP has been renamed InterRAO.
As a result of these procedures, InterRAO will fully consolidate the four aforementioned power
plants, and all UES shareholders will receive pro-rata stakes in InterRAO.
Figure 35: Formation of InterRAO
Source: InterRAO, Glitnir estimates
Figure 36: InterRAO ownership after UES breakup
Source: InterRAO, Glitnir estimates
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 31/183
UES breakup
As the final step of the restructuring process, UES, the largest utility holding in Russia, will be
broken into parts and will cease to exist.
The first stage of the breakup was completed in September 2007, when UES spun off two
generation assets on a pro-rata basis: OGK-5 and TGK-5. The second and final stage will be in
June-July 2008, when UES will spin off all its core assets and simultaneously merge into FSK.
The second stage of the UES breakup will proceed in two steps:
1. UES will spin off 28 entities on a pro-rata basis. The record date for these spinoffs was
June 6.
2. After the spinoffs, UES will be merged into FSK. This merger is scheduled for July 1.
The first step is the most important, as it involves spinning off practically all of UES’s operating
assets. Of the spun-off entities, 23 are interim holdings, which will be merged into target
companies at the same time as the spinoffs. Of the interim holdings, 18 will be merged into 18
generation companies, two will be merged into RusHydro, two into FSK, and one into InterRAO.
Another five spun-off entities will represent stand-alone companies, and will not be merged into
any entities: three large minority holdings, MRSK Holding and Far East Energy Holding.
Figure 37: UES spinoff structure
Source: UES
For the purpose of the breakup, all UES shareholders were divided into three groups: the state,
large minority shareholders (Gazprom, Norilsk Nickel, and SUEK), and other minority
shareholders. Shareholders in the first two groups were given the right to exchange their
attributed stakes in generation companies with one another.
State holdings Mergers
1 State Holding
2 State RusHydro Holding 1 FSK
Minority holdings
3 Minority FSK Holding 2 RusHydro
4 Minority RusHydro Holding
5 OGK-1 Holding 3 OGK-1
6 OGK-2 Holding 4 OGK-2
7 OGK-3 Holding 5 OGK-3
8 OGK-4 Holding 6 OGK-4
9 OGK-6 Holding 7 OGK-6
10 TGK-1 Holding 8 TGK-1
11 TGK-2 Holding 9 TGK-2
12 TGK-3 (Mosenergo) Holding 10 TGK-3 (Mosenergo)
13 TGK-4 Holding 11 TGK-4
14 TGK-6 Holding 12 TGK-6
15 TGK-7 (Volzhskaya TGK) Holding 13 TGK-7 (Volzhskaya TGK)
16 TGK-8 (Yuzhnaya TGK) Holding 14 TGK-8 (Yuzhnaya TGK)
17 TGK-9 Holding 15 TGK-9
18 TGK-10 Holding 16 TGK-10
19 TGK-11 Holding 17 TGK-11
20 TGK-12 (Kuzbassenergo) Holding 18 TGK-12 (Kuzbassenergo)
21 TGK-13 (Yeniseyskaya TGK) Holding 19 TGK-13 (Yeniseyskaya TGK)
22 TGK-14 Holding 20 TGK-14
Large holdings
23 Center Energo Holding 21 Center Energo Holding
24 Sibenergo Holding 22 Sibenergo Holding
25 Intergeneration 23 Intergeneration
Shareholder holdings
26 MRSK Holding 24 MRSK Holding
27 Far East Energy Holding 25 Far East Energy Holding
28 InterRAO Holding 26 InterRAO
Merger
Mergers
28 holdings to be created with UES
stakes in OGKs/TGKs, RusHydro, FSK,
InterRAO transferred to these holdings
26 companies left after
UES breakup
Not to be merged
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 32/183
Figure 38: Large minorities’ equity swaps during UES breakup
Source: UES, Glitnir estimates
State Gazprom
Norilsk
Nickel SUEK Other State Gazprom
Norilsk
Nickel SUEK Other State Gazprom
Norilsk
Nickel SUEK Other
OGK-1 92% 48% 10% 3% 1% 30% 14% -10% -3% -1% 0% 62% 0% 0% 0% 30%
OGK-2 81% 43% 9% 3% 1% 26% -43% 46% -3% -1% 0% 0% 55% 0% 0% 26%
OGK-3 37% 20% 4% 1% 0% 12% -9% -4% 13% 0% 0% 11% 0% 14% 0% 12%
OGK-4 90% 47% 9% 3% 1% 29% 13% -9% -3% -1% 0% 61% 0% 0% 0% 29%
OGK-6 93% 49% 10% 3% 1% 30% -38% 42% -3% -1% 0% 12% 52% 0% 0% 30%
RusHydro 100% 53% 11% 3% 1% 32% 11% -11% 0% 0% 0% 63% 0% 3% 1% 32%
TGK-1 56% 29% 6% 2% 1% 18% 8% -6% -2% -1% 0% 38% 0% 0% 0% 18%
TGK-2 49% 26% 5% 2% 0% 16% 7% -5% -2% 0% 0% 33% 0% 0% 0% 16%
TGK-3 (Mosenergo) 36% 19% 4% 1% 0% 12% 5% -4% -1% 0% 0% 25% 0% 0% 0% 12%
TGK-4 47% 25% 5% 2% 0% 15% 7% -5% -2% 0% 0% 32% 0% 0% 0% 15%
TGK-6 50% 27% 5% 2% 0% 16% 8% -5% -2% 0% 0% 34% 0% 0% 0% 16%
TGK-7 (Volzhskaya TGK ) 54% 29% 6% 2% 1% 18% 8% -6% -2% -1% 0% 37% 0% 0% 0% 18%
TGK-8 (Yuzhnaya TGK) 53% 28% 6% 2% 1% 17% 8% -6% -2% -1% 0% 36% 0% 0% 0% 17%
TGK-9 50% 26% 5% 2% 0% 16% 7% -5% -2% 0% 0% 34% 0% 0% 0% 16%
TGK-10 82% 43% 9% 3% 1% 26% 12% -9% -3% -1% 0% 55% 0% 0% 0% 26%
TGK-11 100% 53% 11% 3% 1% 32% 4% 0% -3% -1% 0% 57% 11% 0% 0% 32%
TGK-12 (Kuzbassenergo) 49% 26% 5% 2% 0% 16% -4% 0% -2% 6% 0% 22% 5% 0% 6% 16%
TGK-13 (Yeniseyskaya TGK) 57% 30% 6% 2% 1% 18% -12% 0% -2% 14% 0% 18% 6% 0% 15% 18%
TGK-14 50% 26% 5% 2% 0% 16% 7% -5% -2% 0% 0% 34% 0% 0% 0% 16%
Initial allocation Change of ownership After minority swaps
Company
UES
stake
as of
Apr 1,
2007
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 33/183
According to the breakup scheme, assets attributed to each group of shareholders are packaged
in a different way. Gazprom, Norilsk Nickel, and SUEK receive shares of specially established
entities Centerenergoholding, Intergeneration, and Sibenergoholding, respectively each of
which contains stakes in selected generation companies and FSK that are attributed to each
respective large minority shareholder. Other minority shareholders in UES receive stakes in
generation companies directly.
Stakes in generation companies attributed to the state (or cash proceeds from the sale of such
stakes) are divided into two parts. At the moment of the UES breakup, one part will be
contributed to the charter capital of FSK, while the other will go to the charter capital of
RusHydro. As a result, the state will not get direct stakes in generation companies; instead it will
receive shares in FSK and RusHydro in excess of what it could receive on a pro-rata basis.
The packages described above relate to UES’s generation and transmission assets only. MRSK
Holding (distribution), Far East Energy Holding, and InterRAO are distributed on a pro-rata basis
directly to all three groups of shareholders.
As a result of the second stage of the breakup, a typical UES minority shareholder will end up
with shares of 23 post-reform companies (the ―for‖ basket). (We regard a typical UES minority
shareholder as one who voted for the restructuring at the October 26 EGM, who did not
participate in the EGM, or who acquired shares after the EGM record date August 23, 2007.)
These companies include six thermal OGKs, 14 TGKs, RusHydro, FSK, MRSK Holding (which
will contain UES’s distribution assets), InterRAO (electricity importer and exporter plus several
power stations), and Far East Energy Holding (which will contain UES’s stakes in Far East and
isolated utilities). Those few minority shareholders who voted against the UES restructuring at
the EGM and who owned UES shares on June 6, 2008, will receive an ―against‖ basket, which
will contain shares of 26 entities and will differ from the ―for‖ basket as follows:
Figure 39: “For” and “against” baskets
Source: UES
Underlying
shares per
UES
common
Underlying
shares per
UES
preferred
Underlying
shares per
UES
common
Underlying
shares per
UES
preferred
MRSK Holding ** - 1 1 1 1
Far East Energy Holding ** - 1 1 1 1
FSK - 10.1056 9.2547 22.7734 20.8559
RusHydro HYDR 3.4532 3.1624 4.5042 4.1250
OGK-1 OGKA 0.9620 0.8810 0.3112 0.2850
OGK-2 OGKB 0.5008 0.4586 0.1620 0.1483
OGK-3 OGKC 0.4114 0.3768 0.1331 0.1219
OGK-4 OGKD 1.0274 0.9409 0.3323 0.3043
OGK-6 OGKF 0.5836 0.5345 0.1888 0.1729
TGK-1 TGKA 38.2332 35.0140 12.3666 11.3254
TGK-2 TGKB 12.9829 11.8897 4.1993 3.8458
TGK-3 (Mosenergo) MSNG 0.3360 0.3077 0.1087 0.0995
TGK-4 TGKD 15.8655 14.5296 5.1317 4.6996
TGK-6 TGKF 15.3259 14.0355 4.9572 4.5398
TGK-7 TGKG 0.3344 0.3062 0.1082 0.0991
TGK-8 TGKH 17.2625 15.8090 5.5836 5.1135
TGK-9 TGKI 67.3347 61.6651 21.7796 19.9457
TGK-10 * TGKJ 0.0089 0.0081 0.0029 0.0026
TGK-11 TGKK 6.1864 5.6655 2.0010 1.8325
TGK-12 (Kuzbassenergo) KZBE 0.6991 0.6402 0.2261 0.2071
TGK-13 (Yeniseyskaya TGK) TGKM 1.7233 1.5782 0.5574 0.5105
TGK-14 TGKN 9.7136 8.8957 3.1419 2.8773
InterRAO - 41.8643 38.3394 41.8643 38.3394
Centerenergoholding (Gazprom) ** - 0 0 1.0490 1.0490
Sibenergoholding (SUEK) ** - 0 0 0.9662 0.9662
Intergeneration (Norilsk Nickel) ** - 0 0 3.5169 3.5169
* If adjusted for planned share split, ratios would change to:
1.4710 1.3471 0.4758 0.4357
** UES prefs holders receive preferred shares in MRSK Holding, Far East Energy Holding,
Centerenergoholding, Sibenergoholding and Intergeneration
Voting FOR issue no. 1
on EGM agenda or not
participating
("FOR basket")
Voting AGAINST issue
no. 1 on EGM agenda
("AGAINST basket")
Company Ticker
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 34/183
The last trading day for UES shares on stock exchanges was June 6, 2008, which was also the
record date for the spinoffs. Those shareholders who owned UES shares as of 18:00 MSK on
this day receive one of the two baskets discussed above.
OTC trading of UES shares will continue until July 1, which is the date UES will conduct the
spinoffs and merge into FSK. Shareholders who acquire shares in UES after June 6 will have
their UES shares converted into FSK shares on July 1 at ratios of around 2.3 and 2.1 shares of
FSK per UES common and preferred share, respectively.
If a shareholder is recorded directly in UES’s register, he will receive all underlying shares by
July 4. If a shareholder owns UES shares through a depositary (nominee), he will receive
underlying shares sometime in mid-July (the exact date depends on the depositary).
Listing
Out of the 23 stocks a typical UES shareholder will receive, 19 are currently quoted on Russian
stock exchanges (5 OGKs, 13 TGKs and RusHydro). FSK and InterRAO shares will be listed in
July 2008, while MRSK Holding and Far East Energy Holding will be listed in September-
November 2008.
GDR holders
Issuance and withdrawal of depositary receipts on UES shares stopped on May 30, 2008.
Depositary receipt holders receive election packages presenting three options:
1. To receive depositary receipts on shares of underlying companies
2. To receive local shares of underlying companies
3. To cash out
In order to receive local shares or depositary receipts on local shares, investors need to present
certain information. Those depositary-receipt holders who fail to provide all the necessary
information will automatically receive cash proceeds from sales of shares. UES expects that local
shares of underlying companies and depositary receipts on such shares will be received by
depositary receipt holders by the end of July 2008, while the cash-out procedure may take three
to six months. UES expects the majority of underlying companies will launch depositary-receipt
programs before July. As an exception, shares of MRSK Holding and Far East Energy Holding
are likely to be received in September 2008, while depositary receipts for these shares will be
issued in December 2008 – January 2009. The delay is explained by the fact that these entities
will be established on July 1.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 35/183
Figure 40: Timeline of corporate actions for local shares
Source: UES, RusHydro, FSK
Figure 41: Timeline of corporate actions for depositary receipts
Source: UES, RusHydro, InterRAO, FSK
3Q07 Jun 2008Aug 2008
EGM Record date
Aug 23
UES shares cancelled (UES ceases to exist)
Jul 1
Far East Energy Holdinglists in Russia
Sep
UES EGMon reorganization
Oct 26
Record date for UES breakup (holders of
local shares)
Jun 6
FSK share listing July
MRSK Holdingshare listing
Sep
RusHydrolists in Russia
Feb
Feb 2008 Apr 2008
UES shares excluded f rom RTS and MICEX Indices
Apr 30
May 2008
UES shares stop trading on stock exchanges
Jun 7
Futures on UES shareslast trading day - May 29
last delivery date - May 30
Jul 2008
Shares of underlying companiescompanies start trading
Jul 9
Non-trading period
Sep 2008
3Q07 Jun 2008 Dec 2008
EGM Record date
Aug 23
UES DRsexclusion f rom MCSI
indices
Depositary banks receive shares of
underlying companies
Jul 4
Far East Energy Holding
DRs issue
Dec
UES EGM on reorganization
Oct 26
Record date for UES breakup (DR
holders)
Jun 6
FSK, RusHydro, InterRAODRs issue
Jul
MRSK HoldingDRs issue
Dec
May 2008
DRs/cash-out election period
Jun 6 - Jul 7
DR issue books close, DRs cancelled
May 30
Jul 2008
DRs of underlying companies are received by
investors
Jul 7- Jul 21
UES DRs stop tradingJun 3
Cash-out periodJul 21
(1-3 months)
UES ceases to exist
Jul 1
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 36/183
Privatisation
The reform stipulates that the state give up control of companies in the competitive segment
(generation and supply companies) but maintain and increase ownership of transmission grids
(FSK), System Operator, and RusHydro. Initially distribution grids (as natural monopolies) were
to be kept under state control as well, but in 2006-2007 UES and state officials told the media
there was a possibility distribution companies would be privatised; this issue remains unresolved.
Furthermore, UES planned to divest all non-core segments, including repair and servicing
companies and engineering centers.
Generation companies
The privatisation of OGKs and TGKs has been on track since autumn 2006. UES transfers new
ownership in two ways: through additional share issues and through the sale of state-attributed
stakes.
Additional share issues are a primary source of financing for generation companies’ investment
programs. Additional issues are usually done either through a single block placement to a
strategic investor, or (rarely) as an SPO.
To date UES and its subsidiaries have sold or agreed to sell stakes in 23 generation companies.
The total value of the deals (including both additional share issues and sales of state-attributed
stakes) has reached USD 35 bn.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 37/183
Figure 42: Generation company privatisation deals
Source: Company data, Glitnir estimates
Company Deal type Buyer Date
Additional
share
issue, post-
money, %
State-
attributed
stake, post-
money, %
Total
post-
money
stake, %
Deal
value,
USD mn
Priced
paid per
share,
USD
Implied
EV /
Installed
Capacity,
USD/kW
OGK-5 Additional share issue Porfolio investors Oct 06 14% 14% 459 0.090 320
OGK-3 Additional share issue & sale of state-attributed stake Norilsk Nickel Mar 07 38% 11% 49% 4 124 0.177 584
Yuznokuzbasskaya GRES (TGK-12) Sale of Kuzbassenergo stake Mechel Mar 07 93% 0 0.467 513
Zapadno-Sibirskaya CHP (TGK-12) Sale of Kuzbassenergo stake Evraz Mar 07 93% 0 0.403 407
Mosenergo (TGK-3) Additional share issue Gazprom Mar 07 29% 29% 2 345 0.204 596
TGK-5 Additional share issue IES May 07 27% 27% 455 0.00138 554
OGK-5 Sale of state-attributed stake Enel Jun 07 25% 25% 1 574 0.178 729
OGK-4 Additional share issue & sale of state-attributed stake E.ON Sep 07 22% 47% 69% 5 782 0.132 755
TGK-1 Additional share issue & sale of state-attributed stake Gazprom Sep 07 24% 29% 53% 2 854 0.00141 682
OGK-2 Additional share issue Gazprom, portfolio investors Oct 07 19% 19% 1 000 0.160 505
TGK-8 Additional share issue & sale of state-attributed stake Lukoil (via IFD Capital) Oct 07 33% 24% 57% 1 656 0.00141 568
Mosenergo (TGK-3) Sale of state-attributed stake Moscow government Nov 07 21% 21% 2 131 0.253 780
TGK-9 Additional share issue & sale of state-attributed stake IES Dec 07 27% 25% 52% 1 306 0.000322 657
Kuzbassenergo (TGK-12) Additional share issue SUEK, porfolio investors Dec 07 14% 14% 306 0.0306 434
OGK-6 Additional share issue & sale of state-attributed stake Gazprom Dec 07 17% 10% 27% 1 339 0.155 490
TGK-10 Additional share issue & sale of state-attributed stake Fortum Feb 08 47% 27% 75% 3 030 4.62 762
Novosibirskenergo Sale of UES stake Renaissance Capital Feb 08 14% 139 60.9 458
TGK-6 Additional share issue & sale of state-attributed stake IES & Prosperity Mar 08 31% 23% 55% 1 085 0.00106 439
TGK-2 Additional share issue & sale of state-attributed stake RWE & Sintez Mar 08 24% 25% 50% 776 0.00106 554
TGK-4 Additional share issue & sale of state-attributed stake Onexim (Norilsk Nickel) Apr 08 30% 23% 52% 1 183 0.00114 535
TGK-13 Additional share issue & sale of state-attributed stake SUEK, porfolio investors Apr 08 19% 14% 33% 469 0.00890 492
TGK-7 Additional share issue & sale of state-attributed stake IES Apr 08 13% 32% 45% 1 651 0.122 470
TGK-11 Sale of state-attributed stake E4 Group May 08 21% 21% 566 0.00172 421
Bashkirenergo Sale of UES stake Unitrade (IES) May 08 21% 464 1.997 426
TGK-14 Additional share issue & sale of state-attributed stakeEnergopromsbyt (Russian
Railways & ESN Group)Jun-08 43% 19% 62% 264 0.00031 368
Total 34 958
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 38/183
In looking at the prices paid for generation companies (measured by EV/capacity), we note the
following trends:
1. Portfolio investors usually paid a lower price than strategic investors. Public
offerings of generation companies were priced at USD 448/kW, which is 27%
below the average price paid by strategic investors of 569/kW.
2. Foreign strategic investors paid an average of USD 700/kW, 33% higher than the
USD 525/kW paid by Russian industrial investors.
Figure 43: EV/Capacity implied in deals
Source: Glitnir estimates
Forthcoming placements
There are three privatisation deals in the generation segment that are expected to be finished by
the end of the year. UES (or its heirs, FSK and RusHydro) will sell its state-attributed stake in
Kuzbassenergo (TGK-12). TGK-11 will float additional shares. The OGK-1 deal, which includes
both an additional share issue and the sale of a state-attributed stake, has not started yet.
Figure 44: Forthcoming placements
Source: Glitnir estimates
Post-reform ownership structure of the generation segment
After the UES breakup and privatisation is completed, the generation sector will still be directly
and indirectly dominated by the state. Generators controlled by the state (Rosenergoatom,
RusHydro, and others) together with those owned by the Gazprom account for 55% and 19% of
total installed capacity in the European and Siberian pricing zones, respectively.
OGK-5
OGK-3
Zapadno-Sibirskaya CHP
Mosenergo
TGK-5
OGK-5OGK-4
TGK-1
OGK-2
TGK-8
Mosenergo
TGK-9
TGK-12
OGK-6
TGK-10
Novosibirskenergo
TGK-6
TGK-2
TGK-4
TGK-7
TGK-11
Bashkirenergo
TGK-14
0
100
200
300
400
500
600
700
800
900
Jul 06 Oct 06 Jan 07 Apr 07 Aug 07 Nov 07 Feb 08 Jun 08 Sep 08
US
D/k
W
Yuzhnokuzbasskaya GRES
Company Deal type Possible buyer Date
Additional
share
issue, post-
money, %
State-
attributed
stake, post-
money, %
Total
post-
money
stake, %
Kuzbassenergo (TGK-12) Sale of state-attributed stake SUEK Jun-08 17% 17%
OGK-1Additional share issue & sale of
state-attributed stakeIES n/a 34% 41% 75%
TGK-11 Additional share issue E4 Group n/a 26% 26%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 39/183
Figure 45: Ownership structure of generation assets by installed capacity
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
On the energy zone level, the state’s dominance is overwhelming: for instance, state-controlled
generators and Gazprom hold a total of 92% of installed capacity in the North-West energy zone,
68% in the South zone, 66% in the Volga zone, and 63% in the Center zone. However the
ownership structure has drastically changed from the one that existed before the reform, when
practically the entire sector was controlled by the state. We believe the privatisation measures
taken to date are enough to create the competitive environment necessary to promote
improvements in the efficiency of generation companies.
Figure 46: Ownership by energy zone, European Russia
Source: Company data, Glitnir estimates
Privatisation of distribution companies
There are no definite plans for the ultimate ownership structure of distribution companies.
Although the MRSKs will effectively remain under state control for at least several years, since
2006 UES has told various media sources that there is a chance privatisation will occur in 2010-
2015. We believe privatisation could promote improvements in efficiency and serve as an
additional trigger for the revaluation of distribution assets.
Ownership structure of distribution companies
UES received controlling stakes in the MRSKs upon their formation. After the UES breakup,
UES’s stakes in all distribution companies will be inherited by MRSK Holding, whose shareholder
structure will mirror that of UES.
Figure 47: Distribution company ownership
Source: Company data, Glitnir estimates
State32%
Gazprom24%
Norilsk Nickel & Onexim
8%
IES10%
Enel6%
E.On5%
RWE & Sintez1%
Fortum2%
Lukoil2%
Bashkirian ref ineries
4%
Other7%
State16%
Gazprom3%
SUEK15%
Norilsk Nickel & Onexim
4%Bazel42%
E.On3%
Group E410%
Other5% Energopromsbyt
2%
Region
Installed
electric
capacity
2007, MW State Gazprom
Norilsk
Nickel &
Onexim IES Enel E.On
RWE &
Sintez Fortum Lukoil
Bashkiria
refineries
Strategic
shareholder
to be
determined
Center 46 112 31.1% 31.9% 18.1% 3.7% 5.2% 3.8% 2.8% 3.4%
North-West 16 748 39.8% 52.5% 6.3% 1.4%
Volga 24 365 65.9% 34.1%
Urals 40 639 5.2% 14.4% 2.2% 12.4% 12.3% 13.3% 8.0% 12.7% 19.6%
South 15 635 39.2% 28.9% 8.3% 23.0% 0.7%
0% 20% 40% 60% 80% 100%
MRSK Center
MRSK South
MRSK North Caucasus
MRSK Center and Volga
MRSK North-West
MRSK Siberia
MRSK Urals
MRSK Volga
Moscow Unified Dist. Co.
Moscow City Dist. Co.
Lenenergo
Tyumenenergo
MRSK Holding Minorities
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 40/183
Supply company auctions
UES has sold 47 out of 57 supply companies to date, collecting USD 1 174 mn in gross
proceeds. The average deal price implies an EV/electricity sales of USD 6.6/MWh and an
EV/revenues of USD 0.152.
Figure 48: Supply company auctions
Source: UES, Glitnir estimates
UES (or its heir, Far East Energy Holding) has yet to auction six supply companies, including
Moscow and Petersburg Supply Companies.
Company
RTS
ticker
UES
stake
auctioned
Price
paid at
auction,
USD mn
Premium
over
starting
price
Implied
EV/
Electricity
sales,
USD/MWh
Implied
EV/
Revenues
Yaroslavl Supply Co. 47% 16 133% 6.13 0.135
Kuban Supply Co. 49% 33 0% 5.98 0.251
Nizhnovgorod Supply Co. NNSB 49% 79 173% 16.45 0.323
Sverdlov Supply Co. SVSB 49% 45 0% 4.58 0.106
Kuzbass Supply Co. KZSB 49% 44 0% 3.46 0.254
Orenburg Supply Co. 100% 43 0% 1.91 0.043
Belgorod Supply Co. BLSB 49% 36 268% 9.09 0.193
Vologda Supply Co. VOSB 49% 10 0% 3.96 0.277
Kurgan Supply Co. 49% 3 0% 2.01 0.144
Karelia Supply Co. 100% 14 0% 5.35 0.156
Voronezh Supply Co. VRSB 49% 12 0% 5.26 0.122
Tver Supply Co. TVSB 49% 22 0% 13.59 0.224
Vladimir Supply Co. VDSB 49% 12 2% 6.32 0.118
Lipetsk Supply Co. LPSB 49% 20 101% 6.27 0.150
Tula Supply Co. TLSB 49% 20 20% 5.03 0.100
Buryat Supply Co. BUSB 47% 8 0% 7.68 0.129
Mari Supply Co. MISB 64% 6 1% 5.59 0.097
Tomsk Supply Co. TOSB 52% 10 1% 4.83 0.112
Omsk Supply Co. OMSB 49% 13 2% 4.23 0.093
Khakas Supply Co. 100% 9 1% 0.60 0.056
Udmurtia Supply Co. UDSB 49% 21 3% 6.27 0.153
Kirov Supply Co. KISB 48% 12 1% 3.21 0.061
Sibirenergo 14% 5 0% 3.51 n/a
Novgorod Supply Co. NGSB 49% 5 4% 6.05 0.106
Kostroma Supply Co. KTSB 49% 6 0% 9.42 0.152
Ryazan Supply Co. RZSB 49% 27 50% 10.24 0.236
Chuvashia Supply Co. 100% 27 12% 5.50 0.123
Mordovia Supply Co. MRSB 53% 8 52% 6.22 0.105
Kursk Supply Co. KUSB 49% 11 0% 9.06 0.157
Chita Supply Co. CHSB 49% 9 0% 2.82 0.066
Smolensk Supply Co. SMSB 51% 15 67% 9.19 0.135
Astrakhan Supply Co. ASSB 49% 15 0% 13.13 0.326
Kola Supply Co. KOSB 49% 19 0% 3.27 0.112
Samaraenergo Supply Co. SAGO 55% 86 0% 6.94 0.142
Ulyanovskenergo Supply Co. ULEN 49% 5 0% 14.87 0.353
Volgograd Supply Co. VGSB 49% 24 0% 7.94 0.158
Penza Supply Co. PZSB 49% 19 88% 12.47 0.174
Orel Supply Co. ORSB 49% 5 0% 9.16 0.166
Ivanovo Supply Co. IVSB 50% 16 0% 8.20 0.151
Komi Supply Co. 50% 11 39% 5.58 0.194
Stavropol Supply Co. STSB 55% 20 46% 6.05 0.132
Bryansk Supply Co. BNSB 49% 11 39% 9.88 0.182
Arkhangelsk Supply Co. ARSB 49% 7 1% 1.91 0.053
Rostov Supply Co. RTSB 48% 21 5% 3.68 0.085
Tyumen Supply Co. 100% 241 57% 1.40 0.041
Kaluga Supply Co. KLSB 52% 19 0% 12.61 0.253
Perm Supply Co. PMSB 49% 53 32% 4.58 0.102
Total/Average 1 174 6.64 0.152
WA 7.04 0.129
Median 6.05 0.139
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 41/183
Figure 49: Forthcoming supply company auctions
Source: UES, Glitnir estimates
The switch to market-based pricing
Pre-reform: Cost-based regulation
Until recently the state had full control over the operational activity of power companies. A special
government body, the Federal Service for Tariffs (FST), determined both production volumes and
tariffs for every utility company in the country.
Before the reform, the FST set tariffs for each AO-energo and each stand-alone GRES. For the
AO-energos the tariff included a total payment for the entire production chain, from generation to
distribution and supply. For GRESs the payment covered only electricity generation. UES also
charged a subscription fee from its subsidiaries to finance expenses and redistribute income
within the group.
The tariff system for all the utility companies was based on the ―cost-plus‖ approach: the
companies were compensated for planned expenses for the next year and left with a margin
close to zero. If a particular company needed funds for repairs or the construction of new power
blocks (and such cases were rare), the company’s tariff was raised for one or several years in
order to finance capex; after the capex was paid, the tariff dropped back to the previous level,
generally maintaining zero cash flow.
The price of gas (the main cost driver for most utilities) was also regulated by the FST, and was
indexed with the expected inflation rate for the next year. Based on expected fuel prices and
costs, the government set tariffs for utility companies that usually corresponded with the
expected inflation rate.
Under the cost-plus system, any cost cuts resulted in a corresponding cut in the tariff the
following year, leaving the companies with low profitability. The companies thus had virtually no
incentive to improve efficiency; instead they were prompted to inflate costs. Those companies
that were in better relations with the regulator generally managed to negotiate sharper hikes in
costs and thus tariffs, which resulted in significant deviation of regulated tariffs across
companies.
Company
RTS
ticker
UES stake
to be
auctioned
Expected
date
Starting
price,
USD mn
Implied
EV/
Electricity
sales,
USD/MWh
Implied
EV/
Revenues
Via auctions
Petersburg Supply Co. PBSB 49% Jun 08 211.9 14.3 0.345
Saratovenergo Supply Co. SARE 48% Jun 08 36.0 8.7 0.184
Moscow Supply Co. MSSB 51% n/a 475.3 14.1 0.25
Chelyabinsk Supply Co. CLSB 49% n/a n/a n/a n/a
Via ISTRA trading system
Pskov Supply Co. 100% n/a 16.1 10.2 0.143
Tambov Supply Co. TASB 49% n/a 13.1 8.1 0.131
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 42/183
Figure 50: Regulated electricity tariff, 2008e
Source: Company data
Figure 51: Regulated capacity tariff, 2008e
Source: Company data
In the early 2000s inflation was one of the government’s biggest concerns, as tariffs for services
provided by natural monopolies were considered one of the core drivers of inflation. The
government’s intention to enforce improvements in efficiency coupled with its desire to keep
tariffs low led to the introduction of ―inflation-minus‖ regulation, which required that electricity
tariffs be indexed at a rate below inflation. The government supposed that companies had the
potential to cut costs and that the pressure of fuel prices (which outpaced electricity tariffs) would
promote improvements in efficiency.
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CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 43/183
Figure 52: Average growth of power tariffs vs. inflation
Source: Rosstat, UES
However, inflation-minus regulation had only a marginal impact on improving efficiency itself, as
it failed to provide any real economic incentives for cutting costs. Instead, utility companies
generated even less cash flow, and many of them began posting net losses, which increased
each year. Utility companies have not made any sizable profit under cost-based tariff regulation
for years and therefore have probably been the biggest victims of the fight against inflation.
Figure 53: UES profitability since 2001
Source: UES
The cost-plus system probably could have existed for several more years had the capacity deficit
and unreliable power supply not been such big problems. The sector’s huge capex needs, which
were impossible to finance through external sources, forced the government to develop a plan to
change the regulatory landscape in order to provide a fair return on invested capital.
Post-reform: The road to the free market and fair-return regulation
The restructuring process resulted in the breaking up of AO-energos into a number of smaller
companies, each of which represented a separate segment: generation, transmission,
distribution, supply, or non-core activity. The reform stipulates that utility companies operating in
competitive segments (generation and supply) are to sell on liberalised markets (the wholesale
market for generators, and the retail market for supply companies), while tariffs of those
operating in naturally monopolistic segments (distribution and transmission grids) are to continue
to be regulated by the government. The reform also specifies that the regulation of natural
monopolies must be changed to provide a fair return on invested capital.
Generation: The road to the free market
According to current legislation, generators in Russia receive two separate revenue flows:
Electricity sales = Volume of electricity actually supplied (MWh) x Electricity tariff
(RUB/MWh)
Capacity sales = Installed capacity x Capacity payment (RUB/kW/month). These sales
represent compensation for the generator’s ability to provide a certain volume of
electric capacity (MW) in a certain technological condition. Capacity payments are
ultimately aimed at ensuring the generator’s ability to handle consumption peaks,
which is a key element in determining the reliability of the power system as a whole.
The FST determines separate tariffs for electricity and for capacity. This two-tariff system is
designed in such a way that the electricity tariff covers only variable costs (fuel), while the
payment for capacity covers fixed costs (such as operating and maintenance expenses) and the
cost of capital.
0%
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2001 2002 2003 2004 2005 2006 2007
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CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 44/183
Capacity payments are an important contribution to revenues and currently make up 31-78% of
generation companies’ top lines.
Figure 54: Capacity payment as % of total revenues, 2006
Source: UES
The reform stipulates the liberalisation of both the electricity and capacity markets. So far,
however, the government has only adopted the necessary legislation to liberalise the electricity
market, while no action has been taken in regards to the capacity market. As a result, a portion of
electricity is currently traded at unregulated prices, while capacity payments are still 100%
regulated.
Electricity market
The first attempt to liberalise the electricity market was in 2006, when the government introduced
the so-called ―5-15‖ market, according to rules of which generators had the right to sell up to 5%
of their output and consumers were allowed to buy up to 15% of their consumption at
unregulated prices. However, as consumers were given the choice to buy electricity at either the
regulated or unregulated tariff—essentially an arbitrage option—the market price of electricity
was effectively capped by the regulated tariff.
The New Wholesale Electricity and Capacity Market (NOREM) established by Government
Decree No. 529 dated August 31, 2006 and launched in September 2006 is the target model for
the electricity market and will remain in effect for the foreseeable future. It consists of the
following three segments:
Bilateral contracts between sellers (generators) and buyers (supply companies and
large consumers). The majority of electricity is sold through bilateral contracts.
Day-ahead market. This is effectively an electronic spot market organized by the
Administrator of Trading Systems (ATS).
Balancing market. This is a real-time system where deviations from the hourly
volumes of production planned on the day-ahead market are traded. The balancing
market typically covers 3-5% of total power consumption.
In the future UES expects that other instruments such as derivatives will emerge to complement
these three segments.
Bilateral contracts
With the launch of NOREM, generators signed the first regulated bilateral contracts for 100% of
their expected production through the end of 2006. Planned volumes as well as prices of
regulated contracts are set by the FST. Regulated contracts are financial in nature: a generator is
obliged to sell a certain volume of electricity at a regulated tariff. The generator is given the
option of either producing this volume in its own generation facilities or buying it from other
producers (from the market) and reselling it to customers in order to fulfil its obligations in
electricity delivery.
The electricity market is being liberalised (deregulated) through the gradual reduction of the
amount of electricity sold through regulated contracts. The pace of this reduction was set by
Government Decree No. 205 dated April 7, 2007, which states that electricity sold at free prices
will reach 100% of sales volume by January 1, 2011, excluding volumes sold to the population.
Currently 15-20% of electricity trades at unregulated prices, and this amount will increase to 25-
30% beginning July 1, 2008.
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Nuclear Hydro CCGT CHP GRES
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 45/183
Figure 55: Electricity market liberalisation schedule
Source: Ministry of Industry and Energy
Any electricity a generator produces in excess of regulated contracts may be sold at unregulated
prices either through unregulated bilateral contracts or on the day-ahead market. The new rules
also stipulate, however, that power blocks constructed after 2007 (i.e. in 2008 and beyond) are
allowed to sell 100% of production volumes at unregulated prices.
Day-ahead market
The day-ahead market is an electronic spot market organized by the ATS. Buyers (supply
companies and large industrial consumers) submit bids of their expected hourly consumption for
the next day, and sellers (generators) submit offers of their expected hourly generation. Day-
ahead trading is based on the marginal generator principle: the ATS determines a uniform
equilibrium (―clearing‖) price equal to the offer price of the most efficient generator that covers
marginal consumption. Offers submitted to the system must correspond to the generators’ actual
variable costs per megawatt hour produced. The government’s antimonopoly service is entitled
to verify offers from the marginal generator; if it finds the marginal generator has overstated its
variable costs (and correspondingly, its offer price), it may impose penalties or other prohibitive
measures.
The actual dynamics of the clearing price on the day-ahead market indicates that this market has
several traits of a normal liberalised electricity market, such as intraday and seasonal effects.
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CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 46/183
Figure 56: Hourly electricity prices and volumes on April 29, 2008
European Russia Siberia
Source: ATS Source: ATS
Figure 57: Seasonal dynamics
European Russia Siberia
Source: ATS Source Source: ATS
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CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 47/183
Russia is divided into two pricing zones: European Russia and Siberia. This division is due to
constraints in transmission capacity that prevent the free flow of electricity between the zones.
The ATS determines an equilibrium price for each zone separately.
European Russia can be further divided into five energy zones, which are characterized by
limited inter-connection capacity: North West, Center, Urals, Volga, and South. However, these
limitations are much less serious than those between the pricing zones.
There are also ―non-pricing‖ zones, which lack the ability to transmit electricity to the rest of the
power system. These non-pricing zones include Komi and Arkhangelsk in the North West, and
the Amur, Primorsk, Khabarovsk, South Yakutia, Sakha, and Jewish Autonomous regions in the
Far East. Furthermore, some regions (Norilsk, Kalmykiya, Magadan, Chukotka, Kamchatka,
Sakhalin, and Kaliningrad) are completely isolated from one another and from the rest of the grid.
As there is no way to introduce the market in non-pricing zones and isolated regions, tariffs for
companies located in these zones and regions will remain regulated for the foreseeable future.
Figure 58: Pricing & energy zones
Source: UES
The pricing zones are characterized by different structures among their generation assets:
European Russia is dominated by gas-fired generators, while Siberia is heavily influenced by
hydroelectric and coal-fired plants. This structure can be explained by geographic conditions
(Siberia is rich in water resources and coal), as well as by infrastructure constraints (most
regions in Siberia have no or limited gas network).
Figure 59: Generation by fuel type, 2007
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
Thermal gas58.1%
Thermal coal7.7%
Thermal fuel oil
1.0%
Thermal other0.1%
Hydro9.8%
Nuclear23.2%
Thermal gas4.0%
Thermal coal
50.6%
Thermal fuel oil0.5%
Hydro 45.0%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 48/183
The supply-and-demand relationship and structure of generation assets located in a certain
pricing zone determines the dynamics of the market price in that zone. For instance in European
Russia, where reserve margin is tight and most power plants are fuelled by expensive gas,
average electricity prices are higher (USD 22.7/MWh in 2007), while in Siberia the average price
of electricity is lower (USD 11.4/MWh in 2007) due to abundant hydroelectric capacities, access
to cheap coal, and a higher reserve margin.
Figure 60: Electricity price dynamics
European Russia Siberia
Source: ATS, Glitnir calculations Source: ATS, Glitnir calculations
Capacity market
The government is currently discussing the rules for the future capacity market. Most recently
state officials and UES said these rules are to be approved in July 2008. However, discussion of
the new capacity market dates back almost two years and its introduction has already been
postponed several times. There is a chance the introduction of the new rules could be delayed
further.
So far, no official documents on the projected capacity market have been released, nor has the
timetable or pace of liberalisation for the capacity market been announced. The reform
legislature states the capacity market should be liberalised at the same time and pace as the
electricity market, but whereas 15% of electricity volumes are currently sold at free prices (and
this share will expand to 25% on July 1, 2008), we see virtually no progress in the liberalisation of
the capacity market.
The only indication of the form the future capacity market may take comes from materials that
UES has released in various presentations since 2006. In our view these materials provided
more questions than answers regarding the key features of the capacity market. Furthermore, we
believe the final official rules may differ materially from those presented by UES. For now we
believe investors have no other option but to guess what the rules of the capacity market will
ultimately be, but for those curious about UES’s proposals on the capacity market we have listed
them below.
UES proposed that the capacity market would begin to be gradually liberalised in 2008, and the
pace of this liberalisation would equal that of the electricity market, meaning that starting in 2009,
tariffs for a maximum of 70% of both electricity and capacity would be regulated. As in the case
of the electricity market, existing capacity in excess of regulated volumes and new capacity
constructed after 2007 would be traded through market-based mechanisms.
Capacity is to be auctioned four years in advance of delivery. For instance, the first auction, to be
held in 2008, is to relate to capacity delivered in 2012. Auctions for capacity to be delivered in
2009-2011 are considered transitory, and will have special rules.
The auctions (also called ―competitive selection of capacity‖) are planned as follows:
1. The territory is divided into capacity free-flow zones. A free-flow zone is a zone in
which there are practically no technical limitations on the transfer of electricity from any
point in the zone to another. These zones are even smaller than pricing and energy
zones.
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4.65.9
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16.9
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 49/183
2. For each free-flow zone, the operator determines the volume of capacity required to
cover the expected consumption peak and the required technical parameters of
capacity.
3. Generators submit price offers.
4. The generators who submit the lowest offers and provide the required volume of
capacity in each free-flow zone with the required technical parameters are selected.
Selected generators are to have two options:
1. To sell both capacity and electricity at free prices
2. To receive a guaranteed (regulated) capacity payment for 10 years. (In this case, the
generator would be required to sell electricity at regulated tariffs as well.)
Generators that are not selected would have no option for guaranteed capacity payment and
would try to sell capacity on the free market.
UES expects the second option would typically be attractive only to those inefficient generators
not able to sell capacity on the free market.
Also, UES expects generators would be able to sign bilateral contracts on the delivery of both
electricity and capacity, meaning these contracts would have a single price.
Electricity consumers would be obliged to pay for their actual peaks in consumption.
Presentations made by UES showed that transitory auctions (for capacity to be delivered in
2008-2011) will have several limitations, including caps on the offer price that a generator can
submit to the auction (price caps can equal the regulated capacity tariff).
If UES’s expectations prove correct, transitory auctions would effectively have no market-based
pricing, meaning the capacity market would be liberalised no sooner than 2012.
Hydroelectric regulation
The current legislative environment envisages several special conditions regarding hydroelectric
plants:
1. Hydroelectric plants are price-takers in the day-ahead market, meaning they can
submit only a price offer of zero to the trading system.
2. Hydroelectric plants are subject to a special tax on the use of natural water resources.
Currently the water tax is marginal, at USD 0.4 /MWh. Hydroelectric plants, which bear no fuel
costs, receive the same price for electricity as fuel-fired generators in the liberalised market,
effectively earning windfall profits. We consider it reasonable to expect that when the electricity
market is liberalised and the huge profits earned by hydroelectric plants become evident, the
government will tax these profits, leaving shareholders with a more or less fair economic return
on invested capital.
Heat regulation
While heat plays a minor role for OGKs, it is an important contributor to the top line of TGKs and
vertically integrated utilities.
Figure 61: Share of heat in total revenues, 2007
Source: Company data
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Heat consumption
Heat consumption in Russia generally moves in line with GDP. Since 1998, total heat
consumption in Russia has shown steady growth, with a CAGR of 2.1%.
Figure 62: GDP growth vs. heat consumption
Source: Rosstat, Glitnir estimates
Sector structure
The heat sector is composed of TGKs, which inherited the heat assets of AO-energos
(cogeneration power plants, which produce electricity and heat, boilers, and heat pipelines), and
local boilers, which are controlled by regional authorities and private owners.
Figure 63: Heat sales, 2006
Source: Rosstat
Tariffs for each segment (heat generation, transportation, and supply) are regulated by regional
energy commissions, special tariff-setting bodies of the regional authorities. Regulation is based
on the cost-plus approach and depends heavily on the relationship between TGK executives and
owners and the local authorities. Most local authorities aim to keep tariffs at the lowest possible
level, so the profitability of a TGK’s heat business depends on how well the company deals with
local officials.
1.4% -5.3%6.4%
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1996 1998 2000 2002 2004 2006
Cumulative GDP growth, % Heat output growth cumulative
Electricpower plants
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Boilers50.4%
Other5.5%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 51/183
Figure 64: Heat tariff and heat operating profit margin, 2006
Source: Company data, Glitnir estimates
The government has not announced any plans to change the regulation of the heat segment, but
it is becoming evident to local officials that regulation of the heat segment needs to be changed
for the same reasons as in the electricity segment: the need for investments to overhaul outdated
equipment and the need to improve efficiency. However, the timetable for these changes
remains unclear.
Distribution: The switch to RAB
Before the reform, AO-energos received compensation for power distribution services as a part
of the overall industry tariff. Currently each spun-off distribution company receives a separate
tariff for electricity distribution. These tariffs are calculated using the cost-plus approach, meaning
the tariff covers operating costs and provides additional cash to finance capex. Each distribution
company’s profit is typically a function of its capex needs the higher the need to invest in a
particular region, the more favourable the tariff.
The cost-plus tariff system does not provide any stimulus for distribution companies to improve
efficiency, nor does it provide investors with sufficient return on invested capital. Under such a
tariff system, any savings the distribution companies manage to make are met with a
corresponding reduction in the company’s tariff.
On June 18, 2008, the Russian government signed Decree No. 459, which enables the switch
from the cost-plus tariff system to the regulatory asset base (RAB) model, a return-based
approach that is used in various forms in the regulation of power grid assets in many countries
around the world. The decree sets the general principles of the new regulatory system, which
include a fair market return on invested capital for investors and mechanisms to stimulate
improvements in efficiency among distribution companies.
The government set a 3-month deadline for the FST to develop the exact methodology for tariff
setting in accordance with the RAB approach. However, the decree itself provides some insights
on how the RAB system will work in Russia:
Under the RAB system, tariffs are set on the basis of required revenue, which is
determined by a regulator on a long-term basis. Required revenue is subject to annual
adjustments to account for differences between projected long-term regulation
parameters and actual numbers. Required revenue provides:
o Defrayal of operating expenses
o Defrayal of depreciation of invested capital (or RAB)
o Return on invested capital (or RAB)
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
5
10
15
20
25
OG
K-5
TG
K-5
OG
K-6
OG
K-2
TG
K-1
0
TG
K-8
TG
K-6
OG
K-4
TG
K-1
OG
K-3
TG
K-9
TG
K-4
No
vo
sib
irske
ne
rgo
TG
K-7
TG
K-2
Ba
sh
kir
en
erg
o
Mo
se
ne
rgo
TG
K-1
1
TG
K-1
4
TG
K-1
3
Fa
r E
ast
GC
OG
K-1
Irku
tske
ne
rgo
Ku
zb
asse
ne
rgo
US
D/G
Ca
l
Heat tariff, 2006 (USD/Gcal) EBIT margin, heat, 2006 (%)
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 52/183
Invested capital (RAB) for regulatory purposes is determined in accordance with rules
to be adopted by the FST. The initial size of invested capital is set on the basis of
independent appraisal, and should correlate with the replacement value of assets and
with their physical and economic depreciation. Size of invested capital is adjusted
annually to account for investments in fixed assets and working capital (which
increases RAB) and depreciation of assets (which decreases RAB).
Invested capital for RAB purposes is accounted for separately from financial and tax
accounting.
Savings resulting from the reduction of operating expenses and losses in grid (i.e. the
difference between regulated and actual values of expenses and losses) are kept in
revenues for five years.
Regulated revenue can be shifted by the regulator from one year to another to smooth
the transition to the RAB method.
According to the statements of government officials and UES, RAB regulation will begin for
between four and six pilot distribution companies on July 1, 2008, while the remaining distribution
companies will switch to the new regulation in 2009-2010. However according to the decree,
tariffs set for 2008 will not be changed, which effectively means that a switch to RAB-based
tariffs will happen no sooner than 2009.
Connection fees
The RAB system should provide a significant boost to cash flow for distribution companies in two
or three years, but these companies face urgent capex needs already. As a temporary means of
financing the construction of new power grids, the government has introduced a connection fee,
which is charged directly to new consumers when connecting to the grid. This connection fee is
expected to remain in effect until the RAB system is introduced, at which point it will be
discontinued.
The connection fee serves as an important source of revenue for distribution companies and is a
substantial driver of short-term profitability. The amount of the fee varies dramatically across
Russia’s regions, peaking at USD 940 per kW for Lenenergo and USD 1 680 per kW for Moscow
City Distribution Company.
According to Decree No. 459, new assets financed by connection fees will not be included in
invested capital (RAB) for tariff-setting purposes. Therefore connection fees have limited
influence on the fair value of distribution companies, as their shareholders will not receive a
return on assets that were financed through connection fees.
Transmission grid regulation
Current regulation of transmission grids is generally the same as that of distribution grids.
Transmission companies receive a tariff for electricity transmission services based on the cost-
plus approach (i.e., companies’ revenues only cover current operating costs and maintenance
capex needs).
In May 2008, Deputy CEO of FSK Alexander Chistyakov told analysts that regulation of FSK is
expected to be switched to the RAB approach in 2009-2011. He also mentioned that the effect
this switch will have has already been incorporated into Ministry for Economic Development and
Trade forecasts. Another indication that such a switch is likely is the methodology used by UES’s
independent appraiser to evaluate transmission companies for their consolidation into FSK. The
appraiser assumed transmission companies would switch to a RAB-like system beginning in
2012.
Far East and isolated regulation
Tariffs for Far East and isolated energy companies will continue to be fully regulated by the state
for at least the next several years. However, in presentations in 2006 and 2007 UES stated the
importance of changing the current cost-based tariff system to one that would stimulate
investments in the modernization and improvements in the efficiency of Far East and isolated
utilities. Furthermore, the company has considered ways of implementing these changes without
sharply increasing the final price of electricity paid by consumers (namely, direct subsidies to
utilities from the state budget). UES has also voiced the possibility of introducing a competitive
market in the Far East region within five years, after eliminating the technological constraints on
establishing such a market.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 53/183
Reform of independent energy companies
Like any other utility company in Russia, independent vertically integrated utility companies
(Bashkirenergo, Irkutskenergo, Tatenergo, and Novosibirskenergo) are subject to electricity
legislation rulings, including but not limited to the separation of competitive from monopolistic
activity. Thus Bashkirenergo, Novosibirskenergo, Irkutskenergo, and Tatenergo have created
100%-owned subsidiaries to which they have transferred their distribution and transmission
assets.
The generation assets of independent energy companies are players on the electricity market
and receive the same benefits from the liberalisation of the electricity market as OGKs and
TGKs.
Independent energy companies’ distribution and transmission assets are regulated by the same
laws as MRSKs and FSK, respectively; therefore we can expect segment-wide regulatory
changes (such as the introduction of a RAB-based tariff system) to impact these assets as well.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 54/183
Fuel supply
Thermal power plants that burn non-renewable natural resources such as gas, coal, and fuel oil
generate 66% of electricity in Russia.
The main fuel used by thermal generators in Russia is gas.
Figure 65: Fuel balance, Russia total, 2006
Source: Company data, Glitnir estimates
The cheapest fuel in 2007 was gas. Due to their proximity to coal deposits, generators in Siberia
paid significantly lower effective coal prices than generators in European Russia.
Figure 66: Prices by fuel type, 2007
Source: Company data, Glitnir estimates
Gas
Utility companies receive gas from Gazprom, as well as from independent gas producers (such
as Novatek and Itera) and integrated oil and gas companies. Russia has enough gas reserves to
satisfy current gas consumption for at least 74 years.
Figure 67: Gas production by producer, 2007
Source: Company data
Gazprom is the dominant supplier of gas in Russia, and therefore its domestic tariffs are
regulated by the FST. Gazprom supplies gas on the basis of bilateral contracts with consumers.
The length of these contracts is typically one to three years.
Gazprom sets a limit on the amount of gas that can be sold at regulated tariffs for each
consumer. If a generator consumes gas in excess of this limit, Gazprom charges a penalty,
which increases the effective price of gas consumed above the limit by up to 80%.
Gas70%
Coal26%
Fuel oil3%Other
1%
168
55 4934
020406080
100120140160180
Fuel oil Coal (European Russia)
Gas Coal (Siberia)
US
D/t
fe
Gazprom84%
Novatek4%Rosnef t
3%Lukoil2%
TNK-BP1%
Other4%
Surgutnef tegaz
2%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 55/183
The FST determines a separate gas tariff for each region of the Russian Federation. Gas tariffs
vary across regions depending on the distance between the region and Gazprom’s main gas
fields.
Figure 68: Gas tariffs by region, 2008
Source: Federal Service for Tariffs
In 2006 the government decided to gradually increase domestic gas tariffs with the aim of
reaching net back parity of domestic supply with exports to Europe. (Net back parity implies that
Gazprom’s sales to Europe have the same profitability as its sales to domestic consumers.) The
government-approved timetable for this process implies domestic gas tariffs will reach net back
parity by 2011, the same year by which 100% of electricity will be sold at free prices.
Independent producers and major Russian oil companies supply gas on the basis of unregulated
contracts, meaning the price and size of these contracts is negotiated directly between
consumers and producers case by case. Typically gas prices of independent producers and
major oil companies follow the dynamics of those charged by Gazprom, but in each case their
absolute effective value is determined by their distance from the gas field (i.e. transportation
costs) and type of gas (associated gas being the cheapest).
The existing gas transportation network supplies gas to most of the European part of Russia,
with the exception of the Arkhangelsk and Komi regions in the north. There are also separate
cases in which the capacity of the gas transportation network does not meet the needs of power
plants. One example is Konakovskaya GRES (OGK-5), located in the Tver region. Due to
insufficient capacity of the gas pipeline, in the last several years the plant’s load factor has not
exceeded 40%.
The gas network in Siberia is poorly developed.
Figure 69: Penetration of gas transportation network
Source: Gazprom
Region USD/mcm
Yamalo-Nenets 40.1
Khantymansiisk 48.2
Tyumen 56.9
Astrakhan, Orenburg, Komi 61.7
Kurgan, Perm, Udmurtia 64.0
Arkhangelsk, Bashkiria, Sverdlovsk, Tomsk 65.4
Kirov, Chelyabinsk, Mary-El, Tatarstan, Chuvashia, Kalmykia, Omsk 67.3
Vologda, Nizhny Novgorod, Yaroslavl, Mordovia, Penza, Samara, Ulyanovsk,
Novosibirsk68.0
Vladimir, Ivanovo, Kostroma, Lipetsk, Tambov, Tver, Saratov, Karelia,
Leningrad region, St. Petersburg, Novgorod71.2
Belgorod, Bryansk, Volgograd, Voronezh, Kaluga, Kursk, Moscow, Moscow
region, Orel, Ryazan, Smolensk, Tula, Pskov, Altai, Kemerovo73.5
Rostov 76.1
Adygea, Dagestan, Ingushetia, Kabardino-Balkaria, Karachayevo-Cherkessia,
North Ossetia, Chechnya, Krasnodar, Stavropol76.7
Kaliningrad 86.2
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 56/183
Coal
Coal-fired generation accounts for 26% of total power generation in Russia. The main coal
deposits are located in the Kuzbass (West Siberia) and Pechora (North-East Russia) regions.
Russia is abundant in coal; proven reserves can handle current domestic consumption for over
400 years.
The major suppliers of thermal coal in Russia are SUEK, Kuzbassrazrezugol, Yuzkuzbassugol
(Evraz), and South Kuzbass Coal (Mechel), which together control about 60% of thermal coal
production.
Figure 70: Thermal market, by market share
Source: Company data, AK&M, MetalExpert, Central Dispatching Department, Glitnir estimates
Coal is freely traded and the industry is rather competitive. The price of coal is made up of two
major components: the FCA price (at the place of mining) and the cost of transportation. Cost of
transportation is a substantial component of the total effective price of coal paid by a generator
and can reach up to 50-60% of the final price paid by the consumer. Transportation costs
significantly reduce the economic availability of coal across distances.
Fuel oil
Fuel oil is used as a reserve fuel in most power stations; its share in the fuel mix of an average
power station rarely exceeds 3-5%. Fuel oil is commonly supplied by oil refineries owned by
large Russian oil and gas companies. Domestic fuel oil prices are not regulated and generally
follow the world prices of oil products. Because Gazprom sets limitations on consumption for
gas-fired generators, the latter have no other choice than to burn expensive fuel oil during
unexpected power consumption. Sharp spikes in demand spurred by speculator activity can lead
fuel oil prices to skyrocket during the cold season.
A new government strategy on fuel consumption
Fuel consumption has risen to utmost importance in Russia. Pushed by the president, the
government developed the General Scheme for Power Facility Allocation, a massive document
that envisages the size, technical parameters, fuel type, and location of every new power block to
be constructed through 2020. The scheme is based on the state’s views on growth in power
consumption across the regions as well as its fuel usage strategy.
The government set the following priorities in the scheme:
In European Russia, to maximize the development of nuclear and hydro-accumulating
power stations (GAESs) and the modernization of gas-fired power stations
In Siberia, to construct hydroelectric and coal-fired power plants
In the Far East, to develop hydroelectric and coal-fired power plants as well as power
plants fuelled by gas from Sakhalin
Overall the scheme envisages growth in average fuel consumption from 295 mn tfe in 2006 to
428 mn tfe in 2020, an increase of 45%, compared with an increase in power consumption of
76% over the same period. The scheme thus shows that as a result of modernized generation
assets, the average fuel burn rate will fall 15%, from 336 gfe/kWh in 2006 to 286 gfe/kWh in
2020, with a corresponding change in the efficiency ratio from 36.7% to 43.4%.
SUEK36%
Mechel6%
SDS-Ugol
Holding
Company2%
Evraz Group
2%
Lutek2%
Other37%
Kuzbassrazrezugol16%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 57/183
Figure 71: Fuel consumption vs. power consumption growth
Source: Ministry of Industry and Energy
Figure 72: Change in average fuel burn rate, government forecast
Source: Ministry of Industry and Energy
The scheme also envisages a change towards a higher share of coal in the fuel balance, from
25% in 2006 to 39% in 2020.
Figure 73: Government fuel mix forecast
Source: Ministry of Industry and Energy
0%
10%
20%
30%
40%
50%
60%
70%
80%
2006 2010e 2015e 2020e
Power consumption cumulative growth
Fuel consumption cumulative growth
336334
316
286
270
280
290
300
310
320
330
340
2006 2010e 2015e 2020e
gfe
/kW
h
68% 65% 60% 56%
25% 29% 36% 39%
0%
20%
40%
60%
80%
100%
2006 2010e 2015e 2020e
Gas Coal Fuel oil Other
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 58/183
Valuation
In this section we discuss the assumptions and methods we used to derive target values for the
43 listed utility companies and the four companies that are expected to list their shares by the
end of 2008.
Macro assumptions
We used the following assumptions for macroeconomic variables and commodity prices
throughout the valuation.
Figure 74: Macro assumptions
Source: Glitnir estimates
We expect Russia’s actual GDP to grow at a healthy 6.5%-7.2% per year in 2008-2010, and then
to slow to a long-term growth rate of 5.5%. This is generally in line with the government’s
economic and social-development program, which foresees a CAGR of approximately 6.0%
through 2020 for Russia’s GDP.
Fuel prices
Our international oil and gas team forecast an average Brent price of USD 100/bbl for 2008, to
decrease to USD 85/bbl by 2011. We indexed Brent prices by 3.0% per year beginning in 2014,
which is generally in line with the historical average US inflation rate.
Figure 75: Oil and gas prices forecast through 2020
Source: Glitnir estimates
In autumn 2006 the government decided to gradually raise domestic gas prices to net back
parity. (Net back parity implies that domestic gas deliveries should effectively have the same
profitability as gas exports to Europe after adjusting for transportation costs and export duties.)
The government approved a schedule for gas tariff hikes that implies average annual hikes of
15%, 25%, 20%, and 27% in 2007, 2008, 2009, and 2010, respectively. The government also
estimated a net back parity of USD 125/mcm; the implied average hike for 2011 (which was to
align domestic gas prices with net back parity) thus stood at 29%.
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
GDP growth 7.8% 7.2% 6.8% 6.5% 6.0% 5.8% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
CPI period end, y-o-y 11.9% 11.5% 10.3% 9.1% 7.9% 7.5% 6.8% 6.5% 5.8% 5.8% 5.8% 5.8% 5.8% 5.8%
PPI period end, y-o-y 13.7% 13.2% 11.3% 9.6% 7.9% 7.5% 6.8% 6.5% 5.8% 5.8% 5.8% 5.8% 5.8% 5.8%
RUB/USD, period average 25.58 24.27 24.50 25.25 25.75 26.25 26.75 27.25 27.75 28.28 28.85 29.42 30.01 30.61
RUB/USD, end period 24.55 24.00 25.00 25.50 26.00 26.50 27.00 27.50 28.00 28.56 29.13 29.71 30.31 30.91
Brent * 73 100 95 90 85 85 85 88 90 93 96 99 101 105
Urals * 70 96 91 87 82 82 82 84 87 90 92 95 98 101
Domestic gas price ** 53 70 86 105 128 157 189 186 192 197 203 209 216 222
Gas price in Europe ** 281 312 429 407 386 364 364 364 375 387 398 410 423 435
Net back gas price level ** 163 174 254 233 211 192 189 186 192 197 203 209 216 222
* USD/bbl
** USD/mcm
0
20
40
60
80
100
120
050
100150200250300350400450500
US
D/m
cmU
SD
/bb
l
Gas price in Europe ** Brent *
0
20
40
60
80
100
120
140
050
100150200250300350400450500
US
D/m
cm
US
D/b
bl
Gas price in Europe, USD/mcm Brent, USD/bbl
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 59/183
Figure 76: Gas tariff hike schedule
Source: Ministry of Industry and Energy presentation dated November 30, 2006
At the time the government made these estimates and set the schedule for gas price hikes, the
Brent oil price was about USD 65/bbl; however it has since risen significantly. We estimate that in
2011 at a Brent price of USD 85/bbl, net back parity of the domestic gas price will reach USD
211/mcm, effectively requiring a one-off hike of the gas tariff of 111% y-o-y in RUB terms. We
believe the government would be reluctant to make such a sharp hike in one year and would thus
distribute the increase needed to reach net back parity over several years. Furthermore, given
the rapid growth of Brent prices (which by far exceeds government forecasts), we believe that in
order to achieve net back parity reasonably soon, the government should increase domestic gas
tariffs each year no less than the 2008 increase of 25% (vs. the government’s projected hike of
20% in 2010). We forecast that it would take four consecutive hikes of 25% from 2009 to 2012
and a 22% hike in 2013 for domestic gas tariffs to reach net back parity in 2013.
Figure 77: Domestic gas price forecast
Source: Ministry of Industry and Energy, Glitnir estimates
We estimate the effective coal price paid by generators in Russia grew 15% in RUB terms in
2007, and we expect it to advance another 20% in 2008. From 2009 on, we forecast coal prices
will increase in line with the PPI rate.
We expect domestic fuel oil prices will follow the dynamics of global oil prices.
Under the assumptions stated above, we expect the price of gas to exceed the price of coal in
European Russia as early as 2009. Fuel oil is expected to remain the most expensive type of fuel
for the foreseeable future.
51(15%)
63(25%)
72(13%)
81(13%)
91(13%)
102(12%)
Net back parity as of
2006
125 (22%)
0
20
40
60
80
100
120
140
Jan 0
7
Jul 0
7
Jan 0
8
Jul 0
8
Jan 0
9
Jul 0
9
Jan 1
0
Jul 1
0
Jan 1
1
Jul 1
1
Jan 1
2
US
D/m
cm
0
50
100
150
200
250
300
350
400
450
500
2007 2009e 2011e 2013e 2015e 2017e 2019e
US
D/m
cm
Domestic gas price (our forecast)
Gas price in Europe
Net back gas price level
Domestic gas price (government forecast)
111% in RUB terms required hike to reach net-back parity in 2011 based
on government scenario
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 60/183
Figure 78: Domestic fuel price forecast
Source: Glitnir estimates
Generation companies
Power consumption
The general scheme for power facility allocation approved by the government in February 2008
envisages a power consumption CAGR of 4.1% for 2007-2020 in the base scenario, and of 5.3%
in the maximum scenario. The maximum scenario assumes the Siberia and East regions will
demonstrate more rapid growth rates than European Russia.
Figure 79: Government forecast for power consumption growth
Source: Ministry of Industry and Energy, Glitnir estimates
We believe the government’s forecast of power consumption is too aggressive for the following
reasons:
1. Since reaching its lowest level in 1998, the annual growth rate of power consumption
has exceeded 4.1% only once: in 2006, when it reached 4.5%. In 2007 consumption
increased far less, at 2.0%.
2. The power efficiency of the Russian economy is low compared with that of other
countries. Russia thus probably has significant unrealized potential to reduce its power
consumption/GDP ratio. Liberalisation of the electricity market and corresponding
increases in electricity prices are likely to serve as a trigger for the country-wide
introduction of power-saving technologies.
0
50
100
150
200
250
300
2006 2008e 2010e 2012e 2014e 2016e 2018e 2020e
US
D/tfe
Gas Fuel oil Coal (European Russia) Coal (Siberia)
CAGR
max
govt.
scenario
2007-
2010
2011-
2015
2016-
2020
2007-
2020
2007-
2020
Center 5.3% 4.3% 4.0% 4.5% 5.2%
North West 7.1% 4.4% 4.3% 5.1% 5.5%
Volga 4.1% 2.3% 2.5% 2.9% 4.6%
South 5.3% 3.3% 2.6% 3.6% 5.2%
Urals 5.0% 3.6% 3.8% 4.0% 4.9%
European Russia average 5.3% 3.7% 3.7% 4.2% 5.1%
Siberia 5.1% 3.0% 3.5% 3.8% 5.7%
Total Russia centralized
(incl. Far East and Isolated)5.2% 3.6% 3.7% 4.1% 5.3%
CAGR base govt. scenario
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 61/183
Figure 80: Electricity consumption vs. GDP, 2007 (PPP)
Source: UES, IEA, CIA
We found the electricity consumption growth rates foreseen by the scheme for power facility
allocation to be too bullish. We therefore used them as a base and adjusted them down one-third
each year in order to derive the forecasts that we used throughout the valuation.
Figure 81: Electricity consumption forecast, Russia total
Source: Ministry of Industry and Energy, Glitnir estimates
In the government’s base scenario around 186 GW of new installed capacity would be
constructed by 2020, which is 88% of current total installed capacity in Russia. In the maximum
scenario, around 236 GW of new capacity would be added over the same period, which is 112%
of Russia’s current total installed capacity. When comparing these numbers to the government’s
forecast of increases in power consumption through 2020 (74% and 104% for the base and
maximum growth scenarios, respectively), it becomes evident that the general scheme for power
facility allocation presents significant risks of capacity oversupply.
Figure 82: Government forecast for installed capacity
Source: Ministry of Industry and Energy
0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
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600
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1 000
1 200
1 400
1 600
1 800
2 000
TW
h
Government base scenario Government max scenario Glitnir forecast
CAGR base 5.2%
CAGR base 3.6%
CAGR base 3.7%
CAGR Glitnir 3.4%
CAGR Glitnir 2.4%
CAGR Glitnir 2.5%
CAGR 2007-2020 max scenario 5.3%
0
50
100
150
200
250
300
350
400
450
500
2006 2010e 2015e 2020e
GW
Old capacityTotal capacity, base scenarioTotal capacity, max growth scenario
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 62/183
Unfortunately the state and UES have taken certain measures to ensure that after the change of
ownership structure in the generation segment, the new capacities envisaged by the general
scheme for power facility allocation are actually constructed. For instance, in relinquishing control
over OGKs and TGKs in 2007-2008, UES has required that the new owners sign special
capacity-delivery contracts. UES stated that the purpose of these contracts was to guarantee the
capex planned for the generation companies would be implemented after ownership changed
hands. These capacity-delivery contracts effectively link the capex of each generation company
to the general scheme for power facility allocation.
The text of the contracts has not been officially disclosed to the public, but various media sources
report that the contracts include the following conditions:
1. The contract must be signed by three parties: the new owner, the ATS, and the
clearing house.
2. The new owner is responsible for constructing new power blocks of a certain capacity
in a certain location by a specific time.
3. If the new owner does not construct the required power blocks or is late in doing so,
there is a penalty. The size of the penalty can reportedly reach up to 25% of planned
capex.
4. The terms of the contract can be altered if observed needs for new capacity differ from
the original plan.
Therefore it seems that capacity-delivery contracts bring no benefits to the generators, only
obligations. Moreover, they may present a significant risk of capacity oversupply if actual growth
of power demand falls short of the government’s forecast, which we believe is a likely scenario.
The terms of the capacity-delivery agreements and the degree to which the assets’ owners are
flexible to make their own decisions are not clear, but we believe the government could hardly
prevent the new owners from making economically reasonable decisions such as cancelling
construction of a power station if there is not sufficient demand. Therefore, we believe investment
projects that have already begun are likely to be realized, but projects that are only in the
preparation stage are likely to be amended or cancelled if actual growth of power consumption
differs drastically from the government’s forecast.
Production
We built an electricity-market model to forecast production volumes for every generator in Russia
through 2020. We modelled production volumes for the European and Siberian pricing zones
separately.
Our model incorporates both first-wave investment projects that have already begun and those
we consider likely to be realized. Overall we accounted for 48 GW of new capacity to be
commissioned by 2015 (80% of which should be completed by 2013). We do not consider it
practical to factor in projects more remote in time (commissioned for 2016 and beyond) for the
following reasons:
1. The parameters of these projects are likely to change materially.
2. Under our assumptions of electricity consumption growth, the first wave of projects
should be sufficient to cover electricity demands through 2020; therefore we believe
many remote projects will be cancelled.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 63/183
Figure 83: Installed electric capacity
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
Our model is based on actual 2007 production data from each power plant and incorporates the
following assumptions:
1. Load factors for existing nuclear and hydroelectric plants equal the historical averages.
2. The maximum load factor is 80% or the historical high for existing condensing power
plants (GRESs), and 65% or the historical high for combined heat and power plants
(CHPs). The minimum load factor for GRESs and CHPs is 20%.
3. Load factors for new nuclear, gas-fired, and CHP plants are assumed to remain
constant at 80%, 80%, and 65%, respectively.
At projected rates of electricity consumption growth and capacity commissioning, we expect new
capacity will put pressure on existing plants’ production volumes.
Figure 84: Electricity generation
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
Excessive new capacity will hurt the least-efficient generators (those with a high fuel burn rate)
the most. These include GRESs and CHPs operating in condensing mode. The load factors of
nuclear and hydroelectric power plants are unlikely to suffer from new additions.
0
20
40
60
80
100
120
140
160
180
200
GW
New generation GRES existing
CHP existing Nuclear existing
Hydro existing
0
10
20
30
40
50
60
GW
New generation GRES existing
CHP existing Nuclear existing
Hydro existing
0
200
400
600
800
1 000
1 200
TW
h
New generation GRES existing
CHP existing Nuclear existing
Hydro existing
0
50
100
150
200
250
300
TW
h
New generation GRES existing
CHP existing Nuclear existing
Hydro existing
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 64/183
Figure 85: Average load factor
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
We expect the load factors of existing generators will recover by 2020 if there are no further
additions of capacity after 2015, or if demand grows faster than expected.
Electricity prices
Under the current regulatory framework, generators receive two separate revenue flows: one
from electricity sales (which aims to cover variable costs such as fuel) and one from capacity
sales (which aims to cover fixed costs and cost of capital).
The government has approved the establishment and liberalisation of the electricity market;
however, it has made no decisions on the rules for the capacity market yet.
We modelled regulated and market-based electricity prices and capacity payments separately,
meaning we effectively came up with four different prices.
We forecast that electricity volumes sold under regulated tariffs would decrease to 0% by the end
of 2010, in line with the government’s schedule for the liberalisation of the electricity market. We
thus assumed that from 2011 on, all electricity would be sold at unregulated prices.
We expect that the first capacity auction will take place in 2H08 and will determine unregulated
capacity prices for 2009. The legislation stipulates the capacity market must be liberalised at the
same pace and simultaneously with the electricity market. Therefore we expect that beginning
January 1, 2009, the share of capacity traded through market-based mechanisms will reach
30%, which is equal to the share of liberalised volumes on the electricity market. For the reasons
presented in the following pages, we expect the capacity market to be fully liberalised beginning
in 2014.
The adopted rules also stipulate that newly commissioned power plants sell 100% of output at
unregulated electricity prices; we expect these plants to sell 100% of capacity at market-based
prices beginning in 2009.
Regulated tariffs
We forecast regulated tariffs for both electricity and capacity to increase at rates that will
effectively maintain the same operating profitability as implied in the 2008 tariffs. We forecast
regulated tariffs for each generator separately.
Free market price
Theoretically, in a competitive market the total equilibrium price for electricity (i.e. the sum of the
electricity price and capacity payment) should, over the long term, converge to the cost of a new
entrant. The cost of a new entrant is the total compensation required by an investor constructing
a power plant and should cover all economic costs, including fuel, operations and management,
and cost of capital. A new entrant is a marginal power station that meets the marginal increase in
power demand.
In Russia’s two-price electricity market, unregulated electricity prices should converge to the fuel
costs of a new entrant, while market-based capacity payment should converge to the capacity
cost of a new entrant (i.e. the sum of operations and management expenses, tax, and cost of
capital).
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Hydro existing Nuclear existing
CHP existing GRES existing
New generation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Hydro existing CHP existing
GRES existing New generation
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 65/183
Cost of new entrant
We estimated new entrant cost separately for the European and Siberian pricing zones. We
considered gas- and coal-fired power plants as those able to handle marginal electricity demand
for the following reasons:
1. Gas- and coal-fired power plants are flexible enough to respond to rapidly changing
power consumption (i.e. they are able to handle intra-day highs and lows) as opposed
to nuclear plants, which can only produce the base load.
2. Gas- and coal-fired power plants can be constructed in practically any location, as
opposed to hydroelectric plants, which are dependent on natural conditions.
3. Thermal power plants (gas- and coal-fired) are the price-setters in the electricity
market in both the European and Siberian pricing zones, and are expected to remain in
this position going forward.
Figure 86: Merit order curve, 2007
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
Figure 87: Merit order curve, 2012e
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
We used the following assumptions on typical characteristics of gas and coal power plants in
calculating the cost of a new entrant.
0
5
10
15
20
25
30
35
40
45
0 20 40 60 80 100 120 140
US
D/M
Wh
GW
Thermal
NuclearHydro
0
5
10
15
20
25
0 10 20 30 40
US
D/M
Wh
GW
Thermal
Hydro
0
10
20
30
40
50
60
70
80
90
0 20 40 60 80 100 120 140 160 180
US
D/M
Wh
GW
Thermal
Nuclear
Hydro
0
5
10
15
20
25
30
35
40
0 10 20 30 40
US
D/M
Wh
GW
Thermal
Hydro
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 66/183
Figure 88: New-entrant assumptions
Source: Glitnir estimates
Our forecast for fuel price dynamics is discussed in ―Macro assumptions: Fuel prices‖.
We assumed the cost of construction for gas and coal power plants as of 2008 to be USD
1 060/kW and 1 380/kW, respectively. Our assumptions may be on the conservative side: some
OGKs and TGKs report construction costs as high as USD 1 250/kW for gas-fired and USD
1 745/kW for coal-fired capacity. We indexed the cost of new construction by 3.0% in USD terms
going forward.
We assumed a new generator’s fixed costs to be 15% below the average seen across OGKs and
TGKs. Going forward, we indexed fixed costs with the expected PPI rate.
We used a 1.0% company-specific risk premium for calculating new-entrant cost, rather than our
standard company-specific risk premium for OGKs and TGKs of 2.5%. This is because we
consider newly commissioned power plants to have less regulatory risk than existing plants.
Figure 89: Cost of new entrant, total
Source: Glitnir estimates
Comparing the costs of new entrants of various types led us to the following conclusions:
1. In European Russia, it is economically justified to construct a gas-fired plant because
of the lower new-entrant cost. This is true through 2013, when the price of gas will
reach its peak in Russia. From 2014 onwards it generally does not matter which type
of power plant is constructed in European Russia, as the cost of new entrant for gas
and coal power plants is practically identical.
2. In Siberia, gas-fired power plants seem to be more economically feasible than coal
plants through 2010, after which coal-fired plants become more attractive due to
soaring domestic gas tariffs.
We must also take into account the underdeveloped nature of the gas transportation network in
Siberia (only the networks in the Tomsk and Omsk regions are developed to any significant
extent), which makes it technically unfeasible to construct gas-fired generators in Siberia on a
large scale.
Thus we assumed a new entrant to be a gas-fired plant in European Russia, and a coal-fired
plant in Siberia.
Gas Coal
Cost of new construction 2008, USD/kW 1 061 1 379
Economic life, years 20 20
Load factor 80% 80%
Fixed O&M costs 2008, USD/kW 36 36
Fuel burn rate, gfe/kWh 220 290
0
10
20
30
40
50
60
70
80
90
100
2006e 2008e 2010e 2012e 2014e 2016e 2018e 2020e
US
D/M
Wh
Gas (European Russia) Gas (Siberia)
Coal (European Russia) Coal (Siberia)
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 67/183
Figure 90: Cost of new entrant by region
European Russia (gas-fired)
Siberia (coal-fired)
Source: Glitnir estimates Source: Glitnir estimates
According to our estimates, fuel makes up a larger share of the cost of a new entrant in
European Russia, while cost of capital takes a larger share in Siberia. There are two major
factors that determine this relationship:
1. Coal-fired plants are more expensive to construct than gas-fired plants.
2. Coal prices in Siberia are much lower than gas prices in European Russia.
Observed electricity prices vs. cost of new entrant assumptions
Actual market electricity prices as seen on the day-ahead market (ATS) in 2007 were 2.1x higher
than our estimate of new-entrant fuel costs in European Russia and generally in line with our
estimates of new-entrant fuel cost in Siberia. In the first five months of 2008 actual ATS prices
were 110% and 61% above our forecasts for fuel costs of new entrants in European Russia and
Siberia, respectively.
Figure 91: Price dynamics on ATS vs. fuel cost of new entrant
European Russia Siberia
Source: Glitnir estimates Source: Glitnir estimates
Deviations of actual electricity price from new-entrant fuel cost are normal and can be explained
by the marginal pricing principle on the spot electricity market, according to which the equilibrium
market price equals the fuel costs of a marginal producer. As the marginal producer is by
definition the least efficient generator to cover marginal demand, its fuel costs can significantly
exceed those of a much more efficient new entrant.
0
10
20
30
40
50
60
70
80
90
100
US
D/M
Wh
Cost of capital
Tax
Operating & maintanance
Fuel
0
10
20
30
40
50
60
70
80
US
D/M
Wh
Cost of capital Tax Operating & maintanance Fuel
0
10
20
30
40
50
60
70
80
90
100
US
D/M
Wh
Cost of capital Tax Operating & maintanance Fuel
0
10
20
30
40
50
60
70
80
90
100
US
D/M
Wh
Cost of capital Tax Operating & maintanance Fuel
0
10
20
30
40
50
60
70
80
90
100
US
D/M
Wh
Cost of capital Tax Operating & maintanance Fuel
0
10
20
30
40
50
60
70
80
90
100
US
D/M
Wh
Cost of capital Tax Operating & maintanance Fuel
0
10
20
30
40
50
60
Ja
n 0
7
Fe
b 0
7
Ma
r 0
7
Ap
r 0
7
Ma
y 0
7
Ju
n 0
7
Ju
l 07
Au
g 0
7
Se
p 0
7
Oct 0
7
No
v 0
7
De
c 0
7
Ja
n 0
8
Fe
b 0
8
Ma
r 0
8
Ap
r 0
8
US
D/M
Wh
Actual price Fuel cost of new entrant Average actual price
19.725.6
30.3
10.914.4
81%135%
110%
0
5
10
15
20
25
30
35
Ja
n 0
7
Fe
b 0
7
Ma
r 0
7
Ap
r 0
7
Ma
y 0
7
Ju
n 0
7
Ju
l 07
Au
g 0
7
Se
p 0
7
Oct 0
7
No
v 0
7
De
c 0
7
Ja
n 0
8
Fe
b 0
8
Ma
r 0
8
Ap
r 0
8
US
D/M
Wh
Actual price Fuel cost of new entrant Average actual price
5.9
16.9
20.1
9.912.5-40%
71%61%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 68/183
We expect free market electricity prices to move closer to the fuel cost of new entrant in three to
four years, when the bulk of new capacities will come into operation. However, we believe the
free market electricity price will stay above the fuel cost of a new entrant because of the marginal
pricing principle of the electricity market.
Figure 92: Electricity price forecast
European Russia Siberia
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
Overall we expect the market electricity price in European Russia to increase 2.0x, from USD
22.7/MWh in 2007 to USD 45.8/MWh in 2013, which implies a relatively modest CAGR of 12.5%.
In Siberia, we expect free market prices to grow 66% over the same period (a CAGR of 8.9%), to
reach USD 18.9/MWh in 2013.
Free-market capacity payment
Following the logic of the electricity market, we expect liberalised capacity payment to converge
to the capacity cost of a new entrant. We define capacity cost of a new entrant as the sum of
fixed costs and the cost of capital.
However, according to our estimates the 2009 market-based capacity payment for European
Russia and Siberia should be about 3.2x and 6.7x higher, respectively, than the current average
regulated capacity tariff. This means that if 30% of capacity begins trading at market-based
prices in 2009, the total effective electricity price (i.e. the sum of effective electricity price and
effective capacity payment) should increase 60% and 122% in a single year in European Russia
and Siberia, respectively. Such a sharp hike would hardly be acceptable from a political
standpoint in our view; we expect the government will introduce price caps on capacity payments
effective for several years in order to smooth growth in total effective electricity price.
For valuation purposes we assumed that as of 2009 market-based capacity payment for existing
generators would be capped at 35% and 30% of its fair level in the European and Siberian
pricing zones, respectively. We assumed these price caps would gradually diminish and be
completely eliminated by 2014, which would allow the hikes in total effective electricity prices to
be smoothed out over several years. We do not expect any price caps for newly constructed
power plants, and assume 100% of their capacity will be paid at fair market-based capacity
payments.
Also, we believe power plants with low load factors (i.e. with idle capacity) are unlikely to be able
to sell the full volume of their capacity. To account for that effect in calculating the market-based
capacity revenue, we adjusted installed capacity down using the following formula:
Installed capacity that receives capacity payment = Installed capacity x
min(100%, load factor + 20%)
This formula implies that a power plant with a load factor of 80% or above receives a market
capacity payment (measured in USD/kW) for 100% of its installed capacity, while a power plant
with a load factor of 50% receives a capacity payment for only 70% of its installed capacity. This
adjustment affects existing power plants only, and given that many of them have low load factors,
we expect that an average free-market capacity payment measured in USD/kW would be
significantly less than the capacity cost for a new entrant.
0
10
20
30
40
50
60
US
D/M
Wh
Free market
Regulated
Average electricity price
Fuel cost of new entrant
0
5
10
15
20
25
30
US
D/M
Wh
Free market
Regulated
Average electricity price
Fuel cost of new entrant
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 69/183
Figure 93: Capacity payment forecast
European Russia Siberia
Source: Glitnir estimates Source: Glitnir estimates
Reality check: Total effective electricity price
Under our assumptions on electricity prices and capacity payments, we expect the total effective
price for electricity received by generators in Russia to increase 2.8x over 2009-2014, which
implies a CAGR of 18.8%. The total electricity price in Siberia will show a much faster CAGR of
26.1% compared with the total CAGR for electricity price of 17.7% in European Russia.
We believe our estimated price hikes are politically acceptable and tend to be on the
conservative side, as they imply full liberalisation of generators’ top lines by January 1, 2014,
three years after the date envisaged by current legislation.
Figure 94: Total effective price
European Russia Siberia
Source: Glitnir estimates Source: Glitnir estimates
0
50
100
150
200
250
300
350
US
D/k
W
Free market
Regulated
Average capacity payment
Capacity cost of new entrant
0
50
100
150
200
250
300
350
400
US
D/k
W
Free market
Regulated
Average capacity payment
Capacity cost of new entrant
0
20
40
60
80
100
120
US
D/M
Wh
Average effective capacity payment
Average effective electricity price
Total cost of new entrant
0
10
20
30
40
50
60
70
80
90
100
US
D/M
Wh
Average effective capacity payment
Average effective electricity price
Total cost of new entrant
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 70/183
Russia total
Source: Glitnir estimates
Siberian generators (many of which are hydroelectric) appear to be more sensitive to the
introduction of the capacity market. We expect the share of capacity payment in their total
electricity price to expand to 73% by 2014, while capacity payment will stand at about 49% for
generators in European Russia.
Heat revenues
Heat production
Due to the lack of reliable data on regional heat markets, we applied a uniform heat production
growth rate of 1% across all generation companies. This is a rather conservative assumption
compared with the actual heat consumption CAGR of 2.1% since 1998.
Heat tariffs
Although this has not been officially announced, we believe regulation of the heat segment is
likely to switch from the current cost-plus approach to an approach that will guarantee sufficient
return on capital for investors. In our view such a change in regulation would be driven by
practically the same factors as in the electricity segment: the need for investments to construct
new heat capacity and modernize old heat-production units.
Probable scenarios of regulatory changes could include the introduction of competitive heat
markets and the switch to a RAB approach similar to the one planned in the power grid segment.
However, given the slow pace at which the government makes decisions and that deregulation of
the electricity segment a top priority of the government at the moment is not yet fully
complete, we believe it is reasonable not to expect changes in the regulation of the heat segment
any time soon.
In order to be conservative, for valuation purposes we assumed regulation of the heat segment
would continue to be based on the current cost-plus approach for the foreseeable future.
However we expect the regulator will set tariffs, which would imply improvement in profitability
over time. This was somewhat confirmed by statements of Elvira Nabiullina, the head of the
Ministry of Economic Development and Trade, who in May 2008 declared the government’s
intentions to improve the profitability of the heat segment through 2011.
We thus forecast that the average operating margin of the heat segment in Russia will expand to
13% by 2011 (vs. our estimate of 8.4% as of 2006). We also expect that dispersion of operating
profitability of the heat segment across companies will diminish over time.
0
20
40
60
80
100
120
US
D/M
Wh
Average effective capacity payment
Average effective electricity price
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 71/183
Figure 95: Heat business operating margin
2006 2011e
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
However, we believe certain differences in the profitability of the heat segment among
companies are sustainable over time. This is mainly related to differences in the ability of
generation companies to negotiate favourable tariffs with local authorities. Those companies that
have managed to negotiate favourable heat tariffs are likely to continue doing so in the future;
those that have not are less likely to be successful in this going forward.
Costs
For valuation purposes, we split the total operating costs of generation companies into three
components fuel costs, fixed costs, and depreciation each of which we modelled separately.
Fuel costs
Fuel cost per unit of output is determined by three parameters: fuel burn rate, fuel prices, and
fuel mix.
Fuel burn rate
We took the most recent company data on fuel burn rates of power stations; for valuation
purposes we assumed fuel burn rates of existing generators would remain constant over the
forecast period.
Figure 96: Fuel burn rates in electricity production, 2007
Average 2006 8.4%
OGK-1OGK-2OGK-3OGK-4OGK-5OGK-6TGK-1TGK-2
MosenergoTGK-4TGK-5TGK-6TGK-7TGK-8TGK-9
TGK-10TGK-11
KuzbassenergoTGK-13TGK-14
BashkirenergoIrkutskenergo
NovosibirskenergoFar East Gen. Co.
-30% -10% 10% 30%
Average 2011e 13%
OGK-1OGK-2OGK-3OGK-4OGK-5OGK-6TGK-1TGK-2
MosenergoTGK-4TGK-5TGK-6TGK-7TGK-8TGK-9
TGK-10TGK-11
KuzbassenergoTGK-13TGK-14
BashkirenergoIrkutskenergo
NovosibirskenergoFar East Gen. Co.
-30% -10% 10% 30%
0
50
100
150
200
250
300
350
400
450
TG
K-3
No
vo
sib
irske
ne
rgo
TG
K-5
TG
K-1
TG
K-1
0
Irku
tske
ne
rgo
OG
K-4
Ba
sh
kir
en
erg
o
TG
K-7
OG
K-1
TG
K-6
TG
K-2
TG
K-1
1
OG
K-5
TG
K-1
3
TG
K-4
OG
K-2
OG
K-3
TG
K-8
DG
K
OG
K-6
TG
K-1
2
TG
K-9
TG
K-1
4
g/k
Wh
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 72/183
Source: Company data, Glitnir estimates
Figure 97: Fuel burn rates in heat production, 2007
Source: Company data, Glitnir estimates
Fuel burn rates are measured in grams of fuel equivalent per kilowatt hour and kilograms of fuel
equivalent per gigacalorie. The energy content of one ton of fuel equivalent equals 7 000 kJ.
Fuel prices
Our forecast of fuel prices on an individual-company level is based on actual fuel prices as
implied in the companies’ most recent financial statements; going forward we indexed them
proportionally to our general forecast for commodity prices, which is presented in the ―Macro
assumptions‖ section.
Fuel mix
With a few exceptions, we do not expect significant changes in the fuel mix of existing power
plants going forward. For those generation companies that have the technical ability and that
have announced plans to switch from one type of fuel to another (typically from gas to coal), we
incorporated this change into our models (for OGK-1, OGK-2, OGK-4, OGK-6, TGK-2, and TGK-
6).
Fixed costs
Using regression analysis we derived an estimate of average fixed costs among generation
companies for 2006 of USD 31.0/kW of electric capacity, and USD 11.1/GCal/h of heat capacity.
Fixed costs on a per-capacity basis vary widely among generators. Although there are
fundamental reasons for this, we believe a significant portion of dispersion across companies is
caused by the current regulatory regime. Under the cost-plus approach it seems economically
reasonable for generation companies to inflate costs in order to receive a higher tariff. As a
result, the relative size of fixed costs reflects more of the generator’s ability to negotiate allowed
costs and thus tariffs with the FST than what would be justified by fundamental reasons. We
expect that dispersion of fixed costs among generators will diminish as the portion of electricity
and capacity sold at unregulated prices expands.
We indexed reported fixed costs with the expected PPI rate going forward and included a
convergence factor that effectively reduces dispersion of fixed costs among generation
companies by a third.
0
20
40
60
80
100
120
140
160
180
200
TG
K-5
Irku
tske
ne
rgo
TG
K-7
No
vo
sib
irske
ne
rgo
TG
K-1
1
TG
K-1
TG
K-1
0
Ba
sh
kir
en
erg
o
OG
K-5
TG
K-8
TG
K-2
TG
K-6
OG
K-2
TG
K-4
TG
K-1
3
TG
K-9
OG
K-6
TG
K-1
2
DG
K
TG
K-1
4
OG
K-4
TG
K-3
OG
K-1
OG
K-3
kg
/Gca
l
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 73/183
Figure 98: Fixed cost of electric capacity, USD/kW, 2006 and 2011e
Source: Company data, Glitnir estimates
Figure 99: Fixed cost of heat capacity, 2006 and 2011e
Source: Company data, Glitnir estimates
Depreciation
We extrapolated actual depreciation rates implied in companies’ financial statements to converge
to an industry-average depreciation rate of 4.0% by 2011.
Capex
We modelled two constituent parts of total capex expense separately: maintenance capex
required to keep existing capacity in working condition, and capex on new power plants.
Maintenance capex
Annual maintenance capex was calculated as follows:
Annual maintenance capex = Construction cost of a new power plant of the same fuel
type / Plant’s expected physical life
OGK-1OGK-2OGK-3OGK-4OGK-5OGK-6TGK-1TGK-2
MosenergoTGK-4TGK-5TGK-6TGK-7TGK-8TGK-9
TGK-10TGK-11
KuzbassenergoTGK-13TGK-14
BashkirenergoIrkutskenergo
NovosibirskenergoFar East Gen. Co.
0 10 20 30 40 50 60 70 80USD thous./MW
Fixed electricity cost, 2006 Fixed electricity cost, 2011e
Average 2006 Average 2011e
OGK-1OGK-2OGK-3OGK-4OGK-5OGK-6TGK-1TGK-2
MosenergoTGK-4TGK-5TGK-6TGK-7TGK-8TGK-9
TGK-10TGK-11
KuzbassenergoTGK-13TGK-14
BashkirenergoIrkutskenergo
NovosibirskenergoFar East Gen. Co.
0 5 10 15 20 25 30 35 40
USD thous./Gcal/h
Fixed heat cost, 2006 Fixed heat cost, 2011e
Average 2006
Average 2011e
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 74/183
In calculating maintenance capex, we used the same assumptions regarding cost of construction
as in our calculation of the cost of new entrant (see ―Free market prices: Cost of new entrant‖):
USD 1 060/kW and USD 1 380/kW of gas and coal installed capacity, respectively, as of 2008.
For hydroelectric power plants we assumed a cost of new construction of USD 2 120/kW as of
2008. We assumed a physical life of 50 years for thermal plants and of 80 years for hydroelectric
plants.
Capex in new power plants
We evaluated each of the 73 investment projects of the generation companies separately and
then consolidated them with existing assets. The following assumptions were used in estimating
cash flows for each investment project:
The size, fuel type, location, and timing of construction of power blocks is respective to
company data.
Initial investment outlay and fixed costs per kilowatt, fuel burn rate, and load factor are
the same as those used in calculating the cost of a new entrant. Load factors for
hydroelectric power plants come from company data.
Fuel price equals the actual fuel price of the plant where the new block is being built, or
the fuel price of a neighbouring power plant if the new block is stand-alone.
Starting from the date of commission, 100% of output and 100% of capacity is sold at
an unregulated electricity price and market-based capacity payment, respectively.
Taxation of hydroelectric plants
Due to their lack of fuel costs and lesser fixed costs compared with thermal generators,
hydroelectric power plants will be the main beneficiaries of the liberalisation of the electricity
market. According to our estimates, when the amount of electricity sold at free prices reaches
100% in 2011, the EBITDA margin of RusHydro, the largest owner of hydroelectric power
stations in Russia, will expand to around 82% (from 36% in 2006), and net margin will increase to
54% (from 12% in 2006), implying a return on equity of around 23%. Such high profitability is
hardly sustainable in the long term in our view.
We thus assumed that beginning in 2012 the government would tax RusHydro’s huge profits by
an amount that would return the company’s profitability to normal levels. For valuation purposes
we assumed that from 2012 onwards RusHydro’s existing assets would be earning a return on
equity of 11.0%, which corresponds to the required increase of the effective corporate tax rate
from the authorized 24% to 60%. For the sake of consistency, we also applied this 60% effective
tax rate to hydroelectric assets owned by TGK-1, TGK-8, Irkutskenergo, and Bashkirenergo.
Discount rate and terminal growth
We estimated cost of equity for utility companies as the sum of market risk, sector risk, and a
company-specific risk adjustment.
Figure 100: Market risk calculation
Source: Glitnir research
Sector risk is mainly related to government regulation and corresponds with our subjective
assessment of risks regarding expected changes in the regulation of a particular segment. We
assumed 2.5% sector risk for generation companies, 1.5% for distribution and transmission grids,
and 1.5% for Far East and isolated energy companies. For independent energy companies, the
sector risk is a mix of the risk for generation companies and grids; we estimated it at roughly
2.5%.
Company-specific risk is a complex measure of a company’s corporate governance,
transparency, and stock liquidity. Company-specific adjustment is subjective, but we note the
following relationships:
1. A 0.5 pp decrease in the cost of equity for OGKs and TGKs acquired by major foreign
power companies, as the latter are likely to bring their extensive expertise
2. Upward company-specific adjustment for several cases. For the source of risk in each
specific case, see ―Appendix 1: Company-specific issues.‖
Source
Sovereign risk-free rate 5.9% Russia 2028 YTM
Standard equity risk premium 5.0% Glitnir research
Market risk 10.9%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 75/183
OGK-1: Risks related to its joint venture with TNK-BP
TGK-11: Risks related to the dispute with Rosneft
RusHydro, Irkutskenergo, and Krasnoyarsk GES: Transfer pricing risks
3. Poor corporate governance and transparency in independent energy companies
(Bashkirenergo, Irkutskenergo, and Novosibirskenergo)
Figure 101: Discount rate calculation, generation companies
Source: Glitnir estimates
We applied a uniform nominal terminal growth rate of 2.0% to all utility companies.
Valuation results
Based on the assumptions outlined above, we built DCF models for each generation company.
Summaries of the DCF and financial statements for 22 generation companies are presented in
―Appendix 3: Company profiles.‖
Under the assumptions outlined above we estimate that market liberalisation will result in
substantial improvement in the earnings of generation companies.
Company
Market
risk
Sector
risk
premium
Liquidity
risk
premium
Corp. gov. risk
premium (+) /
discount (-) RROE
Cost
of
debt
Effective
tax rate
After-
tax
cost
of
debt
Target
D/A
Required
WACC
Terminal
growth
Generation
OGK-1 10.9% 2.5% 0.5% 1.5% 15.4% 9.0% 24.0% 6.8% 30.0% 12.8% 2.0%
OGK-2 10.9% 2.5% 0.5% 1.0% 14.9% 9.0% 24.0% 6.8% 30.0% 12.5% 2.0%
OGK-3 10.9% 2.5% 0.5% 0.5% 14.4% 9.0% 24.0% 6.8% 30.0% 12.1% 2.0%
OGK-4 10.9% 2.5% 1.0% -0.5% 13.9% 9.0% 24.0% 6.8% 30.0% 11.8% 2.0%
OGK-5 10.9% 2.5% 0.0% -0.5% 12.9% 9.0% 24.0% 6.8% 30.0% 11.1% 2.0%
OGK-6 10.9% 2.5% 0.5% 1.0% 14.9% 9.0% 24.0% 6.8% 30.0% 12.5% 2.0%
TGK-1 10.9% 2.5% 0.5% 1.0% 14.9% 9.0% 24.0% 6.8% 30.0% 12.5% 2.0%
TGK-2 10.9% 2.5% 0.5% -0.5% 13.4% 9.0% 24.0% 6.8% 30.0% 11.4% 2.0%
Mosenergo 10.9% 2.5% 1.0% 1.0% 15.4% 9.0% 24.0% 6.8% 30.0% 12.8% 2.0%
TGK-4 10.9% 2.5% 0.5% 0.0% 13.9% 9.0% 24.0% 6.8% 30.0% 11.8% 2.0%
TGK-5 10.9% 2.5% 0.5% 0.0% 13.9% 9.0% 24.0% 6.8% 30.0% 11.8% 2.0%
TGK-6 10.9% 2.5% 0.5% 0.0% 13.9% 9.0% 24.0% 6.8% 30.0% 11.8% 2.0%
TGK-7 10.9% 2.5% 0.5% 0.0% 13.9% 9.0% 24.0% 6.8% 30.0% 11.8% 2.0%
TGK-8 10.9% 2.5% 0.5% 0.0% 13.9% 9.0% 24.0% 6.8% 30.0% 11.8% 2.0%
TGK-9 10.9% 2.5% 0.5% 0.0% 13.9% 9.0% 24.0% 6.8% 30.0% 11.8% 2.0%
TGK-10 10.9% 2.5% 0.5% -0.5% 13.4% 9.0% 24.0% 6.8% 30.0% 11.4% 2.0%
TGK-11 10.9% 2.5% 0.5% 3.0% 16.9% 9.0% 24.0% 6.8% 30.0% 13.9% 2.0%
Kuzbassenergo 10.9% 2.5% 0.5% 0.5% 14.4% 9.0% 24.0% 6.8% 30.0% 12.1% 2.0%
TGK-13 10.9% 2.5% 0.5% 0.5% 14.4% 9.0% 24.0% 6.8% 30.0% 12.1% 2.0%
TGK-14 10.9% 2.5% 2.0% 0.0% 15.4% 9.0% 24.0% 6.8% 30.0% 12.8% 2.0%
RusHydro 10.9% 2.5% 0.0% 1.5% 14.9% 9.0% 24.0% 6.8% 30.0% 12.5% 2.0%
Krasnoyarsk GES 10.9% 2.5% 0.5% 5.0% 18.9% 9.0% 24.0% 6.8% 30.0% 15.3% 2.0%
Isolated
Far East Energy Co. 10.9% 1.5% 0.5% 0.0% 12.9% 11.0% 24.0% 8.4% 30.0% 11.5% 2.0%
Integrated
Bashkirenergo 10.9% 2.0% 0.5% 1.5% 14.9% 9.5% 24.0% 7.2% 30.0% 12.6% 2.0%
Irkutskenergo 10.9% 2.0% 0.5% 3.0% 16.4% 9.5% 24.0% 7.2% 30.0% 13.6% 2.0%
Novosibirskenergo 10.9% 2.0% 0.5% 1.5% 14.9% 9.5% 24.0% 7.2% 30.0% 12.6% 2.0%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 76/183
Figure 102: EBITDA/kW
2007e 2014e
Source: Glitnir estimates Source: Glitnir estimates
0
5
10
15
20
25
30
35
40
OG
K-2
Kra
sn
oya
rsk G
ES
TG
K-8
Ba
sh
kir
en
erg
oT
GK
-1T
GK
-6O
GK
-6T
GK
-13
TG
K-5
OG
K-4
No
vo
sib
irske
ne
rgo
OG
K-5
OG
K-1
Irku
tske
ne
rgo
TG
K-7
TG
K-4
Mo
se
ne
rgo
Fa
r E
ast
GC
TG
K-1
4T
GK
-9O
GK
-3T
GK
-11
TG
K-1
0H
yd
roO
GK
TG
K-2
Ku
zb
asse
ne
rgo
US
D/k
W
0
50
100
150
200
250
300
350
Fa
r E
ast
GC
OG
K-6
OG
K-3
TG
K-6
OG
K-5
OG
K-1
TG
K-5
TG
K-7
Ba
sh
kir
en
erg
oT
GK
-4O
GK
-2T
GK
-2T
GK
-8T
GK
-11
No
vo
sib
irske
ne
rgo
TG
K-9
Mo
se
ne
rgo
OG
K-4
TG
K-1
4T
GK
-13
TG
K-1
0K
uzb
asse
ne
rgo
TG
K-1
Irku
tske
ne
rgo
Hyd
roO
GK
Kra
sn
oya
rsk G
ES
US
D/k
W
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 77/183
Figure 103: Valuation results
Source: Glitnir estimates
Cur-
rent
Tar-
get
Electr.
g/kWh
Heat,
kg/Gcal gas coal
fuel
oil other electr. heat
Generation
OGK-1 common 5 124 0.115 0.132 0.090 46% Buy 444 631 9 531 2 572 47 752 1 053 329 169 1 274 92% 7% 1% 0% 60% 5%
OGK-2 common 4 888 0.149 0.172 0.088 95% Buy 286 582 8 695 1 814 45 419 2 338 344 151 1 131 75% 24% 1% 0% 63% 15%
OGK-3 common 6 702 0.141 0.161 0.116 39% Buy 281 471 8 497 1 675 30 248 1 285 345 180 1 300 59% 38% 3% 0% 43% 9%
OGK-4 common 9 201 0.146 0.166 0.080 108% Buy 416 1 005 8 630 2 179 52 140 2 226 324 162 989 83% 16% 0% 1% 72% 12%
OGK-5 common 6 562 0.186 0.209 0.128 64% Buy 509 826 8 672 2 392 36 481 6 769 336 140 1 281 55% 44% 1% 0% 51% 32%
OGK-6 common 2 855 0.0885 0.102 0.078 30% Buy 230 300 9 052 2 704 31 297 4 366 362 153 1 575 50% 48% 2% 0% 43% 18%
TGK-1 common 5 073 0.00132 0.00151 0.00134 13% Hold 687 757 6 280 14 754 24 159 25 397 311 143 1 717 96% 3% 2% 0% 47% 20%
TGK-2 common 1 755 0.00120 0.00136 0.00100 36% Buy 484 664 2 583 12 471 8 710 18 865 333 147 2 227 57% 15% 27% 1% 45% 17%
preferred 0.000734 0.000832 0.000725 15% Hold
Mosenergo
(TGK-3) common 9 710 0.244 0.278 0.177 57% Buy 615 966 11 117 34 289 58 084 65 557 254 166 1 437 98% 1% 0% 0% 65% 22%
TGK-4 common 2 424 0.00125 0.00142 0.00105 35% Buy 567 763 3 312 17 735 11 074 25 997 342 150 1 527 98% 1% 1% 0% 44% 17%
preferred 0.000623 0.000707 0.000555 27% Buy
TGK-5 common 1 778 0.00145 0.00165 0.00078 112% Buy 227 628 2 467 9 040 9 705 16 672 296 136 1 438 89% 7% 1% 3% 51% 21%
TGK-6 common 1 660 0.00089 0.00102 0.00073 39% Buy 309 454 3 140 10 824 10 983 16 811 332 147 1 660 95% 3% 2% 0% 45% 18%
TGK-7 common 4 425 0.148 0.168 0.090 87% Buy 353 676 6 880 31 143 23 227 44 020 326 140 1 478 100% 0% 0% 0% 44% 16%
TGK-8 common 2 644 0.00128 0.00146 0.00167 -12% Reduce 769 606 3 602 13 381 13 261 13 908 347 146 1 493 100% 0% 0% 0% 47% 12%
TGK-9 common 3 052 0.000390 0.000439 0.000300 46% Buy 569 877 3 280 16 448 13 919 41 500 376 152 1 446 81% 17% 2% 0% 57% 29%
TGK-10 common 5 155 5.87 6.65 4.61 44% Buy 718 1 179 3 253 14 571 18 549 23 922 315 144 1 173 95% 5% 0% 0% 73% 19%
TGK-11 common 943 0.00184 0.00215 0.00112 92% Buy 288 535 2 026 8 202 7 083 13 715 334 143 1 203 51% 48% 1% 0% 46% 19%
Kuzbassenergo
(TGK-12) common 3 022 0.0428 0.0490 0.0235 109% Buy 327 716 4 387 8 842 20 677 14 630 365 154 980 6% 93% 2% 0% 60% 19%
TGK-13 common 2 753 0.0173 0.0198 0.0083 140% Buy 467 765 2 475 7 401 10 107 13 085 339 151 691 0% 99% 1% 0% 53% 20%
TGK-14 common 338 0.000434 0.000501 0.000325 54% Buy 381 578 643 2 277 1 997 3 966 396 161 1 097 0% 100% 0% 0% 42% 20%
Kuban GC common 300 16.8 19.1 11.5 66% Buy 306 494 696 856 4 924 978 366 150 1 682 100% 0% 0% 0% 87% 13%
RusHydro common 25 391 0.0955 0.110 0.085 29% Buy 780 1 038 24 043 n/a 81 495 n/a n/a n/a n/a n/a n/a n/a n/a 40% n/a
Krasnoyarsk GES common 3 314 8.47 10.1 4.0 153% Buy 257 634 6000 n/a 20 631 n/a n/a n/a n/a n/a n/a n/a n/a 40% n/a
Integrated
Bashkirenergo common 3 744 3.52 4.04 1.59 155% Buy 346 831 5 147 17 349 21 204 31 657 327 144 1 284 93% 1% 6% 0% 56% 21%
preferred 1.50 1.72 1.56 11% Hold
Irkutskenergo common 8 774 1.84 2.14 0.88 143% Buy 327 776 12 880 13 002 52 339 23 985 320 139 783 0% 100% 0% 0% 52% 21%
Novosibirskenergo common 2 068 138 159 71 125% Buy 513 1 022 2 522 7 246 9 313 13 171 293 141 1 128 8% 92% 1% 0% 47% 21%
preferred 78.1 89.7 46.0 95% Buy
Isolated
Far East Energy Co. common 1 813 0.105 0.119 0.073 64% Buy 358 450 5 842 12 641 16 403 15 786 357 160 1 570 13% 86% 2% 0% 38% 14%
Fuel mix, 2007
Generation
load factor,
2007
Fuel
consumption,
2007
Installed
electric
capacity
2007, MW
Installed
heat
capacity
2007,
Gcal/h
Elec-
tricity
sales,
2007,
GWh
Fuel
price,
USD/
tfe,
2007
Heat
sales,
2007,
Gcal
thous.
12m TP,
USDCompany
EV/
Installed
capacity,
USD/kW
Mid-
market
price as
of Jun
19, 2008,
USD
Upside
to TP,
% RatingType
Fair
Mcap,
USD
mn FV, USD
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 78/183
Thermal vs. hydroelectric
At target value, we estimate RusHydro’s EV/capacity at USD 1 038/kW, 64% above the average
for OGKs of USD 633/kW. We believe RusHydro deserves a higher valuation per kilowatt of
installed capacity compared with thermal generators due to the absence of fuel expenses.
However, several factors diminish the company’s fair premium to thermal generators:
1. Water tax. Hydroelectric plants are subject to a special water tax, which we expect will
be the government’s means of taking away the huge profits earned by hydro assets in
a fully liberalised market. We forecast 60% effective corporate tax for hydro assets in
2012.
2. Load factor. Hydroelectric plants have an average load factor of 45%, which is far
below the average for OGKs of 55%. The load factor for hydroelectric plants is
dependent on the natural conditions in which a particular plant operates (such as water
flow), and is stable for the long term.
Europe vs. Siberia
Our average target value for OGK power plants located in Siberia of USD 705/kW stands 12%
higher than the average for power plants located in European Russia of USD 627/kW. This is
mainly due to the difference in the assets’ replacement costs. We estimate the full replacement
cost of a new entrant in Siberia at USD 1 380/kW, and in European Russia at USD 1 060/kW.
Thus a market-based capacity payment, which should promote construction of new capacity,
would be higher in Siberia than in European Russia. This effectively means higher electricity
prices and, in turn, a higher value of existing generators in Siberia relative to European Russia.
Coal vs. gas
Comparing coal-fired power plants with gas-fired plants is relevant amongst plants in European
Russia only, as in Siberia there is almost no gas-fired capacity. Coal-fired plants located in
European Russia would have a higher margin than gas-fired plants in the liberalised electricity
market, as gas prices are expected to outperform coal prices going forward (for our assumptions
on commodity prices, see ―Figure 74: Macro assumptions‖). However, the benefits of coal are
partially mitigated by the following factors:
1. Gas-turbine technology allows for more efficient use of fuel compared with the burning
of coal. The fuel burn rate of modern gas-fired power plants of 220 gfe/kWh stands
24% below that of coal power plants (290 gfe/kWh).
2. Coal power plants are more expensive to construct and maintain. We estimate
construction costs of a new coal power plant at USD 1 380/kW, 30% above those of a
gas power plant of USD 1 060/kW.
Our average target valuation of OGK coal-fired power plants in European Russia of USD 760/kW
stands 10% above our average target value of OGK gas-fired power plants of USD 689/kW.
TGKs vs. OGKs
When taking only their electricity business into consideration, we believe TGKs deserve a
discount relative to OGKs on average because TGKs are less sensitive to power consumption
growth. This is due to the technical peculiarity that production at TGKs operating in condensing
mode is much less fuel efficient (and thus more expensive) than at OGKs.
We estimate the target value of the pure electricity-generation business of TGKs at an average
EV/installed capacity of USD 394/kW, 33% below that of OGKs of USD 584/kW.
However, most TGKs have sizable heat production capacity in addition to electricity generation:
their main assets are made up of ―cogeneration‖ power plants, which simultaneously produce
both electricity and heat. Heat is a substantial contributor to the entire value of TGKs, and
furthermore for many TGKs the heat segment exceeds the electricity segment in value. When
taking heat into account, the average target value per kilowatt of electric capacity (the sum of the
target values of the heat and electricity segments divided by electric capacity in kilowatts) of
TGKs increases 96% to USD 771/kW, while that of OGKs increases only 8% to USD 633/kW.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 79/183
Sensitivity analysis
Figure 104: Target price sensitivity analysis, generation companies
Source: Glitnir estimates
In the table, changes in target prices are a result of changes in the indicated variable by or to the indicated value in each year from 2009 to 2020.
-15% -10% -5% Base +5% +10% +15% -15% -10% -5% Base +5% +10% +15% -15% -10% -5% Base +5% +10% +15%
Generation
OGK-1 -4.4% -2.9% -1.4% 0% 1.4% 3.0% 4.5% 1.7% 1.1% 0.5% 0% -0.5% -1.1% -1.6% -54.6% -37.6% -19.5% 0% 22.3% 45.2% 68.5%
OGK-2 -13.0% -9.5% -4.9% 0% 5.0% 10.0% 15.0% 11.5% 7.6% 3.8% 0% -3.8% -7.3% -10.0% -58.1% -40.2% -20.3% 0% 22.3% 48.1% 74.6%
OGK-3 -1.1% -0.9% -0.5% 0% 0.5% 1.1% 1.8% 1.3% 0.8% 0.3% 0% -0.3% -0.6% -0.8% -26.3% -17.8% -8.9% 0% 10.0% 20.1% 30.3%
OGK-4 -3.0% -2.0% -1.0% 0% 1.0% 2.0% 3.0% -0.2% -0.1% -0.1% 0% 0.1% 0.1% 0.2% -42.1% -29.2% -14.6% 0% 15.7% 31.3% 47.6%
OGK-5 -9.5% -7.4% -4.7% 0% 4.8% 9.6% 14.6% 12.4% 8.2% 4.1% 0% -4.0% -6.4% -8.1% -43.0% -30.3% -16.1% 0% 17.4% 35.1% 53.1%
OGK-6 -8.4% -5.7% -3.0% 0% 3.2% 5.9% 8.8% 10.0% 6.5% 3.5% 0% -3.2% -5.9% -8.6% -59.1% -39.9% -20.3% 0% 22.2% 45.3% 70.5%
TGK-1 -3.8% -2.6% -1.3% 0% 1.3% 2.5% 3.8% -0.8% -0.6% -0.3% 0% 0.3% 0.6% 0.9% -46.3% -31.1% -15.4% 0% 17.0% 33.9% 51.4%
TGK-2 -4.5% -3.0% -1.5% 0% 1.5% 3.0% 4.5% 11.1% 7.4% 3.7% 0% -3.7% -7.4% -11.1% -35.3% -23.6% -11.8% 0% 12.7% 25.5% 38.8%
Mosenergo (TGK-3) -2.2% -1.4% -0.7% 0% 0.7% 1.4% 2.2% 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -33.3% -22.5% -11.1% 0% 13.3% 26.4% 39.7%
TGK-4 -1.3% -0.9% -0.4% 0% 0.4% 0.9% 1.3% 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -43.7% -29.3% -14.6% 0% 15.8% 31.8% 48.5%
TGK-5 -2.1% -1.4% -0.7% 0% 0.7% 1.4% 2.1% 0.5% 0.3% 0.2% 0% -0.2% -0.3% -0.4% -30.9% -21.1% -10.6% 0% 12.1% 24.3% 37.4%
TGK-6 -1.0% -0.6% -0.3% 0% 0.3% 0.6% 1.0% 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -48.3% -32.4% -16.2% 0% 17.5% 35.6% 54.5%
TGK-7 -2.1% -1.4% -0.7% 0% 0.7% 1.4% 2.1% 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -24.4% -16.4% -8.3% 0% 9.1% 18.6% 28.8%
TGK-8 -2.4% -1.6% -0.8% 0% 0.8% 1.6% 2.4% 0.1% 0.1% 0.0% 0% 0.0% -0.1% -0.1% -32.4% -21.8% -10.9% 0% 12.0% 24.4% 37.1%
TGK-9 -3.1% -2.1% -1.0% 0% 1.0% 2.1% 3.1% -0.2% -0.1% -0.1% 0% 0.1% 0.1% 0.2% -35.6% -23.8% -11.9% 0% 12.7% 25.6% 39.2%
TGK-10 -3.3% -2.2% -1.1% 0% 1.1% 2.2% 3.3% 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -31.4% -21.1% -10.7% 0% 11.5% 23.1% 34.9%
TGK-11 6.2% 4.1% 2.1% 0% -2.1% -4.1% -6.2% -5.1% -3.4% -1.7% 0% 1.7% 3.4% 5.1% -40.3% -26.9% -13.4% 0% 13.4% 26.9% 40.3%
Kuzbassenergo (TGK-12) -0.1% -0.1% 0.0% 0% 0.0% 0.1% 0.1% -0.3% -0.2% -0.1% 0% 0.1% 0.2% 0.3% -35.5% -23.6% -11.8% 0% 11.8% 23.6% 35.5%
TGK-13 0.5% 0.3% 0.2% 0% -0.2% -0.3% -0.5% -1.9% -1.3% -0.6% 0% 0.6% 1.3% 1.9% -22.1% -18.7% -10.1% 0% 7.0% 18.5% 30.2%
TGK-14 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -0.5% -0.3% -0.2% 0% 0.2% 0.3% 0.5% -24.8% -16.5% -8.3% 0% 8.3% 16.5% 24.8%
RusHydro -2.6% -1.8% -0.9% 0% 0.9% 1.8% 2.6% -1.2% -0.8% -0.4% 0% 0.4% 0.8% 1.2% -12.2% -8.2% -4.1% 0% 4.8% 9.4% 14.2%
Krasnoyarsk GES 1.5% 1.0% 0.5% 0% -0.5% -0.9% -1.4% -3.1% -2.1% -1.0% 0% 1.0% 2.1% 3.1% -10.5% -7.1% -3.5% 0% 4.1% 8.2% 12.4%
Integrated
Bashkirenergo -1.9% -1.2% -0.6% 0% 0.6% 1.2% 1.9% -0.9% -0.6% -0.3% 0% 0.3% 0.6% 0.9% -23.6% -16.1% -8.0% 0% 9.6% 19.3% 29.2%
Irkutskenergo 1.5% 1.0% 0.5% 0% -0.5% -1.0% -1.4% -3.8% -2.6% -1.3% 0% 1.3% 2.5% 3.8% -16.5% -11.1% -5.6% 0% 6.1% 12.3% 18.7%
Novosibirskenergo -0.1% 0.0% 0.0% 0% 0.0% 0.0% 0.1% -0.3% -0.2% -0.1% 0% 0.1% 0.2% 0.3% -17.2% -11.5% -5.7% 0% 5.7% 11.5% 17.2%
Gas prices Coal prices Electricity prices
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Target price sensitivity analysis, generation companies (continued)
Source: Glitnir estimates
In the table, changes in target prices are a result of changes in the indicated variable by or to the indicated value in each year from 2009 to 2020.
7% 9% 11% 13% 15% 17% 19% -15% -10% -5% Base +5% +10% +15% -1.5% -1.0% -0.5% Base +0.5% +1.0% +1.5%
Generation
OGK-1 -0.5% -0.4% -0.2% 0% 0.2% 0.4% 0.6% -14.4% -9.6% -4.8% 0% 4.8% 9.6% 14.4% -37.0% -24.9% -13.0% 0% 12.0% 18.6% 22.3%
OGK-2 -0.5% -0.3% -0.2% 0% 0.2% 0.4% 0.6% -11.9% -7.9% -4.0% 0% 4.0% 7.9% 11.9% -33.1% -19.9% -8.0% 0% 9.2% 17.4% 21.3%
OGK-3 -0.3% -0.2% -0.1% 0% 0.1% 0.2% 0.3% -9.4% -6.3% -3.1% 0% 3.1% 6.3% 9.4% -30.2% -23.7% -15.0% 0% 13.1% 21.4% 25.0%
OGK-4 -0.3% -0.2% -0.1% 0% 0.1% 0.2% 0.3% -9.8% -6.6% -3.3% 0% 3.3% 6.6% 9.8% -20.6% -10.8% -3.5% 0% 3.8% 6.9% 8.0%
OGK-5 -1.5% -1.0% -0.5% 0% 0.5% 1.1% 1.7% -13.2% -8.8% -4.4% 0% 4.4% 8.8% 13.2% -36.2% -25.6% -12.1% 0% 12.0% 18.6% 22.9%
OGK-6 -2.6% -1.7% -0.9% 0% 0.9% 1.9% 2.9% -20.6% -13.7% -6.9% 0% 6.9% 13.7% 20.6% -61.6% -50.0% -25.9% 0% 25.2% 49.6% 57.8%
TGK-1 -11.1% -7.6% -3.9% 0% 3.9% 8.2% 12.6% -3.7% -2.5% -1.2% 0% 1.2% 2.5% 3.7% 0.3% 0.1% 0.0% 0% 0.1% 0.3% 0.6%
TGK-2 -17.6% -12.0% -6.2% 0% 6.2% 12.9% 19.9% -1.7% -1.1% -0.6% 0% 0.6% 1.1% 1.7% -2.6% -1.9% -1.1% 0% 1.2% 2.3% 3.3%
Mosenergo (TGK-3) -15.3% -10.5% -5.4% 0% 5.4% 11.3% 17.4% -8.5% -5.6% -2.8% 0% 2.8% 5.6% 8.5% -6.9% -5.0% -2.7% 0% 2.9% 4.8% 5.7%
TGK-4 -21.8% -14.9% -7.7% 0% 7.7% 16.0% 24.6% -6.9% -4.6% -2.3% 0% 2.3% 4.6% 6.9% -4.1% -3.1% -1.7% 0% 1.9% 4.2% 6.6%
TGK-5 -14.1% -9.6% -5.0% 0% 5.0% 10.3% 15.8% -8.3% -5.5% -2.8% 0% 2.8% 5.5% 8.3% -6.5% -4.7% -2.6% 0% 2.8% 5.4% 7.3%
TGK-6 -21.5% -14.7% -7.6% 0% 7.6% 15.7% 24.3% -11.2% -7.5% -3.7% 0% 3.7% 7.5% 11.2% -8.2% -6.0% -3.3% 0% 3.6% 7.5% 11.3%
TGK-7 -19.4% -13.2% -6.8% 0% 6.9% 14.2% 21.9% -9.5% -6.3% -3.2% 0% 3.2% 6.3% 9.5% -3.1% -2.4% -1.4% 0% 1.7% 3.7% 6.0%
TGK-8 -10.1% -6.9% -3.6% 0% 3.6% 7.4% 11.4% -6.3% -4.2% -2.1% 0% 2.1% 4.2% 6.3% -4.0% -2.8% -1.5% 0% 1.1% 2.0% 2.9%
TGK-9 -24.9% -17.0% -8.8% 0% 8.8% 18.2% 28.1% -5.2% -3.5% -1.7% 0% 1.7% 3.5% 5.2% -3.4% -2.6% -1.4% 0% 1.6% 2.9% 3.4%
TGK-10 -8.0% -5.5% -2.8% 0% 2.8% 5.9% 9.1% -5.7% -3.8% -1.9% 0% 1.9% 3.8% 5.7% -5.3% -3.8% -2.0% 0% 2.0% 2.8% 3.3%
TGK-11 -22.0% -15.0% -7.8% 0% 7.8% 16.2% 25.0% -13.7% -9.2% -4.6% 0% 4.6% 9.2% 13.7% -6.3% -4.5% -2.4% 0% 2.8% 5.8% 8.8%
Kuzbassenergo (TGK-12) -6.4% -4.4% -2.3% 0% 2.3% 4.7% 7.3% -13.7% -9.1% -4.6% 0% 4.6% 9.1% 13.7% -9.9% -6.5% -2.8% 0% 1.3% 2.4% 3.3%
TGK-13 -5.3% -3.6% -1.9% 0% 1.9% 3.9% 6.0% -8.8% -7.9% -4.2% 0% 2.3% 6.5% 10.1% -6.4% -4.5% -2.4% 0% 2.6% 4.2% 5.2%
TGK-14 -16.9% -11.6% -6.0% 0% 6.0% 12.4% 19.2% -9.7% -6.5% -3.2% 0% 3.2% 6.5% 9.7% -6.6% -4.7% -2.5% 0% 2.8% 6.0% 9.5%
RusHydro 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -4.7% -3.1% -1.6% 0% 1.6% 3.1% 4.7% 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0%
Krasnoyarsk GES 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0% -5.9% -3.9% -1.9% 0% 1.9% 3.8% 5.7% 0.0% 0.0% 0.0% 0% 0.0% 0.0% 0.0%
Integrated
Bashkirenergo -12.3% -8.4% -4.3% 0% 4.4% 9.0% 13.9% -8.7% -5.8% -2.9% 0% 2.9% 5.8% 8.7% -8.5% -6.1% -3.2% 0% 3.4% 7.1% 8.8%
Irkutskenergo -2.1% -1.5% -0.8% 0% 0.8% 1.6% 2.4% -5.6% -3.7% -1.9% 0% 1.8% 3.7% 5.5% -1.3% -0.9% -0.5% 0% 0.5% 1.1% 1.8%
Novosibirskenergo -9.1% -6.2% -3.2% 0% 3.2% 6.7% 10.3% -9.2% -6.1% -3.1% 0% 3.1% 6.1% 9.2% -3.5% -2.6% -1.5% 0% 1.7% 3.8% 6.2%
Heat margins Power consumption growth rate, p.a.Cost of new construction
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Distribution companies
We valued Russian distribution companies on an assets basis.
According to UES and state officials, RAB is to be introduced in four to six pilot regions beginning
July 1, 2008, and in all regions beginning in 2010. The pilot regions have not been officially
announced, but according to recent statements of UES officials they may include Belgorod,
Perm, Astrakhan, Orenburg, Tver, and Kuzbass.
In our valuation we conservatively assumed that all distribution companies would switch to RAB
beginning in 2011, about a year later than the guideline announced by UES and state officials.
We assumed the new regulatory system would provide a return on RAB equal to the WACC
required by investors, and therefore we assumed that each MRSK’s enterprise value should
equal its RAB at the time the new regulation is introduced. Thus to derive the fair value of
MRSKs, we estimated RAB for each MRSK as of our expected RAB introduction date (January
1, 2011) and assumed it to be equal to enterprise value by that date. We subtracted expected net
debt as of YE10 from the company’s YE10 enterprise value to arrive at a YE10e market cap and
discounted it at the required return on equity to arrive at the current fair market cap.
We estimated the 2010e RAB of each MRSK as follows:
2010e RAB = Current depreciated replacement cost of fixed assets (DRC) + Expected
capex through 2010 (excluding connection fee) – Depreciation through 2010
Depreciated replacement cost (DRC) estimate
DRC is made up of two components: replacement cost new (RCN) and accumulated
depreciation rate.
We used the RCN estimates provided by UES for the eight MRSKs it appraised for consolidation
(the effective date of the appraisal was June 30, 2007). We believe this data provides one of the
best estimates of the companies’ RCNs for tariff-setting purposes, as the appraiser used the
approach and inputs most likely to be used by the industry regulator in the future.
We studied the relationship between the RCN estimates provided by the appraiser and various
technical parameters of the electric grids (such as length, electricity throughput, and overall size)
using regression analysis with RCN as a dependent variable. The strongest relationship (adj. R2
= 0.91) was found between RCN and overall grid size (overall size in units is a measure of the
volume of the grid’s assets used by an industry regulator; it comprises grid length and substation
capacity with a common measurement unit). We also found a strong relationship between RCN
and grid length (adj. R2 = 0.89), while the correlation between RCN and electricity throughput was
relatively weak (adj. R2 = 0.21).
Figure 105: RCN vs. overall grid size
Source: UES, Glitnir calculations
y = 0.01006xR2 = 0.91
0
2
4
6
8
10
12
14
0 200 400 600 800 1 000 1 200 1 400
RC
N e
stim
ate
d b
y a
pp
rais
er, U
SD
bn
Size, thous. units
MRSK Center
MRSK Siberia
MRSK Center and Volga
MRSK South
MRSK Volga
MRSK Urals
MRSK North-West
MRSK North Caucasus
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Figure 106: RCN vs. grid length
Source: UES, Glitnir calculations
Figure 107: RCN vs. electricity throughput
Source: UES, Glitnir calculations
We used an estimated RCN per unit of overall grid size of USD 10 060, which we derived from
the regression to estimate the RCNs for the four distribution companies not included in the
appraisal (Moscow City and Moscow United distribution companies, Lenenergo, and
Tyumenenergo).
To calculate DRC, we multiplied RCN by the adjusted depreciation rates reported in regional
distribution companies’ accounting statements. As accounting depreciation rates are easily
manipulated, we adjusted them by twice reducing the deviation of depreciation rates across
MRSKs in order to reduce volatility in estimates of relative fair value for MRSKs as a result of
imperfections in the accounting data.
We compared our RCN and DRC estimates for MRSKs to the gross and net book values,
respectively, of the fixed assets of foreign peers. On average, our RCN estimate was 19% below
the full replacement cost of foreign peers’ fixed assets on a per-kilometre-of-grid basis. The
discount of our DRC estimate for Russian distributors to the net fixed-assets book values of
foreign distributors on a per-kilometre-of-grid basis was even higher, at 58%.
y = 0.0375xR2 = 0.89
0
2
4
6
8
10
12
14
16
0 50 100 150 200 250 300 350 400R
CN
estim
ate
d b
y a
pp
rais
er, U
SD
bn
Length of grid, thous. km
MRSK CenterMRSK Siberia
MRSK Center and Volga
MRSK Volga
MRSK Urals
MRSK North-West
MRSK North Caucasus
MRSK South
y = 0.145xR2 = 0.21
0
2
4
6
8
10
12
14
0 20 000 40 000 60 000 80 000 100 000
RC
N e
stim
ate
d b
y a
pp
rais
er, U
SD
bn
Electricity throughput, GWh
MRSK Center
MRSK Siberia
MRSK Urals
MRSK South
MRSK Volga
MRSK Center and Volga
MRSK North-West
MRSK North
Caucasus
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Figure 108: RCN and DRC, Russian vs. foreign distribution grids
Source: Company data, Glitnir estimates
Company Country
PPE
cost,
USD
mn
Depr.
rate
PPE acc.
depr., USD
mn
PPE
net,
USD
mn
Grid
length,
km
Transformer
capacity, MVA
MVA/
km
PPE
cost,
USD
thous/
km
PPE
net,
USD
thous/
km
EDF Energy plc* UK 12 477 18% -2231 10 246 175 000 83 000 0.47 71 59
Scottish and Southern Energy plc* UK 8 074 41% -3340 4 733 122 388 66 39
SP AUSNET* Australia 1 428 9% -126 1 302 43 384 33 30
Prazska Energeticka Czech Republic 1 159 39% -458 701 11 544 100 61
ELMU Hungary 1 179 51% -605 574 22 242 53 26
Rytu Skirstomieji Lithuania 1 186 12% -143 1 043 62 816 7 548 0.12 19 17
Vakaru Skirstomieji Lithuania 1 062 25% -268 794 57 000 19 14
Eletropaulo Metropolitana S.A. Brazil 4 282 39% -1673 2 610 42 269 12 662 0.30 101 62
Rio Grande Energia Sa Brazil 1 362 29% -395 966 80 669 1 452 0.02 17 12
Average 3 579 29% -1 027 2 552 68 590 26 166 0.23 53 35
WA 29% 0.29 52 37
* Data for power distribution segment only
RCN,
USD
mn
Assumed
acc. depr.,
USD mn
DRC,
USD
mn
RCN,
USD
thous./
km
DRC,
USD
thous./
km
MRSK Center Russia 12 783 66% -8 438 4 345 367 674 44 898 0.12 35 12
MRSK South Russia 9 296 69% -6 413 2 883 248 283 34 487 0.14 37 12
MRSK North Caucasus Russia 4 261 63% -2 694 1 567 105 165 13 084 0.12 41 15
MRSK Center and Volga Russia 8 134 65% -5 316 2 818 250 000 27 400 0.11 33 11
MRSK North-West Russia 6 585 64% -4 190 2 395 162 200 21 628 0.13 41 15
MRSK Siberia Russia 10 459 65% -6 801 3 657 261 000 33 947 0.13 40 14
MRSK Urals Russia 7 360 62% -4 567 2 793 140 971 25 343 0.18 52 20
MRSK Volga Russia 8 522 53% -4 506 4 016 211 958 36 598 0.17 40 19
Moscow Unified Dist. Co. Russia 5 373 60% -3 197 2 175 74 000 40 326 0.54 73 29
Moscow City Dist. Co. Russia 4 762 62% -2 960 1 803 60 457 17 050 0.28 79 30
Lenenergo Russia 3 232 63% -2 043 1 189 52 021 17 932 0.34 62 23
Tyumenenergo Russia 2 086 52% -1 082 1 004 38 328 23 203 0.61 54 26
Average 6 904 62% -4 351 2 554 164 338 27 991 0.24 49 19
WA 63% 0.17 42 16
Discount relative to foreign peers -19% -58%
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The discount of Russian distribution companies to their foreign peers on a DRC-to-grid-length basis might seem high, which would call into question the validity of the independent appraiser’s estimates. However, we believe such a large discount is justified for the following reasons:
1. The RCN per kilometre of Russian distribution grids may be lower than that of foreign companies as a result of the lower sophistication of Russia’s grids. If we compare our RCN estimates for Russian distribution companies to the full replacement values of foreign peers with comparable grid sophistication, we find no downward bias in our RCN estimates. For instance, for the Moscow, St. Petersburg, and Tyumen distribution grids, we estimated an average RCN of USD 69 000/km, which is in line with the gross book value/grid length multiple of USD 66 000-71 000/km for distributors in the UK. The Moscow, St. Petersburg, and Tyumen regions are similar to the UK in terms of grid sophistication; however, grid sophistication in these regions is higher than in the rest of Russia.
2. Russian distribution grids have a significantly higher depreciation rate (63%) than their foreign peers (an average of 29% in our sample). This is because neither the utilities sector as a whole nor Russia’s distribution segment in particular has received proper financing for decades.
In the future, the state regulator is likely to show a downward bias in its estimates of RAB (and thus DRC) in order to ensure that tariffs rise at the lowest possible rate. Inflation is a major concern of the Russian government, and officials have frequently cited electricity tariffs as a significant contributor to growth in the country’s consumer price index. Therefore, we believe it is reasonable to be conservative when forecasting the DRC values expected to be adopted by regulators.
We applied a 3.0% annual asset depreciation rate and a 2.0% annual RCN appreciation rate to account for changes in the economic value of assets prior to the RAB introduction date.
Capex In order to estimate initial RAB, we must augment the DRC presented above (as of June 30, 2007) with expected capex through the RAB introduction date (i.e. from 2H07 to 2010). Data on distribution companies’ total planned capex from 2H07 to 2010 was provided in appraisal presentations, which were based on data from the companies’ respective business plans.
In calculating future RAB, we excluded connection fee revenues from total capex. Based on company data for current profitability and financial leverage potential, we made a rough estimate of the 2H07-2010 capex breakdown by source of financing (existing equity, debt, and connection fees) for each MRSK.
We first forecast the maximum amount of capex that could be financed using current operating cash flow (i.e. existing equity), then estimated the amount of capex that could reasonably be financed by debt. The remainder of the company’s capex program was assumed to be financed by connection fees and was not accounted for in the initial RAB estimate.
Figure 109: Capex by source of financing, MRSKs
Source: Company data, Glitnir estimates
Existing equity
Debt Connection fee
MRSK Center 1 243 30% 70% 0% 28% 15%MRSK South 1 145 30% 70% 0% 38% 11%MRSK North Caucasus 194 30% 70% 0% 12% 5%MRSK Center and Volga 1 181 40% 60% 0% 40% 13%MRSK North-West 583 60% 40% 0% 23% 22%MRSK Siberia 435 20% 80% 0% 11% 38%MRSK Urals 660 40% 60% 0% 23% 18%MRSK Volga 777 50% 50% 0% 19% 18%Moscow Unified Dist. Co. 2 331 20% 15% 65% 103% 4%Moscow City Dist. Co. 1 645 15% 30% 55% 88% 4%Lenenergo 1 636 15% 20% 65% 133% 3%Tyumenenergo 1 481 50% 50% 0% 142% 11%
Total capex,
USD mn 2H07-2010
% to be financed fromTotal capex 2H07-2010/DRC 1H07
EBITDA 2006/ Total capex 2H07-2010
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Differences in the capex financing structures across MRSKs can be explained by the following:
1. Current profitability relative to size of capex program. The higher an MRSK’s current cash flow relative to its capex, the higher the portion of capex that can be financed through internal sources.
2. Leverage potential relative to size of capex program. The higher an MRSK’s capex is relative to its assets, the more capex is to be financed through connection fees.
We expect most MRSKs will rely on debt as a primary source of capex financing. This seems reasonable given the following:
1. Distribution companies’ current operating cash flow is not enough to meet capex needs in full.
2. Distribution companies have relatively little debt and therefore possess substantial unrealized financial leverage potential.
Thus we expect the distribution sector to significantly increase its leverage by 2011.
Figure 110: Debt to assets,* 1H07 and 2010e
Source: Company data, Glitnir estimates
Our view that distribution companies will increase their leverage is shared by UES. Alexander Chistyakov, the deputy CEO of FSK, gave a presentation in September 2007 in which he reported that he expected the distribution segment to significantly increase the portion of debt in its capital structure in the coming years.
Figure 111: Capital structure, distribution sector
Source: FSK
Discount rate We applied a 12.4-13.9% required return on equity (RROE) to discount the estimated YE10 market cap to its present value.
Company 1H07 2010eMRSK Center 3% 18%MRSK South 5% 25%MRSK North Caucasus 1% 9%MRSK Center and Volga 1% 19%MRSK North-West 2% 10%MRSK Siberia 4% 12%MRSK Urals 2% 14%MRSK Volga 1% 9%Moscow Unified Dist. Co. 13% 30%Moscow City Dist. Co. -4% 31%Lenenergo -10% 30%Tyumenenergo 2% 31%Total 2% 20%
* Assumed assets are revalued at DRC
0%10%20%30%40%50%60%70%80%90%
100%
2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015eEquity Net debt
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Figure 112: Cost of equity calculation, MRSKs
Source: Glitnir estimates
Company
Market
risk
Sector
risk
premium
Liquidity
risk
premium
Corp. gov. risk
premium (+) /
discount (-) RROE
MRSK Center 10.9% 1.5% 0.5% 0.0% 12.9%
MRSK South 10.9% 1.5% 1.0% 0.0% 13.4%
MRSK North Caucasus 10.9% 1.5% 1.0% 0.0% 13.4%
MRSK Center and Volga 10.9% 1.5% 0.0% 0.0% 12.4%
MRSK North-West 10.9% 1.5% 1.0% 0.0% 13.4%
MRSK Siberia 10.9% 1.5% 1.0% 0.0% 13.4%
MRSK Urals 10.9% 1.5% 1.0% 0.0% 13.4%
MRSK Volga 10.9% 1.5% 1.5% 0.0% 13.9%
Moscow Unified Dist. Co. 10.9% 1.5% 0.5% 0.0% 12.9%
Moscow City Dist. Co. 10.9% 1.5% 0.5% 0.0% 12.9%
Lenenergo 10.9% 1.5% 0.5% 0.0% 12.9%
Tyumenenergo 10.9% 1.5% 0.5% 0.0% 12.9%
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Valuation results
Figure 113: Target price calculation, MRSKs
Source: Glitnir estimates
MRSK
Center
MRSK
South
MRSK
North
Caucasus
MRSK
Center
and Volga
MRSK
North-
West
MRSK
Siberia
MRSK
Urals
MRSK
Volga
Moscow
Unified
Dist. Co.
Moscow
City Dist.
Co. Lenenergo Tyumenenergo
RCN 1H07, USD mn 12 783 9 296 4 261 8 134 6 585 10 459 7 360 8 522 5 373 4 762 3 232 2 086
Depreciation rate 66% 69% 63% 65% 64% 65% 62% 53% 60% 62% 63% 52%
DRC 1H07, USD mn 4 345 2 883 1 567 2 818 2 395 3 657 2 793 4 016 2 175 1 803 1 189 1 004
Net debt 1H07 *, USD mn 110 150 18 17 39 131 56 21 286 -74 -118 15
Total capex excluding connection fees,
2H07-2010, USD mn1 243 1 145 194 1 181 583 435 660 777 2 331 1 645 1 636 1 481
Initial RAB 2010e, USD mn 5 240 3 760 1 657 3 759 2 804 3 839 3 259 4 578 4 275 3 262 2 672 2 368
Net debt 2010e, USD mn 961 934 151 709 267 473 443 401 1 265 997 793 738
Minority interest 2010e, USD mn 0 972 0 0 0 205 277 0 0 0 0 0
Fair EV/RAB 2010e 1.00 1.00 0.70 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Fair Mcap 2010e, USD mn 4 279 1 853 1 009 3 050 2 536 3 161 2 539 4 177 3 010 2 266 1 879 1 629
Cost of equity 12.9% 13.4% 13.4% 12.4% 13.4% 13.4% 13.4% 13.9% 12.9% 12.9% 12.9% 12.9%
Fair Mcap current, USD mn 3 142 1 346 733 2 265 1 841 2 295 1 843 2 999 2 247 1 627 1 380 1 196
Common shares outstanding*, mn 42 218 49 845 30 112 698 95 786 89 368 87 430 178 578 28 249 28 249 932 274
FV per common share, USD 0.0744 0.0270 24.8 0.0201 0.0192 0.0257 0.0211 0.0168 0.0795 0.0576 1.37 4.37
12m TP common share, USD 0.0840 0.0306 28.1 0.0226 0.0218 0.0291 0.0239 0.0191 0.0898 0.0650 1.55 4.93
Mid-market price as of Jun 19, 2008,
per common share, USD0.0519 n/a 11.5 0.0141 0.0111 0.0183 0.0191 0.0073 0.0885 0.0630 1.75 n/a
Upside to 12m TP 62% n/a 145% 61% 96% 59% 26% 162% 1% 3% -11% n/a
Recommendation Buy n/a Buy Buy Buy Buy Buy Buy Hold Hold Reduce n/a
Target EV/Grid length, USD thous./km 9.8 9.9 8.0 10.1 12.9 11.0 16.6 15.9 38.1 28.5 26.9 35.1
Target EV/Grid size, USD thous./unit 2 740 2 801 1 938 2 666 3 280 2 804 3 890 4 324 5 270 3 642 4 355 6 490
Target EV/DRC 0.82 0.84 0.53 0.89 0.87 0.78 0.83 0.83 1.28 0.95 1.17 1.33
Transformer capacity/Grid length, MVA/km 0.12 0.14 0.12 0.11 0.13 0.13 0.18 0.17 0.54 0.28 0.34 0.61
EBITDA 2006/ DRC 1H07 4.3% 4.4% 0.6% 5.1% 5.2% 4.3% 4.2% 3.4% 13.1% 7.7% 9.7% 15.2%
* Estimated after consolidation of regional distribution companies into MRSK; for Lenenergo adjusted for the additional share issue
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 88/183
The MRSK valuation results are indicative of the following relationships between grid
characteristics and target value:
1. Target EV/kilometre is higher for distribution companies with more sophisticated grids
(measured by the ratio of transformer capacity to grid length).
2. Target EV/kilometre, target EV/DRC, and target EV/size are higher for distribution
companies that have higher short-term returns on assets (for instance, as measured
by EBITDA/DRC).
What do our valuation assumptions imply by 2011?
Based on our assumption that RAB will be introduced in 2011, the average distribution tariff in
Russia should stand about 112% above the 2006 level, which implies a CAGR of 16% over five
years. We believe the government will find this growth rate acceptable, though high enough for it
to be reluctant to allow tariffs to advance any faster.
Figure 114: Implied distribution tariff, USD/MWh
Source: Company data, Glitnir estimates
According to our estimates, the new regulatory regime will boost the sector’s top line to USD 22.1
bn in 2011. Profit margins will also expand for distribution companies, leading to a net income of
USD 3.7 bn for the sector by 2011. Massive capex will drive sector assets up from USD 32.2 bn
in 2006 to USD 41.5 bn by 2011. For selected financials of distribution companies, see
―Appendix 3: Company profiles.‖
Special cases
As Moscow United and Moscow City distribution companies are to be merged, we adjusted their
target values according to the approved swap ratio (1.38 shares of Moscow City Distribution
Company per share of Moscow United Distribution Company).
We also accounted for Lenenergo’s additional share issue in favour of the St. Petersburg city
government at USD 1.58 (RUB 37.44) per share, which is expected to be completed in
November 2008.
As the consolidation of Kurganenergo, Kubanenergo, and Tomsk Distribution Company into
MRSK Urals, MRSK South, and MRSK Siberia, respectively, was rejected by minority
shareholders, we calculated target prices for those companies on a stand-alone basis. We
derived valuations for those companies from the implied fair EV/grid length of the respective
MRSKs and applied 50% company-specific discounts in order to account for lesser liquidity and
higher corporate governance risks of these regional distribution companies relative to larger
MRSKs. Correspondingly, we accounted for minority interest in MRSK Urals, MRSK South, and
MRSK Siberia.
We also applied a 30% discount to MRSK North Caucasus’s EV to account for company-specific
risks related to the general economic and political situation in the region where the company
operates.
Company 2006 2011e
MRSK Center 17 41 137% 17.5%
MRSK South 18 41 124% 16.2%
MRSK North Caucasus 27 71 163% 20.0%
MRSK Center and Volga 15 32 120% 15.8%
MRSK North-West 17 36 108% 14.5%
MRSK Siberia 12 25 106% 14.3%
MRSK Urals 14 26 94% 12.9%
MRSK Volga 16 36 124% 16.2%
Moscow Unified Dist. Co. 15 29 93% 12.8%
Moscow City Dist. Co. 11 29 154% 19.2%
Lenenergo 15 36 139% 17.7%
Tyumenenergo 13 22 70% 10.0%
Total 15 32 112% 14.9%
2011e/
2006
CAGR in
RUB terms
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 89/183
Sensitivity analysis
The tables below illustrate the sensitivities of the MRSKs’ target prices to several key variables, including estimated DRC, RAB introduction date (along with tariff CAGR), capex, and RCN appreciation rate.
Figure 115: Sensitivity analysis, MRSKs
Source: Glitnir estimates
2009 2010
Base
2011 2012 2013 2009 2010
Base
2011 2012 2013
MRSK Center 30% 14% 0% -12% -22% 27.3% 21.2% 17.5% 15.2% 13.6%
MRSK South 30% 14% 0% -12% -23% 24.3% 19.3% 16.2% 14.2% 12.7%
MRSK North Caucasus 37% 17% 0% -15% -28% 32.8% 24.7% 20.0% 17.3% 15.3%
MRSK Center & Volga 24% 11% 0% -11% -20% 23.4% 18.7% 15.8% 13.8% 12.4%
MRSK North-West 26% 12% 0% -10% -18% 21.8% 17.3% 14.5% 12.7% 11.5%
MRSK Siberia 36% 17% 0% -13% -25% 22.0% 17.2% 14.3% 12.6% 11.4%
MRSK Urals 30% 14% 0% -11% -21% 18.9% 15.2% 12.9% 11.4% 10.3%
MRSK Volga 29% 14% 0% -11% -21% 25.1% 19.5% 16.2% 14.1% 12.6%
Moscow Unified DC 9% 5% 0% -12% -23% 15.6% 14.2% 12.8% 11.0% 9.7%
Moscow City DC 9% 5% 0% -12% -23% 27.2% 22.5% 19.2% 16.1% 13.8%
Lenenergo 8% 4% 0% -12% -23% 22.9% 20.1% 17.7% 14.9% 12.9%
Tyumenenergo 1% 1% 0% -10% -20% 11.3% 10.7% 10.0% 9.0% 8.3%
Total 21.8% 17.6% 14.9% 13.0% 11.6%
Company
Year of RAB introduction
Change in target price
Tariff growth CAGR through year
of RAB introduction
-50% -25% -10% Base 10% 25% 50% -50% -25% -10% Base 10% 25% 50%
MRSK Center -47% -24% -9% 0% 9% 24% 47% 12.5% 15.1% 16.6% 17.5% 18.4% 19.7% 21.8%
MRSK South -47% -24% -9% 0% 9% 24% 47% 12.2% 14.3% 15.5% 16.2% 17.0% 18.1% 19.8%
MRSK North Caucasus -51% -26% -10% 0% 10% 26% 51% 14.8% 17.5% 19.1% 20.0% 21.0% 22.3% 24.5%
MRSK Center & Volga -43% -22% -9% 0% 9% 22% 43% 11.8% 13.9% 15.0% 15.8% 16.6% 17.6% 19.4%
MRSK North-West -44% -22% -9% 0% 9% 22% 44% 10.4% 12.5% 13.7% 14.5% 15.2% 16.3% 18.0%
MRSK Siberia -51% -25% -10% 0% 10% 25% 51% 10.2% 12.3% 13.5% 14.3% 15.0% 16.1% 17.8%
MRSK Urals -47% -23% -9% 0% 9% 23% 47% 10.0% 11.5% 12.3% 12.9% 13.4% 14.2% 15.5%
MRSK Volga -46% -23% -9% 0% 9% 23% 46% 11.7% 14.0% 15.4% 16.2% 17.0% 18.2% 20.1%
Moscow Unified DC -36% -18% -7% 0% 7% 18% 36% 10.3% 11.6% 12.3% 12.8% 13.2% 13.9% 15.0%
Moscow City DC -36% -18% -7% 0% 7% 18% 36% 15.0% 17.2% 18.4% 19.2% 20.0% 21.2% 23.0%
Lenenergo -30% -15% -6% 0% 6% 15% 30% 14.9% 16.3% 17.2% 17.7% 18.2% 19.0% 20.3%
Tyumenenergo -29% -15% -6% 0% 6% 15% 29% 8.8% 9.4% 9.8% 10.0% 10.3% 10.6% 11.2%
Total 11.3% 13.2% 14.3% 14.9% 15.6% 16.6% 18.2%
Company Change in target price Tariff growth CAGR, 2007 - 2011
DRC estimate
0% 1%
Base
2% 3% 4% 0% 1%
Base
2% 3% 4%
MRSK Center -25% -12% 0% 13% 26% 15.8% 16.7% 17.5% 18.4% 19.2%
MRSK South -27% -14% 0% 14% 29% 14.7% 15.5% 16.2% 17.0% 17.7%
MRSK North Caucasus -24% -12% 0% 12% 25% 18.4% 19.2% 20.0% 20.9% 21.7%
MRSK Center & Volga -22% -11% 0% 12% 24% 14.4% 15.1% 15.8% 16.5% 17.2%
MRSK North-West -21% -11% 0% 11% 23% 13.1% 13.8% 14.5% 15.1% 15.8%
MRSK Siberia -25% -13% 0% 13% 27% 12.9% 13.6% 14.3% 14.9% 15.6%
MRSK Urals -21% -11% 0% 11% 23% 11.9% 12.4% 12.9% 13.4% 13.9%
MRSK Volga -17% -8% 0% 9% 18% 15.0% 15.6% 16.2% 16.8% 17.5%
Moscow Unified DC -17% -9% 0% 9% 18% 11.9% 12.3% 12.8% 13.2% 13.7%
Moscow City DC -17% -9% 0% 9% 18% 17.7% 18.5% 19.2% 20.0% 20.8%
Lenenergo -16% -8% 0% 8% 17% 16.6% 17.2% 17.7% 18.3% 18.8%
Tyumenenergo -12% -6% 0% 6% 13% 9.6% 9.8% 10.0% 10.2% 10.5%
Total 13.7% 14.3% 14.9% 15.6% 16.2%
Company Change in target price Tariff growth CAGR, 2007 - 2011
Rate of RCN appreciation
-50% -25% -10% Base 10% 25% 50% -50% -25% -10% Base 10% 25% 50%
MRSK Center -4% -2% -1% 0% 1% 2% 4% 16.6% 17.0% 17.3% 17.5% 17.7% 18.0% 18.4%
MRSK South -5% -3% -1% 0% 1% 3% 5% 15.2% 15.7% 16.0% 16.2% 16.4% 16.7% 17.2%
MRSK North Caucasus 0% 0% 0% 0% 0% 0% 0% 19.6% 19.8% 19.9% 20.0% 20.1% 20.2% 20.5%
MRSK Center & Volga -7% -4% -1% 0% 1% 4% 7% 14.7% 15.2% 15.6% 15.8% 16.0% 16.4% 16.9%
MRSK North-West -6% -3% -1% 0% 1% 3% 6% 13.8% 14.1% 14.3% 14.5% 14.6% 14.8% 15.1%
MRSK Siberia -1% -1% 0% 0% 0% 1% 1% 14.0% 14.1% 14.2% 14.3% 14.3% 14.4% 14.6%
MRSK Urals -4% -2% -1% 0% 1% 2% 4% 12.4% 12.6% 12.8% 12.9% 13.0% 13.1% 13.4%
MRSK Volga -4% -2% -1% 0% 1% 2% 4% 15.6% 15.9% 16.1% 16.2% 16.3% 16.5% 16.8%
Moscow Unified DC -16% -8% -3% 0% 3% 8% 16% 10.1% 11.5% 12.3% 12.8% 13.3% 14.0% 15.2%
Moscow City DC -16% -8% -3% 0% 3% 8% 16% 15.7% 17.5% 18.6% 19.2% 19.9% 20.9% 22.4%
Lenenergo -17% -9% -3% 0% 3% 9% 17% 13.8% 15.8% 17.0% 17.7% 18.4% 19.5% 21.2%
Tyumenenergo -21% -10% -4% 0% 4% 10% 21% 8.5% 9.3% 9.7% 10.0% 10.3% 10.7% 11.4%
Total 13.7% 14.3% 14.7% 14.9% 15.2% 15.6% 16.2%
Company Change in target price
Total capex, 2H07-2010
Tariff growth CAGR, 2007 - 2011
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 90/183
Foreign peer comparison
Almost all MRSKs have completed consolidation (except Moscow MRSK), but they have not all
published consolidated financials yet. The financial multiples presented below are based on the
RAS financial statements of each MRSK’s regional distribution companies.
On average, Russian distribution companies currently trade at 39-52% premiums on various
earnings multiples. It thus seems the market has to some extent already priced in the transition
to the new regulatory approach and associated improvements in the financial performance of
Russian distribution companies. Nevertheless, asset-based ratios such as EV/grid length and
EV/electricity throughput are still indicative that the market heavily discounts Russian distribution
companies relative to their foreign peers.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 91/183
Figure 116: Peer group, distribution companies
Source: Company data, Bloomberg, Glitnir estimates
2006 2011e 2006 2011e 2006 2011e
Cur-
rent
Tar-
get
Cur-
rent
Tar-
get 2006 2011e 2006 2011e 2006 2011e
MRSK Center Russia MRKC RU 2 191 2 303 2.5 0.9 13.1 2.0 33.3 4.6 1.5 38 60 6.3 9.8 19% 47% 10% 29% 7% 19%
MRSK South Russia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 50 n/a 9.9 14% 41% 7% 25% 1% 16%
MRSK North Caucasus Russia MRKK RU 340 358 1.2 0.4 37.2 1.0 neg 2.1 0.7 26 60 3.4 8.0 3% 44% neg 26% neg 19%
MRSK Center and Volga Russia MRKP RU 1 583 1 600 2.0 0.8 11.7 2.0 72.1 4.7 1.4 27 42 6.4 10.1 18% 42% 10% 26% 3% 18%
MRSK North-West Russia MRKZ RU 1 063 1 103 1.6 0.7 9.3 1.8 40.9 4.0 1.1 26 50 6.8 12.9 17% 39% 9% 24% 4% 17%
MRSK Siberia Russia MRKS RU 1 635 1 768 1.7 0.7 11.8 2.0 neg 4.5 1.5 19 31 6.8 11.0 14% 36% 4% 21% neg 15%
MRSK Urals Russia MRKU RU 1 666 1 722 1.6 0.7 15.5 2.5 58.9 5.5 1.5 20 27 12.2 16.6 10% 29% 6% 18% 3% 13%
MRSK Volga Russia MRKV RU 1 304 1 325 1.5 0.6 10.1 1.4 64.2 3.0 1.2 22 55 6.3 15.9 15% 41% 7% 28% 2% 20%
Moscow Unified Dis. Co. Russia MSRS RU 2 500 2 789 3.0 1.3 10.3 2.9 23.9 7.0 1.4 41 41 37.7 38.1 29% 43% 16% 26% 11% 16%
Moscow City Dis. Co. Russia MGRS RU 1 780 1 705 4.6 1.5 12.9 2.4 18.0 6.6 2.3 47 48 28.2 28.5 36% 61% 25% 38% 27% 24%
Lenenergo Russia LSNG RU 1 754 1 635 4.2 1.5 14.9 2.7 104.3 7.3 1.4 55 47 31.4 26.9 28% 54% 9% 32% 4% 20%
Lenenergo Russia LSNGP RU
Kurganenergo Russia KRGE RU 74 89 0.5 n/a 6.0 n/a n/a n/a 0.3 22 27 3.3 4.0 9% n/a 5% n/a neg n/a
Kurganenergo Russia KRGEP RU
Tomsk Dis. Co. Russia TORS RU 111 111 1.4 n/a 11.5 n/a 403.0 n/a 1.0 18 13 7.0 5.2 13% n/a 3% n/a 0% n/a
Tomsk Dis. Co. Russia TORSP RU
Kubanenergo Russia KUBE RU 496 611 1.4 n/a 12.4 n/a 203.2 n/a 1.6 38 32 7.2 6.1 12% n/a 7% n/a 1% n/a
Russian dis. co. average 2.4 0.9 14.7 2.1 52.0 4.9 1.4 32 46 14.5 15.6 18% 43% 9% 26% 5% 18%
WA 2.6 1.0 12.8 2.2 49.7 5.4 1.5 34 45 17.1 16.8 21% 44% 11% 27% 7% 18%
Foreign distribution companies
ELMU Rt. Hungary ELMU HB 939 1 077 1.1 n/a 6.8 n/a 13.6 n/a 2.1 146 n/a 48.4 n/a 16% n/a 9% n/a 7% n/a
EMASZ Hungary EMASZ HB 409 474 1.1 n/a 8.9 n/a 19.6 n/a 2.0 163 n/a 21.3 n/a 13% n/a 5% n/a 5% n/a
Prazska EnergetikaCzech
RepublicPREN CP 1 584 1 541 2.5 n/a 11.5 n/a 20.8 n/a 3.1 266 n/a 133.5 n/a 22% n/a 17% n/a 12% n/a
Eletropaulo Metropolitana
Eletricidade de Sao
Paulo SA
Brazil ELPL6 BZ 3 664 4 029 1.0 0.8 6.1 4.0 21.4 9.0 3.6 127 134 95.3 100.0 17% 20% 13% 17% 4% 8%
Vakaru Skirstomieji TinklaiLithuania RST1L LH 853 929 2.7 n/a 12.4 n/a 94.5 n/a 1.2 252 n/a 16.3 n/a 22% n/a 3% n/a 3% n/a
CegedelLuxem-
bourg VST1L LH 1 254 1 293 3.8 n/a 11.4 n/a 57.9 n/a 2.3 278 n/a 180.1 n/a 34% n/a 10% n/a 6% n/a
International dis. co. average 2.0 9.5 38.0 2.4 205 82.5 20% 10% 6%
WA 1.8 8.6 32.8 2.8 187 96.3 20% 12% 6%
Russian Dis. Co. premium / (discount) to foreign peers 39% 49% 52% -48% -82%
Bloomberg consensus target prices and earnings estimates used for foreign peers
P/E
Company Country BB ticker
P/B,
2007e
EV,
USD
mn
MCap,
USD
mn
EV / EBITDA Net marginEBIT margin
EBITDA
margin
EV / Grid
length,
USD th/km
EV /
Through-
put 2006,
USD/MWhEV/Sales
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 92/183
Transmission companies
Regional transmission companies are to be merged into FSK on July 1, 2008. As a result, FSK
will consolidate practically all of Russia’s transmission assets.
To value FSK we applied the same asset-based approach we used to value distribution
companies. We assumed RAB regulation would come into effect for FSK in 2012, a year later
than for distribution companies. This is in line with the RAB introduction date assumed by the
independent appraiser that evaluated FSK and transmission companies for consolidation
purposes.
To calculate FSK’s fair enterprise value we estimated RAB on the expected RAB introduction
date (January 1, 2012). Assuming the new regulatory system will provide a return on invested
capital equal to the WACC required by investors, FSK’s YE11e enterprise value should equal its
YE11e RAB. Based on our forecasts of net debt and number of shares outstanding as of YE11e,
we estimated FSK’s fair value per share by YE11. Discounting it back to present, we arrived at
the current fair value for FSK shares.
We estimated FSK’s YE11e RAB using the following formula, which is similar to the one we used
in our valuation of distribution grids:
YE11e RAB = Current DRC + Expected capex through 2011 (excluding connection
fee) – Depreciation through 2011
Depreciated replacement cost (DRC) estimate
There are RCN and DRC estimates for FSK and transmission companies available that were
prepared by an independent appraiser and reported to analysts in September 2007. We cross-
checked these estimates against data on foreign peers. The appraiser estimated an RCN for
FSK of about USD 288 000 per kilometre of grid, which is 18% below the gross book value of
fixed assets of foreign peers on a per-kilometre basis. FSK’s accumulated depreciation rate
stands at 48%, which is 6 pp above the average for the company’s foreign peers, resulting in a
DRC estimate for FSK of USD 150 000/km, 25% below the average peers’ net book value of
USD 201 000/km. This difference seems reasonable given that the power utilities sector as a
whole and Russian transmission assets in particular have been underfinanced for years. Overall,
we found the appraiser’s data provided a reasonable estimate for FSK’s DRC and incorporated it
into our valuation for FSK.
Figure 117: RCN and DRC, FSK and foreign peers
Source: Company data, Glitnir estimates
We applied a 2% annual RCN appreciation rate and a 3% annual depreciation rate to account for
changes in the economic values of assets before the RAB introduction date.
Capex
We incorporated FSK’s data on planned capex as envisaged in the company’s capex program
for 2008-2012 approved by the company’s board in May 2008. The data provided a breakdown
of the company’s capex by source of financing. When estimating RAB we did not account for
capex financed by connection fees.
Company Country BS date
PPE
cost,
USD mn
Depreci-
ation rate
PPE acc.
depr., USD
mn
PPE
net,
USD
mn
Grid
length,
km
Trans-
former
capacity,
MVA
MVA/
km
PPE
cost,
USD
thous./
km
PPE
net,
USD
thous./
km
Terna Italy Dec 31, 2007 14 646 44% -6 378 8 267 42 334 115 221 2.72 346 195
Red Electrica Spain Dec 31, 2007 10 726 34% -3 639 7 087 33 503 58 000 1.73 320 212
Transmissao Paulista Brazil Dec 31, 2007 3 364 48% -1 601 1 763 12 144 42 556 3.50 277 145
Transgrid Australia Dec 31, 2007 5 779 50% -2 915 2 864 12 442 32 575 2.62 464 230
Total / Weighted avg. 8 629 42% -3 633 4 995 25 106 76 519 2.47 351 201
Appraisal
date
RCN,
USD mn
Depreci-
ation rate
Assumed
acc. depr.,
USD mn
DRC,
USD
mn
Grid
length,
km
Trans-
former
capacity,
MVA
MVA/
km
RCN,
USD
thous./
km
DRC,
USD
thous./
km
FSK Russia Mar 31, 2007 34 674 48% 16 652 18 022 120 513 295 691 2.45 288 150
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 93/183
Figure 118: FSK capex through 2012
Source: FSK, Glitnir estimates
New equity issues
We also accounted for the state’s massive cash injection into FSK. We added the cash proceeds
that should be pumped into FSK through the company’s second, third, and fourth additional
share issues to FSK’s expected 2011e RAB and correspondingly increased our forecast for
number of shares outstanding. Overall, we expect that by 2012 the company will have 1 264 687
mn shares outstanding and will receive a total of USD 21.8 bn in cash proceeds from the second,
third, and fourth additional share issues (see ―Figure 28: Additional share issues‖ for details).
Discount rate
We applied a 12.4% cost of equity to discount the expected fair value of FSK as of YE11 back to
the present.
Figure 119: Cost of equity calculation, FSK
Source: Glitnir estimates
Valuation results
Figure 120: FSK target price calculation
Source: Glitnir estimates
Our target price for FSK of USD 0.0258 per share stands roughly in line with the estimate of USD
0.0248 (RUB 0.59) of fair value per share as of April 1, 2007, provided by UES’s independent
appraiser. Our target price is also 10% above FSK’s OTC forward price of USD 0.0235 per share
implied by mid-market prices of transmission companies on the RTS.
We believe the massive capex program is value-erosive for FSK shareholders because the
current regulatory system does not provide an adequate return on invested capital. We estimate
that in the absence of capex and cash inject ion from the state the target price of FSK would
stand at USD 0.0324 per share.
Source of financing, USD mn 2007 2008e 2009e 2010e 2011e 2012e
Existing equity 1 080 1 322 1 702 2 147 2 632 3 171 10 973
New equity 2 318 5 442 3 576 1 658 1 355 1 063 13 095
Debt 0 0 2 635 1 830 1 948 422 6 835
Connection fee 145 548 2 145 2 497 2 041 1 602 8 833
Total 3 542 7 312 10 058 8 133 7 975 6 258 39 736
Year Total
2008-2012
Company Market risk
Sector risk
premium
Liquidity
risk
premium
Corp. gov. risk
premium (+) /
discount (-) RROE
FSK 10.9% 1.5% 0.0% 0.0% 12.4%
USD mn
Consolidated RCN 1Q07 35 263
Consolidated RCN 1Q07 USD thous./km 316
Depreciation rate 48%
Consolidated DRC 1Q07 18 328
Consolidated DRC 1Q07, USD thous./km 164
Capex excl. connection fee 2Q07-2012 29 289
RAB YE11e 43 004
Fair EV/RAB YE11e 1.00
Net debt (+) / cash (-) YE11e -69
Fair MCap YE11e 43 073
Expected number of shares, mn 1 264 687
FV per share YE11e, USD 0.0347
Current FV per share, USD 0.0229
12m TP, USD 0.0258
Target EV*/DRC 0.58
Target EV*/km, USD thous./km 96
* On fully consolidated basis
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 94/183
Figure 121: Valuation without capex or state injection
Source: Glitnir estimates
Target price calculation for regional transmission companies
To estimate the target prices of Russian transmission companies, we applied the swap ratios into
FSK approved by UES and shareholders of regional transmission companies.
We assigned a 30% company-specific discount to the target prices of Kurgan, Kuban, and
Tomsk transmission companies, as shareholders of Kurgan Transmission Company have
reportedly blocked the company’s merger into FSK, and mergers of Kuban and Tomsk
transmission companies into FSK have been prohibited by the court (see ―Appendix 1: Company-
specific issues‖).There remains a possibility that shares of Kurgan, Kuban, and Tomsk
transmission companies will be converted into FSK; however, the timing of this is uncertain for
now.
Figure 122: Target price, regional transmission companies
Source: Bloomberg, Glitnir estimates
What do our valuation assumptions imply by 2012?
Our valuation implies that the transmission tariff will grow 2.4x between 2006 and 2012, implying
a CAGR of 15% over six years. We believe the government will find this growth rate acceptable,
though high enough for it to be reluctant to allow tariffs to advance any faster, as reducing
inflation has been a priority in Russian economic policy.
According to our estimates, FSK’s top line will rise to USD 10.0 bn and EBIT margin to 59% by
2012.
Figure 123: Transmission tariff
Figure 124: FSK, revenues
Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates
USD mn
Consolidated RCN 1Q07 35 263
Depreciation rate 48%
Consolidated DRC 1Q07 18 328
RAB 2011e 14 375
Fair EV/RAB 2011e 1.0
Net debt (+) / cash (-) 2011e -12 442
Fair MCap 2011e 26 817
Expected number of shares 614 003
FV per share 2011e, USD 0.0437
Current FV per share, USD 0.0289
12m TP, USD 0.0324
Company BB ticker Share type Rating
FV per
share,
USD
12m TP,
USD
Market
price as
of Jun 19,
2008
Upside
to TP
MCap,
USD mn
EV,
USD mn
Vologda Trans. Co. VOMS RU common Hold 1.56 1.75 1.70 3% 36 n/a
Kuban Trans. Co. KNMS RU common Reduce 0.288 0.323 0.475 -32% 8 n/a
Tomsk Trans. Co. TOMS RU common Reduce 0.0102 0.0114 0.0158 -28% 59 66
Tomsk Trans. Co. TOMSP RU preferred Reduce 0.00930 0.0105 0.0135 -23%
7.7
18.3
0
5
10
15
20
2006 2012e
US
D/M
Wh
Effective tariff, USD/MWh
CAGR 15%
3.4
10.0
0
2
4
6
8
10
12
2006 2012e
US
D, b
n
Revenue, USD mn
CAGR 19%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 95/183
Figure 125: FSK, EBIT margin
Source: Company data, Glitnir estimates
Sensitivity analysis
We tested the sensitivity of our fair value for FSK to changes in various key valuation
assumptions.
Figure 126: Sensitivity to year of introduction
Source: Glitnir estimates
Figure 127: Sensitivity to DRC estimate
Source: Glitnir estimates
Figure 128: Sensitivity to RCN appreciation rate
Source: Glitnir estimates
Foreign peer comparison
The OTC forward price of FSK is USD 0.0235 per share. The company currently trades at a 66%
discount to its foreign peers on an EV-to-grid- length basis, and 35-54% discounts based on
various financial ratios.
35%
40%
45%
50%
55%
60%
65%
0
2 000
4 000
6 000
8 000
2006 2012e
US
D, m
n
EBIT, USD mn EBIT margin, %
CAGR 29%
2010 2011
Base,
2012 2013 2014 2010 2011
Base,
2012 2013 2014
Company
FSK 20% 9% 0% -8% -14% 18.7% 16.4% 14.9% 13.3% 11.8%
Target price change
Implied tariff growth CAGR through
year of RAB introduction
-50% -25% -10% Base 10% 25% 50% -50% -25% -10% Base 10% 25% 50%
Company
FSK -19% -9% -4% 0% 4% 9% 19% 12.6% 13.8% 14.4% 14.9% 15.3% 15.9% 16.9%
Target price change Tariff growth CAGR, 2007 - 2011
0% 1%
Base,
2% 3% 4% 0% 1%
Base,
2% 3% 4%
Company
FSK -10% -5% 0% 5% 10% 13.7% 14.3% 14.9% 15.4% 16.0%
Target price change Tariff growth CAGR, 2007 - 2011
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 96/183
Figure 129: Peer comparison, FSK
Source: Bloomberg, Glitnir estimates
Company Country BB ticker
MCap*,
USD
mn
EV*,
USD
mn
EV /
Sales
2006
EV /
EBITDA
2006
P/E
2006
P/B
2006
EV / Grid
length,
USD
thous.
/km
EV /
Through-
put 2006,
USD/
MWh
EBITDA
margin,
2006
EBIT
margin,
2006
Net
margin,
2006
Russian trans. co.
FSK n/a 12 414 10 323 3.0 5.5 n/a 2.7 86 23.0 54% 39% n/a
Vologda Trans. Co. VOMS RU 36 n/a
Kuban Trans. Co. KNMS RU 8 n/a
Tomsk Trans. Co. TOMS RU 59 66
Tomsk Trans. Co. TOMSP RU
Foreign trans. co.
Terna Rete Elettrica
Nazionale SpAItaly TRN IM 8 991 13 156 8.5 11.9 18.4 3.2 317 41.6 72% 53% 32%
Cia de Transmissao
de Energia Eletrica PaulistaBrazil
TRPL3 BZ 4 394 4 609 7.6 43.6 81.2 2.5 380 35.5 17% 5% 9%
Interconexion Electrica SALatin
AmericaISA CB 5 029 5 027 5.6 10.1 78.9 1.7 134 96.0 55% 16% 7%
Lietuvos Energija Lithuaniua LEN1L LH 1 086 1 106 3.1 16.0 159.6 1.3 166 89.6 19% 3% 2%
Red Electrica de Espana Spain REE SM 9 117 n/a n/a n/a 36.3 6.8 n/a n/a 68% 42% 21%
International trans. co. avg. 6.2 20.4 84.5 2.2 249 65.7 41% 19% 12%
WA 7.5 17.8 56.0 2.6 284 54.1 55% 34% 21%
Russian FSK premium / (discount) to foreign peers -60% -69% n/a 5% -70% -57%
* For FSK - based on OTC forward price, on fully consolidated basis
Bloomberg consensus target prices and earnings estimates used for foreign peers
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 97/183
We believe FSK deserves a discount to its foreign peers both on financial and asset-based
multiples for the following reasons:
1. The late switch to a RAB model, which will provide investors with a fair return on
invested capital. According to our estimates, FSK will start earning an adequate return
on shareholders’ equity in 3.5 years.
2. Higher depreciation. FSK’s assets are depreciated to a much higher extent compared
with its peers. FSK and the Russian utilities sector as a whole have been
underfinanced for decades.
3. Inefficient capex. FSK is going to invest some USD 33.5 bn before its regulation is
switched to the RAB approach. Such capex is value-erosive for shareholders in our
view, as the current cost-based approach does not provide investors with fair return on
capital.
Independent AO-energos
We evaluated three listed independent AO-energos (Irkutskenergo, Bashkirenergo, and
Novosibirskenergo) as a sum of their generation, distribution, and transmission divisions. We
based the valuation of generation on the DCF approach we used for OGKs and TGKs, while for
transmission and distribution we used generally the same methodology as in the valuation of
FSK and the MRSKs, respectively. Therefore all the assumptions and methods discussed above
in regards to the valuation of generators and grids apply in full to the independent AO-energos.
Figure 130: Sum-of-parts valuation, independent AO-energos
Source: Company data, Glitnir estimates
Far East Energy Company
We valued Far East Energy Company as the sum of Far East Generation Company and Far East
Distribution Company. We valued Far East Generation Company with the same approach we
used for generation companies (DCF), and Far East Distribution Company with the same
approach we used for distribution companies (asset-based).
We used a DCF valuation for the isolated energy companies on a company-wide basis; our
models for these companies thus effectively incorporate retail electricity prices paid by
consumers rather than wholesale prices.
Due to technical constraints, we do not expect that electricity prices in the Far East and isolated
regions will be liberalised any time soon. We do believe, however, that growth in regulated tariffs
would imply steady improvements in the profitability of these companies. For valuation purposes
we assumed that the EBIT margin of Far East Generation Company and isolated energy
companies would increase from its current level of nearly 0% to 7% by 2011.
Assumptions implied in our models for Far East Generation Company and the isolated energy
companies other than those related to electricity tariffs are generally the same as those used in
the valuation of generation companies located in the European and Siberian parts of Russia.
Bashkirenergo Irkutskenergo Novosibirskenergo
Fair EV of generation, USD mn 2 660 7 822 1 719
Fair EV of grids, USD mn 1 133 975 572
Total Fair EV, USD mn 3 793 8 797 2 291
Net debt 2007e, USD mn - 49 - 23 - 223
Fair MCap, USD mn 3 744 8 774 2 068
Common shares outstanding, mn 1 043 4 767 14
Preferred shares outstanding, mn 50 n/a 3
FV of common share, USD 3.52 1.84 138
12m TP of common share, USD 4.04 2.14 159
Current common share price, USD 1.59 0.88 70.5
Upside to TP, common share 155% 143% 125%
FV of preferred share, USD 1.50 n/a 78.1
12m TP of preferred share, USD 1.72 n/a 89.7
Current preferred share price, USD 1.56 n/a 46.0
Upside to TP, preferred share 11% n/a 95%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 98/183
Figure 131: Sum-of-parts valuation, Far East Energy Company
Source: Company data, Glitnir estimates
UES
UES, the largest Russian utility, is to be broken up on July 1, 2008. June 6, 2008, was the last
trading day of UES shares and the record date for the breakup.
Those UES shareholders who held shares in the company on June 6 will receive one of two
baskets of underlying shares depending on their voting decision at the company’s EGM on
October 26, 2007 (see section ―The reform: UES breakup‖ for details).
We estimate the target value of the ―for‖ basket of shares at USD 2.08 and USD 1.82 per UES
common and preferred shares, respectively. These values stand 92% and 96% above the last
MICEX trading quotes of UES common and preferred shares on June 6, 2008, of USD 1.08 and
USD 0.93, respectively.
Fair EV of generation, USD mn 1 841
Fair EV of grids, USD mn 527
Total Fair EV, USDm 2 368
Net debt 2007, USD mn - 842
Fair value of stake in FSK, USD mn 287
Fair MCap, USD mn 1 813
Common shares outstanding, mn 17 223
FV per share, USD 0.105
12m TP, USD 0.119
Current price, USD 0.0725
Upside to 12m TP 64%
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 99/183
Figure 132: UES basket indicative valuation
Source: Glitnir estimates
Number of
underlying
shares
Value at
market
prices,
USD
Target
value,
USD
Number of
underlying
shares
Value at
market
prices,
USD
Target
value,
USD
Number of
underlying
shares
Value at
market
prices,
USD
Target
value,
USD
Number of
underlying
shares
Value at
market
prices,
USD
Target
value,
USD
12m
common
TP
12m
preferred
TP
MRSK Holding ** - 1 0.2300 0.2922 1 0.1840 0.2046 1 0.2300 0.2922 1 0.1840 0.2046 0.318 0.223
Far East Energy Holding ** - 1 0.0600 0.0672 1 0.0480 0.0471 1 0.0600 0.0672 1 0.0480 0.0471 0.0672 0.0471
FSK - 10.1056 0.2375 0.2605 9.2547 0.2175 0.2386 22.7734 0.5352 0.5871 20.8559 0.4901 0.5377 0.0258
RusHydro HYDR 3.4532 0.2927 0.3786 3.1624 0.2680 0.3468 4.5042 0.3817 0.4939 4.1250 0.3496 0.4523 0.110
OGK-1 OGKA 0.9620 0.0868 0.1268 0.8810 0.0795 0.1161 0.3112 0.0281 0.0410 0.2850 0.0257 0.0376 0.132
OGK-2 OGKB 0.5008 0.0441 0.0859 0.4586 0.0404 0.0787 0.1620 0.0143 0.0278 0.1483 0.0131 0.0255 0.172
OGK-3 OGKC 0.4114 0.0478 0.0664 0.3768 0.0438 0.0608 0.1331 0.0155 0.0215 0.1219 0.0142 0.0197 0.161
OGK-4 OGKD 1.0274 0.0822 0.1707 0.9409 0.0753 0.1564 0.3323 0.0266 0.0552 0.3043 0.0243 0.0506 0.166
OGK-6 OGKF 0.5836 0.0747 0.0593 0.5345 0.0684 0.0543 0.1888 0.0242 0.0192 0.1729 0.0221 0.0176 0.102
TGK-1 TGKA 38.2332 0.0510 0.0579 35.0140 0.0467 0.0530 12.3666 0.0165 0.0187 11.3254 0.0151 0.0171 0.00151
TGK-2 TGKB 12.9829 0.0129 0.0176 11.8897 0.0118 0.0161 4.1993 0.0042 0.0057 3.8458 0.0038 0.0052 0.00136 0.000832
TGK-3 (Mosenergo) MSNG 0.3360 0.0595 0.0935 0.3077 0.0545 0.0856 0.1087 0.0192 0.0302 0.0995 0.0176 0.0277 0.278
TGK-4 TGKD 15.8655 0.0167 0.0225 14.5296 0.0153 0.0206 5.1317 0.0054 0.0073 4.6996 0.0049 0.0067 0.00142 0.000707
TGK-6 TGKF 15.3259 0.0112 0.0156 14.0355 0.0102 0.0143 4.9572 0.0036 0.0050 4.5398 0.0033 0.0046 0.00102
TGK-7 TGKG 0.3344 0.0301 0.0562 0.3062 0.0276 0.0515 0.1082 0.0097 0.0182 0.0991 0.0089 0.0166 0.168
TGK-8 TGKH 17.2625 0.0287 0.0252 15.8090 0.0263 0.0231 5.5836 0.0093 0.0082 5.1135 0.0085 0.0075 0.00146
TGK-9 TGKI 67.3347 0.0202 0.0296 61.6651 0.0185 0.0271 21.7796 0.0065 0.0096 19.9457 0.0060 0.0088 0.000439
TGK-10 * TGKJ 0.0089 0.0409 0.0589 0.0081 0.0374 0.0540 0.0029 0.0132 0.0191 0.0026 0.0121 0.0175 6.65
TGK-11 TGKK 6.1864 0.0069 0.0133 5.6655 0.0063 0.0122 2.0010 0.0022 0.0043 1.8325 0.0021 0.0039 0.00215
TGK-12 (Kuzbassenergo) KZBE 0.6991 0.0164 0.0342 0.6402 0.0150 0.0313 0.2261 0.0053 0.0111 0.2071 0.0049 0.0101 0.0490
TGK-13 (Yeniseyskaya TGK) TGKM 1.7233 0.0142 0.0341 1.5782 0.0130 0.0312 0.5574 0.0046 0.0110 0.5105 0.0042 0.0101 0.0198
TGK-14 TGKN 9.7136 0.0032 0.0049 8.8957 0.0029 0.0045 3.1419 0.0010 0.0016 2.8773 0.0009 0.0014 0.000501
InterRAO - 41.8643 0.1054 38.3394 0.0966 41.8643 0.1054 38.3394 0.0000 0.0966 0.00252
Centerenergoholding (Gazprom) ** - 1.0490 0.0715 0.0901 1.0490 0.0572 0.0901 0.0859 0.0687
Sibenergoholding (SUEK) ** - 0.9662 0.0076 0.0142 0.9662 0.0061 0.0142 0.0147 0.0118
Intergeneration (Norilsk Nickel) ** - 3.5169 0.0259 0.0360 3.5169 0.0207 0.0360 0.0102 0.0082
Value of baskets per UES share 1.47 2.08 1.31 1.82 1.52 2.00 1.348 1.767
* If adjusted for planned share split, ratios would change to:
1.4710 1.3471 0.4758 0.4357
** UES prefs holders receive preferred shares in MRSK Holding, Far East Energy Holding,
Centerenergoholding, Sibenergoholding and Intergeneration
Voting AGAINST issue no. 1 on EGM agenda
("AGAINST basket")
Per UES common Per UES preferred
Company Ticker
Voting FOR issue no. 1 on EGM agenda or not participating
("FOR basket")
Per UES common Per UES preferred
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 100/183
We have detailed the valuation of MRSK Holding, Far East Energy Holding, and InterRAO, the
entities that will be received by former UES shareholders. As none of these three entities are
listed, we are not giving an investment recommendation; we provide target prices for informational
purposes only.
UES will spin off MRSK Holding and Far East Energy Holding on a pro-rata basis, meaning a
UES shareholder will receive one common share of MRSK Holding and one common share of Far
East Energy Holding for each common share of UES, and one preferred share of each of these
two companies for one preferred share of UES. Thus MRSK Holding and Far East Energy
Holding will each have the same number of shares outstanding as UES.
MRSK Holding
MRSK Holding will be created on the UES breakup date of July 1, 2008. In accordance with the
breakup balance, MRSK Holding will receive all of UES’s stakes in regional distribution
companies and some other entities (mainly project institutions), as well as a portion of fixed
assets from UES’s balance sheet. The largest asset that will be included in MRSK Holding
besides electricity distribution companies is a stake in Moscow Heat Distribution Company.
Our target price for MRSK Holding is based on our valuation of MRSKs.
Figure 133: MRSK Holding valuation
Source: Glitnir estimates
We applied a holding discount of 15% to MRSK Holding. We believe the company does not
deserve a discount any higher than this given that all of its main assets operate in a single
segment of the industry.
Far East Energy Holding
Far East Energy Holding will be created on the UES breakup date of July 1. In accordance with
the breakup balance sheet, UES will contribute its stakes in Far East Energy Company, isolated
energy companies, certain supply companies, and a portion of its fixed assets to the charter
capital of Far East Energy Holding.
Stakes in MRSKs at fair value Stake, % USD mn
MRSK Center 50.23% 1 578
MRSK South 50.62% 681
MRSK North Caucasus 58.25% 427
MRSK Center and Volga 50.40% 1 142
MRSK North-West 55.40% 1 020
MRSK Siberia 52.80% 1 212
MRSK Urals 50.10% 924
MRSK Volga 67.61% 2 028
Moscow Unified Dist. Co. 50.90% 1 144
Moscow City Dist. Co. 50.90% 828
Lenenergo 45.19% 636
Tyumenenergo 100.00% 1 196
Total stakes in MRSKs, USD mn 12 815
Stake in Moscow Heat Distribution
at actual sales price, USD mn 576
Stakes in engineering centers at
actual sales price, USD mn 696
Fair holding discount 15%
Total Fair EV, USD mn 11 974
Net debt, USD mn -8
Total Fair MCap, USD mn 11 982
Common shares outstanding, mn 41 042
Preferred shares outstanding, mn 2 075
Fair discount of preferred shares 30%
FV per common share, USD 0.282
FV per preferred share, USD 0.197
TP common share, USD 0.318
TP preferred share, USD 0.223
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 101/183
Our target price for Far East Energy Holding is based on our valuation of Far East Energy
Company and isolated energy companies. We also accounted for the value of stakes in supply
companies at the actual prices at which UES auctioned them (see details in "Privatisation: Supply
company auctions"); for those that have not yet been sold we used an EV/electricity sales of USD
6.6/MWh, which is the average multiple implied in the actual sales prices of supply companies
auctioned to date.
Figure 134: Sum-of-parts valuation, Far East Energy Holding
Source: Glitnir estimates
InterRAO
InterRAO is an electricity importer and exporter that controls various generation and distribution
assets in Russia and abroad.
We valued InterRAO on a fully consolidated basis (i.e. we incorporated Sochi TPP, North-West
CHP, Kaliningrad CHP-2, and Ivanovo CCGT). We evaluated these four power plants with the
DCF method, and InterRAO’s international business at an EV/EBITDA of 8.3x (a 30% discount to
foreign peers).
Figure 135: Sum-of-parts valuation, InterRAO sum
Source: Glitnir estimates
Stakes in Far East and isolated utilities at fair value:
Stake, % USD mn
Far East Energy Company 50.92% 923
Kamchatskenergo 98.68% 55
Magadanenergo 49.00% 22
Sakhalinenergo 49.00% 15
Yakutskenergo 47.39% 216
Total 1 230
Stakes in 39 supply companies at actual sales price 899
Stakes in 5 supply companies at USD 6.6/MWh 400
Total Fair EV, USD mn 2 529
Net debt, USD mn -2
Total Fair MCap, USD mn 2 531
Common shares outstanding, mn 41 042
Preferred shares outstanding, mn 2 075
Fair discount of preferred shares 30%
FV per common share, USD 0.0596
FV per preferred share, USD 0.0417
TP common share, USD 0.0672
TP preferred share, USD 0.0471
USD mn
Kaliningrad CHP-2 385
North-West CHP 725
Sochi TPP 78
Ivanovo CCGT 415
Total four power plants merged in 2008 1 602
Assets consolidated in IFRS 2006 at EV/EBITDA of 8.3x 1 672
50% stake in Ekibastuz GRES-2 at carrying value 101
Fair EV 3 375
Net debt, 2007e 109
Fair MCap 3 267
Common shares outstanding (expected after consolidation of the
four power plants), mn 1 470 538
FV common, USD 0.00222
TP common, USD 0.00252
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 102/183
Appendix 1: Company-specific issues
OGK-1
In February 2008, OGK-1 and TNK-BP signed a preliminary agreement on the establishment of a
joint venture. By the terms of the agreement, OGK-1 plans to contribute its two 800 MW blocks at
Nizhevartovskaya GRES to the venture, while TNK-BP will contribute USD 320 mn in cash. The
cash is to be used to construct a third 800 MW power block at Nizhevartovskaya GRES, which
will be fuelled with associated gas from TNK-BP’s facilities. The agreement envisages that TNK-
BP will receive a 25% stake in the venture and will have the option to acquire a stake of up to
50% minus one share in the company after the construction of the new power block is completed
in 2010. OGK-1 and TNK-BP also plan to sign a long-term (15+ years) agreement on the supply
of gas to all three blocks and the supply of electricity from the new block to TNK-BP’s facilities.
The announced terms of the deal imply that TNK-BP will acquire a 25% stake in
Nizhevartovskaya GRES, one of the best power plants in Russia in terms of quality of assets, at
an EV/capacity of USD 600/kW. Under our assumptions on market-based gas and electricity
prices, we estimate Nizhevartovskaya GRES’s target EV/capacity at USD 1145/kW, which is 91%
above the price offered by TNK-BP. Unless TNK-BP supplies gas to the plant at prices
significantly below the market, we believe the joint venture presents value-dilution risks to OGK-1
shareholders.
As the deal has not yet been finalized (and we consider there is a chance it will be cancelled or
amended when UES sells its controlling stake in OGK-1 to a strategic investor), and as the terms
of the long-term gas- and electricity-supply contracts in regards to Nizhevartovskaya GRES are
not clear, we have not accounted for the joint venture in our valuation of OGK-1. Instead, we
currently value the station as 100%-owned by OGK-1; however we added a 1.5% company-
specific adjustment to OGK-1’s cost of equity to account for the risks associated with the joint
venture.
Dispute with Rosneft
In 2006, the Rosneft subsidiary Neft-Activ acquired former Yukos assets, including stakes in a
number of power companies. These power companies were undergoing the restructuring
process being consolidated into TGKs, MRSKs, and FSK.
Restructuring of Rosneft’s power assets
Source: Company data
A former shareholder of the power companies (Yukos) had previously blocked the consolidation
of Tomskenergo into TGK-11 and the merger of Kuban Generation Company into TGK-8. As a
result, TGK-8 was formed as a holding owning a 67% stake in Kuban Generation Company.
In February 2008, Neft-Activ filed a lawsuit against Tomskenergo’s consolidation into TGK-11,
reportedly because Neft-Activ was not notified of the EGM. However, UES stated that all the
procedures related to TGK-11’s formation were completed in compliance with all applicable laws.
Former YUKOS power assets
acquired by Rosneft
Generation
Kuban Gen. Co.
Tomskenergo
TGK-8
TGK-11
merger blocked by YUKOS
merger
Distribution
Kubanenergo
Tomsk Dist. Co.
MRSK South
MRSK Siberia
merger
merger
Transmission
Kuban Trans. Co.
Tomsk Trans. Co.
FSK
merger
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 103/183
In the same month, Neft-Activ also filed several lawsuits regarding the mergers of Kubanenergo
and Tomsk Distribution Company into MRSK South and MRSK Siberia, respectively, and the
consolidation of Kuban and Tomsk Transmission Companies into FSK.
Government bodies took the following measures as a result of the lawsuits:
As a complementary measure, the court prohibited additional share issues of TGK-11
that aimed to finance the generation company’s investment program and facilitate the
UES breakup.
Consolidation of Tomsk and Kuban Transmission Companies into FSK was stopped by
the Federal Securities Commission.
The court’s first decision came on June 6, 2008, when it ruled the merger of Kubanenergo into
MRSK South was invalid (i.e. it ruled in favour of Rosneft) because it found ―serious violations of
shareholders’ rights.‖ The court’s second decision, which was related to the merger of Kuban
Transmission Company into FSK, came on June 20, 2008, and also ruled in favour of Rosneft;
the merger was effectively considered invalid. Kubanenergo and Kuban Transmission Company
had 30 days from the court decisions to file an appeal.
Following the court’s rulings on Kubanenergo and Kuban Transmission Company we consider
there is a certain chance the consolidation procedures of the other companies involved will be
stopped or reversed.
Scheduled court hearings of lawsuits
Source: Interfax
Transfer pricing risks of RusHydro, Irkutskenergo, and Krasnoyarsk GES
Significant volumes of electricity supplied by certain hydroelectric plants of RusHydro,
Irkutskenergo, and Krasnoyarsk GES are consumed by Rusal’s aluminium smelters.
Since 2006 RusHydro has been considering the possibility of signing long-term electricity supply
contracts with Rusal. At the beginning of 2008 RusHydro negotiated with Rusal the main
conditions of the contracts, which the media reported as the following:
Sayano-Shushenskaya GES is to be a supplier, while Sayanogorsk, Khakass and
Novokuznetsk aluminium smelters are to be consumers of electricity.
RusHydro estimated that contracts will cover about 50-60% of Sayano-
Shushenskaya GES’s output, which is about 10-15% of RusHydro’s total electricity
production.
Contracts are 8-12 years in length.
The price of contacts will be higher than a regulated tariff and lower than the
market price. According to Interfax, the price of the contracts can be as low as
USD 21/MWh.
RusHydro had planned to call an EGM on June 20, at which it had planned to approve contracts
with Rusal. However on May 30, RusHydro’s board cancelled the EGM reportedly because there
was no uniform opinion on the issue among board members (state representatives were
reportedly against the contracts).
While the EGM was cancelled, we do not rule out that in the future RusHydro may sign some
power supply contracts at prices significantly below the market.
Such transfer pricing risks are even higher for Irkutskenergo and Krasnoyarsk GES, about 48%
and 68% of which, respectively, are controlled by entities affiliated with Rusal.
Company Date
Tomskenergo/TGK-11 Jul 10, 2008
Tomsk Transmission Company Jun 23, 2008
Tomsk Distribution Company Not available
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 104/183
Appendix 2: Selected financials, distribution companies
Source: Company data, Glitnir estimates
2006 2011e CAGR 2006 2011e CAGR 2006 2011e CAGR 2006 2011e 2006 2011e CAGR 2006 2011e
MRSK Center 937 2 449 21% 176 1 158 46% 91 698 50% 19% 47% 66 473 48% 7% 19%
MRSK South 825 2 040 20% 119 843 48% 60 501 53% 14% 41% 12 324 94% 1% 16%
MRSK North Caucasus 291 844 24% 10 367 107% - 12 221 n/a 3% 44% - 7 159 n/a -3% 19%
MRSK Center and Volga 782 1 898 19% 137 805 42% 75 501 46% 18% 42% 22 338 73% 3% 18%
MRSK North-West 684 1 567 18% 119 609 39% 61 373 44% 17% 39% 26 268 59% 4% 17%
MRSK Siberia 1 070 2 430 18% 150 870 42% 47 511 61% 14% 36% - 98 360 n/a -9% 15%
MRSK Urals 1 080 2 424 18% 111 697 44% 60 434 48% 10% 29% 28 303 61% 3% 13%
MRSK Volga 896 2 213 20% 131 915 48% 66 610 56% 15% 41% 20 439 85% 2% 20%
Moscow Unified Dist. Co. 937 2 194 19% 270 948 29% 153 570 30% 29% 43% 104 357 28% 11% 16%
Moscow City Dist. Co. 371 1 149 25% 132 702 40% 94 435 36% 36% 61% 99 270 22% 27% 24%
Lenenergo 387 1 122 24% 109 604 41% 35 356 59% 28% 54% 16 223 70% 4% 20%
Tyumenenergo 890 1 756 15% 145 429 24% 99 315 26% 16% 24% 64 195 25% 7% 11%
Total 9 149 22 085 19% 1 610 8 949 41% 830 5 525 46% 18% 41% 351 3 709 60% 4% 17%
EBITDA, USD mn EBIT, USD mnRevenues, USD mn
Company
Net marginEBITDA margin Net income, USD mn
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Appendix 3: Company profiles
In this report, current prices are taken as of June 19, 2008.
01. OGK-1 ................................................................................................................................................................................................................ 106 02. OGK-2 ................................................................................................................................................................................................................ 109 03. OGK-3 ................................................................................................................................................................................................................ 112 04. OGK-4 ................................................................................................................................................................................................................ 115 05. OGK-5 ................................................................................................................................................................................................................ 118 06. OGK-6 ................................................................................................................................................................................................................ 121 07. TGK-1 ................................................................................................................................................................................................................. 124 08. TGK-2 ................................................................................................................................................................................................................. 127 09. Mosenergo (TGK-3) ................................................................................................................................................................................................... 130 10. TGK-4 ................................................................................................................................................................................................................. 133 11. TGK-5 ................................................................................................................................................................................................................. 136 12. TGK-6 ................................................................................................................................................................................................................. 139 13. TGK-7 ................................................................................................................................................................................................................. 142 14. TGK-8 ................................................................................................................................................................................................................. 145 15. TGK-9 ................................................................................................................................................................................................................. 148 16. TGK-10 ............................................................................................................................................................................................................... 151 17. TGK-11 ............................................................................................................................................................................................................... 154 18. Kuzbassenergo (TGK-12) ................................................................................................................................................................................... 157 19. TGK-13 ............................................................................................................................................................................................................... 160 20. TGK-14 ............................................................................................................................................................................................................... 163 21. Bashkirenergo ..................................................................................................................................................................................................... 166 22. Irkutskenergo ...................................................................................................................................................................................................... 168 23. Novosibirskenergo .............................................................................................................................................................................................. 170 24. RusHydro ............................................................................................................................................................................................................ 172 25. Krasnoyarsk GES ............................................................................................................................................................................................... 175
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 106/183
OGK-1
Strengths Above-average electricity load factor
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
OGK-1 RTS Index RTS Electric Utilities Index
Plant Region
Installed
electric
capacity,
MW
Installed heat
capacity,
Gcal/h
Electricity
generated,
GWh
Heat sales,
k GCal
Permskaya GRES Perm 2 400 420 14 252 243
Verkhnetagilskaya GRES Sverdlov 1 497 464 7 362 161
Iriklinskaya GRES Orenburg 2 430 121 10 207 101
Kashirskaya GRES Moscow 1 580 399 6 426 302
Nizhnevartovskaya GRES Khanty-Mansiysk 1 600 758 11 635 186
Urengoyskaya GRES Yamalo-Nenetsk 24 410 192 60
OGK-1 total 9 531 2 572 50 075 1 053
2007
Plant Project Date
New
electric
capacity,
MW
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Permskaya GRES new 800 MW CCGT 4th unit 2010 800 gas 869 38
Verkhnetagilskaya GRES new 330 MW CCGT 2011 330 gas 367 - 64
Kashirskaya GRES upgrade of 330 MW 3rd unit 2009 330 coal 391 - 50
Nizhnevartovskaya GRES new 800 MW CCGT 3rd unit 2010 800 gas 738 430
Urengoyskaya GRES new 450 MW CCGT 2011 450 gas 489 224
Gas92%
Coal7%
Fuel oil1%
Gas78%
Coal21%
Fuel oil1%
UES92%
Other minorities
8%
Strategic shareholder
75%
Other minorities
25%
OGK-1
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 107/183
Financials
Financial ratios
Operational data
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 973 1 204 2 641 3 541 4 034 4 077 4 021 4 040 4 058 4 073 4 095 4 123 4 158 4 202 4 266
Non-cash WC 92 158 127 140 176 159 175 203 223 232 250 269 290 315 340
LT investments
Equity 900 1 040 1 166 1 363 2 008 2 594 3 207 4 020 5 081 6 171 7 342 8 604 9 961 11 434 13 025
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 32 199 1 476 2 198 2 084 1 527 875 110 - 914 -1 979 -3 112 -4 326 -5 627 -7 031 -8 534
Other LT liabilities (+) or assets (-) 133 123 126 121 119 116 114 114 114 114 114 114 114 114 114
Income statement*Revenues 1 012 1 297 1 767 2 301 3 319 3 571 3 923 4 564 5 007 5 216 5 602 6 036 6 506 7 059 7 622
Electricity 966 1 256 1 715 2 240 3 252 3 496 3 837 4 468 4 903 5 105 5 484 5 912 6 376 6 921 7 473
Heat 16 18 25 32 38 45 54 64 70 76 80 85 90 96 106
Other 30 23 27 28 29 30 31 33 34 36 37 38 40 42 43
Cost of sales - 939 -1 176 -1 614 -1 954 -2 408 -2 723 -3 025 -3 466 -3 580 -3 750 -4 027 -4 342 -4 685 -5 084 -5 490
Fuel costs - 605 - 794 -1 163 -1 391 -1 672 -1 893 -2 146 -2 540 -2 598 -2 714 -2 936 -3 191 -3 470 -3 802 -4 136
D&A - 38 - 58 - 82 - 134 - 178 - 214 - 221 - 231 - 241 - 252 - 263 - 275 - 287 - 300 - 315
Fixed costs - 296 - 324 - 370 - 428 - 558 - 616 - 658 - 695 - 740 - 783 - 829 - 877 - 928 - 982 -1 039
EBITDA 111 179 235 481 1 089 1 062 1 119 1 329 1 669 1 718 1 837 1 968 2 108 2 275 2 448
EBIT 73 121 153 347 911 848 898 1 098 1 427 1 466 1 574 1 694 1 821 1 974 2 133
EBT 71 113 133 327 892 829 880 1 080 1 409 1 448 1 556 1 675 1 803 1 956 2 115
Net income 54 86 101 249 678 630 669 821 1 071 1 100 1 183 1 273 1 370 1 487 1 607
EBITDA margin 11% 14% 13% 21% 33% 30% 29% 29% 33% 33% 33% 33% 32% 32% 32%
EBIT margin 7% 9% 9% 15% 27% 24% 23% 24% 29% 28% 28% 28% 28% 28% 28%
Net margin 5% 7% 6% 11% 20% 18% 17% 18% 21% 21% 21% 21% 21% 21% 21%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC - 37 - 48 35 - 19 - 39 14 - 19 - 29 - 20 - 9 - 17 - 20 - 21 - 25 - 25
OCF 42 91 237 383 836 877 889 1 041 1 311 1 361 1 446 1 547 1 654 1 780 1 915
Net capex - 64 - 181 -1 475 -1 161 - 746 - 336 - 242 - 250 - 259 - 268 - 284 - 303 - 322 - 345 - 379
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 63 - 181 -1 475 -1 161 - 746 - 336 - 242 - 250 - 259 - 268 - 284 - 303 - 322 - 345 - 379
Equity raised/bought back 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 24 126 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 6 85 - 20 - 20 - 19 - 19 - 18 - 18 - 18 - 18 - 18 - 18 - 18 - 18 - 18
Net CF - 27 - 5 -1 258 - 797 72 522 629 773 1 033 1 075 1 144 1 226 1 314 1 417 1 517
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 3.3 2.4 1.8 1.3 1.2 1.1 0.9 0.8 0.8 0.8 0.7 0.6 0.6 0.6
EV/EBITDA 23.6 18.0 8.8 3.9 4.0 3.8 3.2 2.5 2.5 2.3 2.1 2.0 1.9 1.7
P/E 47.0 39.8 16.2 5.9 6.4 6.0 4.9 3.8 3.7 3.4 3.2 2.9 2.7 2.5
2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 9 531 9 531 9 531 9 861 11 761 11 911 12 241 12 241 12 241 12 241 12 241 12 241 12 241 12 241 12 241
Electricity sales, GWh 45 048 47 752 51 246 52 971 61 324 60 159 57 938 58 105 58 521 58 792 61 360 64 121 66 947 70 337 73 428
Load factor (electricity) 57% 60% 64% 64% 62% 61% 57% 57% 57% 58% 60% 63% 66% 69% 72%
Heat capacity, Gcal/h 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572 2 572
Heat sales, thous. Gcal 1 043 1 053 1 135 1 217 1 299 1 381 1 463 1 545 1 627 1 710 1 792 1 875 1 958 2 041 2 124
Load factor (heat) 5% 5% 5% 5% 6% 6% 6% 7% 7% 8% 8% 8% 9% 9% 9%
Total effective electricity price,
USD/MWh 21 26 33 42 53 58 66 77 84 87 89 92 95 98 102
Fuel cost, USD/MWh 13 17 23 26 27 31 37 44 44 46 48 50 52 54 56
EBITDA/kW, USD 12 19 25 49 93 89 91 109 136 140 150 161 172 186 200
OGK-1
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DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 153 347 911 848 898 1 098 1 427 1 466 1 574 1 694 1 821 1 974 2 133
Tax on EBIT - 37 - 83 - 219 - 204 - 216 - 264 - 343 - 352 - 378 - 406 - 437 - 474 - 512
After-tax EBIT 116 264 692 644 683 834 1 085 1 114 1 197 1 287 1 384 1 500 1 621
Depreciation 82 134 178 214 221 231 241 252 263 275 287 300 315
Capex -1 475 -1 161 - 746 - 336 - 242 - 250 - 259 - 268 - 284 - 303 - 322 - 345 - 379
Change in WC 35 - 19 - 39 14 - 19 - 29 - 20 - 9 - 17 - 20 - 21 - 25 - 25
FCFF -1 243 - 782 86 536 643 787 1 047 1 089 1 158 1 239 1 328 1 431 1 531
WACC 12.8%
Terminal growth 2.0%
NPV of cash flow 2 155
NPV of terminal value 3 168
Fair EV 5 323
Net debt 2007 - 199
Minority interest 0
Fair MCap 5 124
FV of common share, USD 0.115
Upside to FV 27%
12m TP, USD 0.132
Upside to TP 46%
Dividend yield 0.8%
Expected total return over 12m 47%
Current price, USD 0.0903
Shares outstanding, mn 44 643
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 0.166 0.177 0.191 0.209 0.231
11.8% 0.140 0.148 0.159 0.171 0.187
12.8% 0.118 0.125 0.132 0.142 0.153
13.8% 0.100 0.105 0.111 0.118 0.126
14.8% 0.085 0.089 0.094 0.099 0.105
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 784 835 899 979 1 082
11.8% 664 703 750 807 879
12.8% 565 595 630 672 724
13.8% 483 506 533 564 603
14.8% 414 432 452 476 505
Terminal growth
Plant Electricity Heat Total USD/kW
Permskaya GRES 1 635 10 1 645 685 43 1 688 703
Verkhnetagilskaya GRES 766 - 3 764 510 - 72 691 462
Iriklinskaya GRES 1 040 4 1 044 430 0 1 044 430
Kashirskaya GRES 496 11 507 321 - 56 451 285
Nizhnevartovskaya GRES 1 350 - 3 1 346 842 485 1 831 1 145
Urengoyskaya GRES - 5 58 53 2 194 253 305 12 727
OGK-1 total 5 282 76 5 359 562 652 6 011 631
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 109/183
OGK-2
Strengths Above-average electricity load factor
Coal plants in European Russia
Below-average effective fuel price
Weaknesses Above-average fuel burn rate
Gazprom's corporate governance
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
OGK-2 RTS Index RTS Electric Utilities Index
Plant Region
Installed
electric
capacity
2007, MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Pskovskaya GRES Pskov 430 121 1 735 54
Serovskaya GRES Sverdlov 526 220 3 087 102
Stavropolskaya GRES Stavropol 2 400 200 9 704 66
Surgutskaya GRES Khanty-Mansiysk 3 280 958 24 469 1 643
Troitskaya GRES Chelyabinsk 2 059 315 9 026 473
OGK-2 total 8 695 1 814 48 022 2 338
Plant Project
Completion
date
New electric
capacity,
MW Fuel type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Serovskaya GRES upgrade, 2x330 MW turbines 2012 660 coal 960 12
Stavropolskaya GRES new 2x400 MW CCGT 2011 800 gas 886 -67
Troitskaya GRES new 2x660 MW turbines 2011 1 320 coal 1886 224
Gas75%
Coal24%
Fuel oil
1%
Gas63.7%
Coal35.8%Fuel
oil
0.5%
UES66%
Gazprom12%
Westmead Limited
4%Other
minorities
18%
Gazprom57%
Westmead Limited
4%
Other minorities39%
OGK-2
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 110/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 670 1 113 1 877 2 779 3 605 4 228 4 573 4 588 4 602 4 615 4 635 4 665 4 702 4 740 4 778
Non-cash WC 89 94 105 114 122 131 163 190 206 214 232 252 269 283 298
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 497 1 484 1 494 1 533 1 761 2 226 2 860 3 724 4 788 5 871 7 038 8 308 9 657 11 051 12 486
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 154 - 393 370 1 246 1 854 2 023 1 767 947 - 87 -1 150 -2 279 -3 499 -4 794 -6 136 -7 517
Other LT liabilities (+) or assets (-) 109 116 119 114 112 110 108 108 108 108 108 108 108 108 108
Income statement*Revenues 894 1 050 1 370 1 779 2 219 2 948 3 654 4 272 4 628 4 804 5 197 5 649 6 033 6 350 6 684
Electricity 872 1 020 1 336 1 737 2 171 2 893 3 590 4 199 4 553 4 726 5 116 5 565 5 946 6 259 6 588
Heat 18 24 29 36 42 49 58 66 68 71 74 76 79 83 87
Other 4 5 6 6 6 6 6 7 7 7 8 8 8 9 9
Cost of sales - 910 -1 062 -1 375 -1 620 -1 851 -2 259 -2 730 -3 100 -3 188 -3 340 -3 620 -3 935 -4 214 -4 471 -4 750
Fuel costs - 600 - 705 - 955 -1 124 -1 256 -1 543 -1 898 -2 214 -2 250 -2 351 -2 578 -2 836 -3 054 -3 248 -3 459
D&A - 31 - 41 - 66 - 104 - 147 - 192 - 219 - 237 - 247 - 258 - 269 - 281 - 294 - 308 - 322
Fixed costs - 278 - 316 - 354 - 392 - 447 - 524 - 614 - 649 - 691 - 731 - 774 - 818 - 866 - 916 - 969
EBITDA 12 23 56 257 509 875 1 136 1 402 1 680 1 715 1 838 1 987 2 105 2 178 2 246
EBIT - 20 - 17 - 11 153 362 683 917 1 165 1 433 1 457 1 569 1 705 1 811 1 870 1 925
EBT - 30 - 37 - 31 133 342 664 898 1 146 1 414 1 439 1 550 1 687 1 792 1 852 1 906
Net income - 31 - 37 - 31 101 260 504 683 871 1 075 1 093 1 178 1 282 1 362 1 407 1 448
EBITDA margin 1% 2% 4% 14% 23% 30% 31% 33% 36% 36% 35% 35% 35% 34% 34%
EBIT margin neg neg neg 9% 16% 23% 25% 27% 31% 30% 30% 30% 30% 29% 29%
Net margin neg neg neg 6% 12% 17% 19% 20% 23% 23% 23% 23% 23% 22% 22%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC - 59 1 - 9 - 14 - 9 - 12 - 34 - 28 - 16 - 8 - 18 - 20 - 17 - 14 - 15
OCF - 53 33 54 211 418 703 886 1 099 1 325 1 362 1 448 1 561 1 657 1 719 1 774
Net capex - 37 - 419 - 797 -1 101 -1 036 - 892 - 647 - 252 - 262 - 271 - 290 - 312 - 331 - 346 - 360
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 37 - 418 - 796 -1 100 -1 035 - 891 - 646 - 251 - 261 - 270 - 289 - 311 - 330 - 345 - 359
Equity raised/bought back 0 921 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 157 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 119 901 - 21 - 21 - 20 - 20 - 20 - 20 - 20 - 20 - 20 - 20 - 20 - 20 - 20
Net CF 29 516 - 763 - 910 - 638 - 208 220 828 1 044 1 073 1 140 1 231 1 308 1 355 1 395
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 2.4 1.8 1.4 1.1 0.8 0.7 0.6 0.5 0.5 0.5 0.4 0.4 0.4 0.4
EV/EBITDA 107.5 44.8 9.7 4.9 2.8 2.2 1.8 1.5 1.5 1.4 1.3 1.2 1.1 1.1
P/E neg neg 28.5 11.1 5.7 4.2 3.3 2.7 2.6 2.4 2.2 2.1 2.0 2.0
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 8 695 8 695 8 695 8 695 9 095 9 935 11 325 11 325 11 325 11 325 11 325 11 325 11 325 11 325 11 325
Electricity sales, GWh 45 515 45 419 46 468 46 086 45 222 49 939 55 505 55 701 56 190 56 508 59 484 63 026 65 376 66 548 67 621
Load factor (electricity) 63% 63% 65% 64% 60% 61% 59% 59% 60% 60% 63% 67% 70% 71% 72%
Heat capacity, Gcal/h 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814 1 814
Heat sales, thous. Gcal 2 523 2 338 2 361 2 385 2 409 2 433 2 457 2 482 2 506 2 532 2 557 2 582 2 608 2 634 2 661
Load factor (heat) 16% 15% 15% 15% 15% 15% 15% 16% 16% 16% 16% 16% 16% 17% 17%
Total effective electricity price,
USD/MWh19 22 29 38 48 58 65 75 81 84 86 88 91 94 97
Fuel cost, USD/MWh 13 16 21 24 28 31 34 40 40 42 43 45 47 49 51
EBITDA/kW, USD 1 3 6 30 56 88 100 124 148 151 162 175 186 192 198
OGK-2
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DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT - 11 153 362 683 917 1 165 1 433 1 457 1 569 1 705 1 811 1 870 1 925
Tax on EBIT 3 - 37 - 87 - 164 - 220 - 280 - 344 - 350 - 377 - 409 - 435 - 449 - 462
After tax EBIT - 8 116 275 519 697 886 1 089 1 107 1 192 1 296 1 376 1 421 1 463
Depreciation 66 104 147 192 219 237 247 258 269 281 294 308 322
Capex - 797 -1 101 -1 036 - 892 - 647 - 252 - 262 - 271 - 290 - 312 - 331 - 346 - 360
Change in WC - 9 - 14 - 9 - 12 - 34 - 28 - 16 - 8 - 18 - 20 - 17 - 14 - 15
FCFF - 747 - 894 - 623 - 193 234 842 1 058 1 087 1 154 1 245 1 322 1 369 1 409
WACC 12.5%
Terminal growth 2.0%
NPV of cash flow 1 362
NPV of terminal value 3 132
Fair EV 4 495
Net debt 2007e 393
Minority interest 0
Fair MCap 4 888
FV of common share, USD 0.149
Upside to FV 70%
12m TP, USD 0.172
Upside to TP 95%
Dividend yield 0.0%
Expected total return over 12m 95%
Current price, USD 0.0880
Shares outstanding, mn 32 733
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 0.215 0.230 0.250 0.274 0.307
11.5% 0.180 0.192 0.206 0.224 0.246
12.5% 0.152 0.161 0.172 0.184 0.200
13.5% 0.129 0.136 0.144 0.153 0.165
14.5% 0.109 0.115 0.121 0.128 0.137
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 740 798 870 961 1 080
11.5% 613 657 709 773 855
12.5% 510 543 581 629 687
13.5% 424 449 479 514 556
14.5% 352 372 394 421 453
Terminal growth
Electricity Heat Total USD/kW
Pskovskaya GRES 136 1 137 317 13 150 348
Serovskaya GRES 167 - 2 165 314 - 75 90 170
Stavropolskaya GRES 679 0 679 283 0 679 283
Surgutskaya GRES 2 374 22 2 396 730 0 2 396 730
Troitskaya GRES 1 488 6 1 494 726 252 1 746 848
OGK-2 total 4 845 26 4 870 560 190 5 060 582
Plant
12m target EV, USD mn
Existing assets New
project Total USD/kW
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OGK-3
Strengths Coal plants in European Russia
Weaknesses Below-average electricity load factor
Above-average fuel burn rate
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
OGK-3 RTS Index RTS Electric Utilities Index
Plant Region
Installed
electric
capacity
2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Kostromskaya GRES Kostroma 3 600 450 13 357 172
Gusinoozerskaya GRES Buryatiya 1 100 221 4 170 210
Pechorskaya GRES Komi 1 060 387 3 648 267
Kharanorskaya GRES Chita 430 128 2 335 106
Cherepetskaya GRES Tula 1 425 94 3 257 180
Yuzhnouralskaya GRES Chelyabinsk 882 395 5 343 350
OGK-3 total 8 497 1 675 32 111 1 285
Plant Project name
Completion
date
New
electric
capacity,
MW Fuel type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Gusinoozerskaya GRES upgrade of 180 MW 4th unit to 210 MW 2011 210 coal 300 - 55
Kharanorskaya GRES new 225 MW 3rd unit 2011 225 coal 322 - 25
Cherepetskaya GRES new 2x225 MW turbines 2012 450 coal 653 - 115
Yuzhnouralskaya GRES reconstruction and upgrade, 580 MW 2012 580 gas 644 49
Gas59%
Coal38%
Fuel oil3%
Gas56%
Coal41%Fuel
oil3%
UES26%
Norilsk Nickel65%
Other minorities
9%
Norilsk Nickel80%
Other minorities
20%
OGK-3
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 113/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 698 1 006 1 539 2 055 2 579 2 891 2 877 2 874 2 871 2 867 2 866 2 872 2 893 2 929 2 978
Non-cash WC 72 132 98 96 86 79 108 123 136 142 153 167 189 213 239
LT investments 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6
Equity 579 4 158 4 456 4 503 4 617 4 741 5 111 5 672 6 408 7 159 7 956 8 826 9 818 10 947 12 204
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 127 -3 134 -2 936 -2 464 -2 062 -1 879 -2 232 -2 781 -3 507 -4 256 -5 043 -5 891 -6 842 -7 910 -9 092
Other LT liabilities (+) or assets (-) 69 120 123 118 116 114 112 112 112 112 112 112 112 112 112
Income statement*Revenues 758 988 1 321 1 546 1 596 1 767 2 422 2 750 3 052 3 184 3 423 3 754 4 233 4 789 5 368
Electricity 731 948 1 281 1 498 1 542 1 707 2 355 2 675 2 974 3 102 3 338 3 667 4 144 4 696 5 273
Heat 19 23 21 27 33 38 44 51 53 56 58 59 60 61 63
Other 8 17 20 21 22 22 23 24 25 26 27 28 30 31 32
Cost of sales - 756 - 909 -1 213 -1 397 -1 478 -1 631 -1 956 -2 149 -2 220 -2 330 -2 509 -2 744 -3 060 -3 434 -3 843
Fuel costs - 461 - 542 - 799 - 926 - 946 -1 027 -1 272 -1 428 -1 457 -1 526 -1 662 -1 850 -2 118 -2 440 -2 793
D&A - 40 - 48 - 67 - 94 - 125 - 157 - 169 - 176 - 183 - 191 - 198 - 207 - 216 - 226 - 237
Fixed costs - 254 - 318 - 347 - 377 - 406 - 447 - 515 - 544 - 580 - 613 - 649 - 687 - 726 - 769 - 813
EBITDA 46 129 177 244 245 295 637 779 1 018 1 047 1 114 1 220 1 392 1 583 1 764
EBIT 5 81 110 150 120 138 468 603 834 856 916 1 013 1 176 1 357 1 527
EBT - 2 147 264 303 268 283 611 745 977 998 1 058 1 155 1 318 1 499 1 670
Net income - 2 112 201 230 204 215 464 566 742 759 804 878 1 002 1 139 1 269
EBITDA margin 6% 13% 13% 16% 15% 17% 26% 28% 33% 33% 33% 32% 33% 33% 33%
EBIT margin 1% 8% 8% 10% 8% 8% 19% 22% 27% 27% 27% 27% 28% 28% 28%
Net margin 0% 11% 15% 15% 13% 12% 19% 21% 24% 24% 23% 23% 24% 24% 24%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC - 25 - 52 37 - 3 9 6 - 31 - 15 - 14 - 6 - 11 - 15 - 22 - 25 - 26
OCF - 6 33 151 169 190 233 459 586 770 801 850 927 1 054 1 198 1 337
Net capex - 46 - 134 - 571 - 683 - 695 - 522 - 209 - 174 - 180 - 187 - 198 - 213 - 237 - 262 - 286
Acquisitions/divestments 0 -2 923 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 45 -2 984 - 417 - 530 - 547 - 377 - 67 - 31 - 38 - 44 - 55 - 71 - 94 - 120 - 144
Equity raised/bought back 0 3 158 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 74 - 145 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 60 3 007 0 0 0 0 0 0 0 0 0 0 0 0 0
Net CF 9 56 - 267 - 362 - 357 - 145 392 554 732 757 794 856 960 1 078 1 194
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 2.4 1.8 1.5 1.5 1.4 1.0 0.9 0.8 0.7 0.7 0.6 0.6 0.5 0.4
EV/EBITDA 18.5 13.5 9.8 9.7 8.1 3.7 3.1 2.3 2.3 2.1 2.0 1.7 1.5 1.4
P/E 49.3 27.5 24.0 27.1 25.7 11.9 9.7 7.4 7.3 6.9 6.3 5.5 4.8 4.4
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 8 497 8 497 8 497 8 497 8 497 8 752 9 782 9 782 9 782 9 782 9 782 9 782 9 782 9 782 9 782
Electricity sales, GWh 28 640 30 248 34 465 35 277 32 473 31 934 36 026 34 525 34 862 35 155 36 723 39 282 43 422 47 934 52 236
Load factor (electricity) 41% 43% 49% 50% 46% 44% 45% 43% 43% 43% 45% 48% 54% 59% 65%
Heat capacity, Gcal/h 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675 1 675
Heat sales, thous. Gcal 1 412 1 285 1 298 1 311 1 324 1 337 1 351 1 364 1 378 1 392 1 406 1 420 1 434 1 448 1 463
Load factor (heat) 10% 9% 9% 9% 9% 9% 9% 9% 9% 9% 10% 10% 10% 10% 10%
Total effective electricity price,
USD/MWh26 31 37 42 47 53 65 77 85 88 91 93 95 98 101
Fuel cost, USD/MWh 16 18 23 26 29 32 35 41 42 43 45 47 49 51 53
EBITDA/kW, USD 5 15 21 29 29 34 65 80 104 107 114 125 142 162 180
OGK-3
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 114/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 110 150 120 138 468 603 834 856 916 1 013 1 176 1 357 1 527
Tax on EBIT - 26 - 36 - 29 - 33 - 112 - 145 - 200 - 205 - 220 - 243 - 282 - 326 - 367
After tax EBIT 84 114 91 105 356 458 634 650 696 770 894 1 031 1 161
Depreciation 67 94 125 157 169 176 183 191 198 207 216 226 237
Capex - 571 - 683 - 695 - 522 - 209 - 174 - 180 - 187 - 198 - 213 - 237 - 262 - 286
Change in WC 37 - 3 9 6 - 31 - 15 - 14 - 6 - 11 - 15 - 22 - 25 - 26
FCFF - 384 - 478 - 470 - 255 284 446 624 649 686 748 851 970 1 085
Discounted FCFF - 360 - 400 - 351 - 170 169 236 295 273 258 251 254 258 258
WACC 12.1%
Terminal growth 2.0%
NPV of cash flow 972
NPV of terminal value 2 595
Fair EV 3 568
Net debt 2007 3 134
Minority interest 0
Fair MCap 6 702
FV of common share, USD 0.141
Upside to FV 21%
12m TP, USD 0.161
Upside to TP 39%
Dividend yield 0.0%
Expected total return over 12m 39%
Current price, USD 0.116
Shares outstanding, mn 47 488
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.1% 0.184 0.193 0.205 0.220 0.239
11.1% 0.165 0.172 0.180 0.191 0.204
12.1% 0.150 0.155 0.161 0.169 0.178
13.1% 0.138 0.142 0.146 0.152 0.159
14.1% 0.127 0.130 0.134 0.138 0.143
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.1% 594 645 708 789 897
11.1% 492 529 575 632 705
12.1% 409 437 471 512 563
13.1% 341 362 388 418 456
14.1% 284 301 321 344 371
Terminal growth
Electricity Heat Total USD/kW
Kostromskaya GRES 1 831 - 1 1 830 508 0 1 830 508
Gusinoozerskaya GRES 662 3 665 605 - 62 603 548
Pechorskaya GRES 497 6 504 475 0 504 475
Kharanorskaya GRES 374 1 376 873 - 28 347 808
Cherepetskaya GRES 236 10 246 172 - 129 117 82
Yuzhnouralskaya GRES 544 4 549 622 55 603 684
OGK-3 total 4 145 23 4 168 491 - 164 4 004 471
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 115/183
OGK-4
Strengths Above-average electricity load factor
Below-average fuel burn rate
Below-average effective fuel price
Foreign strategic investor
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
OGK-4 RTS Index RTS Electric Utilities Index
Plant Region
Installed
electric
capacity
2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Surgutskaya GRES-2 Khanty-Mansiysk 4 800 840 34 406 1 062
Smolenskaya GRES Smolensk 630 66 2 099 45
Shaturskaya GRES Moscow 1 100 344 4 912 446
Yayvinskaya GRES Perm 600 69 4 295 101
Berezovskaya GRES Krasnoyarsk 1 500 860 8 529 572
OGK-4 total 8 630 2 179 54 241 2 226
Plant Project
Completion
date
New
electric
capacity,
MW Fuel type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Surgutskaya GRES-2 new 2x400 MW CCGTs 2010 800 gas 859 725
Shaturskaya GRES new 400 MW CCGT 2009 400 gas 425 209
Yayvinskaya GRES new 400 MW CCGT 2010 400 gas 437 138
Berezovskaya GRES new 800 MW turbine 2009 800 coal 1 119 97
Gas82.78%
Coal16.48%
Fuel oil
0.05%
Peat0.69%
Gas71.78%
Coal27.80%
Fuel oil
0.18%
Peat0.23%
UES23%
E.On69%
Other minorities
8%
E.On76%
Other minorities
24%
OGK-4
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 116/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 927 1 452 2 652 3 717 4 019 3 986 3 947 3 977 4 007 4 038 4 080 4 127 4 172 4 215 4 257
Non-cash WC 48 57 71 93 144 153 159 186 207 216 237 251 262 274 286
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 852 2 796 2 916 3 068 3 810 4 586 5 300 6 284 7 552 8 869 10 329 11 869 13 459 15 097 16 790
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) - 28 -1 448 - 359 583 197 - 599 -1 342 -2 271 -3 487 -4 764 -6 160 -7 641 -9 175 -10 758 -12 396
Other LT liabilities (+) or assets (-) 150 161 165 158 155 152 150 150 150 150 150 150 150 150 150
Income statement*Revenues 932 1 119 1 461 2 026 3 157 3 442 3 576 4 170 4 640 4 856 5 323 5 629 5 881 6 137 6 421
Electricity 896 1 075 1 406 1 965 3 091 3 371 3 496 4 079 4 546 4 758 5 222 5 524 5 771 6 022 6 302
Heat 21 28 36 41 45 50 58 68 70 73 75 78 81 85 89
Other 14 16 19 20 21 21 22 23 24 25 26 27 28 29 30
Cost of sales - 894 -1 068 -1 390 -1 669 -2 095 -2 318 -2 518 -2 866 -2 961 -3 112 -3 390 -3 588 -3 775 -3 967 -4 179
Fuel costs - 542 - 668 - 914 -1 086 -1 348 -1 507 -1 675 -1 978 -2 019 -2 118 -2 341 -2 481 -2 607 -2 734 -2 878
D&A - 52 - 62 - 100 - 151 - 188 - 208 - 214 - 224 - 234 - 245 - 257 - 269 - 282 - 295 - 309
Fixed costs - 300 - 338 - 377 - 432 - 559 - 603 - 629 - 665 - 708 - 749 - 792 - 838 - 887 - 938 - 993
EBITDA 93 117 175 513 1 255 1 337 1 277 1 533 1 919 1 996 2 197 2 316 2 395 2 472 2 559
EBIT 41 55 75 362 1 067 1 129 1 064 1 309 1 685 1 751 1 940 2 047 2 113 2 177 2 250
EBT 37 54 74 361 1 066 1 128 1 063 1 308 1 684 1 750 1 939 2 046 2 112 2 176 2 249
Net income 28 41 56 274 810 857 808 994 1 280 1 330 1 474 1 555 1 605 1 654 1 709
EBITDA margin 10% 10% 12% 25% 40% 39% 36% 37% 41% 41% 41% 41% 41% 40% 40%
EBIT margin 4% 5% 5% 18% 34% 33% 30% 31% 36% 36% 36% 36% 36% 35% 35%
Net margin 3% 4% 4% 14% 26% 25% 23% 24% 28% 27% 28% 28% 27% 27% 27%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC - 36 - 5 - 12 - 26 - 53 - 13 - 9 - 27 - 21 - 10 - 21 - 14 - 11 - 12 - 13
OCF 27 99 145 400 947 1 054 1 013 1 192 1 494 1 566 1 710 1 811 1 876 1 938 2 006
Net capex - 38 - 502 -1 254 -1 346 - 568 - 252 - 250 - 254 - 265 - 276 - 299 - 316 - 327 - 339 - 352
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 37 - 501 -1 252 -1 344 - 566 - 251 - 249 - 253 - 264 - 275 - 298 - 315 - 326 - 338 - 351
Equity raised/bought back 0 1 764 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 18 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 3 1 762 - 2 - 2 - 2 - 2 - 2 - 2 - 2 - 2 - 2 - 2 - 2 - 2 - 2
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 3.2 2.5 1.8 1.1 1.0 1.0 0.9 0.8 0.7 0.7 0.6 0.6 0.6 0.6
EV/EBITDA 30.6 20.5 7.0 2.9 2.7 2.8 2.3 1.9 1.8 1.6 1.6 1.5 1.5 1.4
P/E 122.1 89.3 18.4 6.2 5.9 6.2 5.1 3.9 3.8 3.4 3.2 3.1 3.0 3.0
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 8 630 8 630 8 630 9 030 11 030 11 030 11 030 11 030 11 030 11 030 11 030 11 030 11 030 11 030 11 030
Electricity sales, GWh 49 073 52 140 53 579 55 956 66 406 63 831 60 752 59 796 60 760 61 626 65 977 67 694 68 231 68 672 69 305
Load factor (electricity) 68% 72% 74% 74% 72% 69% 66% 65% 66% 67% 71% 73% 74% 74% 75%
Heat capacity, Gcal/h 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179 2 179
Heat sales, thous. Gcal 2 204 2 226 2 248 2 271 2 293 2 316 2 340 2 363 2 387 2 410 2 435 2 459 2 484 2 508 2 533
Load factor (heat) 12% 12% 12% 12% 12% 12% 12% 12% 13% 13% 13% 13% 13% 13% 13%
Total effective electricity price,
USD/MWh18 21 26 35 47 53 58 68 75 77 79 82 85 88 91
Fuel cost, USD/MWh 11 13 17 19 20 24 28 33 33 34 35 37 38 40 42
EBITDA/kW, USD 11 14 20 57 114 121 116 139 174 181 199 210 217 224 232
OGK-4
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 117/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 75 362 1 067 1 129 1 064 1 309 1 685 1 751 1 940 2 047 2 113 2 177 2 250
Tax on EBIT - 18 - 87 - 256 - 271 - 255 - 314 - 404 - 420 - 466 - 491 - 507 - 522 - 540
After tax EBIT 57 275 811 858 808 995 1 280 1 331 1 475 1 556 1 606 1 654 1 710
Depreciation 100 151 188 208 214 224 234 245 257 269 282 295 309
Capex -1 254 -1 346 - 568 - 252 - 250 - 254 - 265 - 276 - 299 - 316 - 327 - 339 - 352
Change in WC - 12 - 26 - 53 - 13 - 9 - 27 - 21 - 10 - 21 - 14 - 11 - 12 - 13
FCFF -1 109 - 945 379 801 763 938 1 229 1 290 1 411 1 496 1 549 1 599 1 654
WACC 11.8%
Terminal growth 2.0%
NPV of cash flow 3 492
NPV of terminal value 4 261
Fair EV 7 753
Net debt 2007e 1 448
Minority interest 0
Fair MCap 9 201
FV, USD 0.146
Upside to FV 83%
12m TP, USD 0.166
Upside to TP 108%
Dividend yield 0.2%
Expected total return over 12m 108%
Current price, USD 0.080
Shares outstanding, mn 63 017
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.198 0.210 0.224 0.244 0.270
10.8% 0.173 0.181 0.192 0.205 0.223
11.8% 0.152 0.158 0.166 0.176 0.188
12.8% 0.135 0.140 0.146 0.153 0.162
13.8% 0.121 0.125 0.129 0.134 0.141
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 1 229 1 314 1 421 1 559 1 745
10.8% 1 049 1 111 1 187 1 284 1 408
11.8% 902 948 1 004 1 073 1 160
12.8% 780 815 857 908 970
13.8% 678 705 737 775 821
Terminal growth
Electricity Heat Total USD/kW
Surgutskaya GRES-2 5 179 19 5 198 1 083 810 6 008 1 252
Smolenskaya GRES 129 2 130 207 0 130 207
Shaturskaya GRES 387 21 408 371 233 641 583
Yayvinskaya GRES 436 4 440 733 154 594 990
Berezovskaya GRES 1 192 - 1 1 191 794 108 1 299 866
OGK-4 total 7 324 44 7 368 854 1 305 8 673 1 005
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 118/183
OGK-5
Strengths Coal plant in European Russia
Foreign strategic investor
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
OGK-5 RTS Index RTS Electric Utilities Index
Plant Region
Installed
electric
capacity
2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat
sales
2007,
k GCal
Konakovskaya GRES Tver 2 400 120 8 504 229
Nevinnomysskaya GRES Stavropol 1 290 729 6 236 1 781
Reftinskaya GRES Sverdlovsk 3 800 350 16 363 481
Sredneuralskaya GRES Sverdlovsk 1 182 1 193 7 276 4 278
OGK-5 total 8 672 2 392 38 379 6 769
Gas58%
Coal41%
Fuel oil1%
Gas57%
Coal42%
Fuel oil1%
Government26.4%
Enel52.9%
Gazprom and af f ilates
6.3%
Other minorities
14.4%
Government26.4%
Enel55.8%
Gazprom and af f ilates
6.4%EBRD5.2%
Other minorities
6.3%
Plant Project
Completion
date
New
electric
capacity,
MW
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Nevinnomysskaya GRES new 410 MW CCGT 2010 410 gas 442 134
Reftinskaya GRES
upgrade of six 300 MW units to
328MW and four 500MW units to
580MW
2013 488 coal 705 129
Sredneuralskaya GRES new 420 MW CCGT 2009 420 gas 448 147
OGK-5
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 119/183
Financials
Financial ratios
Operational data
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetsFixed assets 1 675 2 588 3 186 3 543 3 749 3 864 3 851 3 866 3 880 3 894 3 915 3 948 3 997 4 059 4 124
Non-cash WC 94 135 119 123 136 121 131 156 170 177 191 211 235 258 275
LT investments 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Equity 1 857 2 497 2 621 2 683 3 019 3 389 3 805 4 460 5 296 6 144 7 063 8 086 9 234 10 488 11 796
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) - 295 - 118 332 645 534 270 - 142 - 758 -1 564 -2 393 -3 276 -4 246 -5 321 -6 491 -7 716
Other LT liabilities (+) or assets (-) 208 346 354 340 333 327 321 321 321 321 321 321 321 321 321
Income statement*Revenues 913 1 115 1 521 1 886 2 454 2 718 2 949 3 495 3 812 3 960 4 291 4 734 5 264 5 778 6 163
Electricity 845 1 039 1 438 1 767 2 302 2 533 2 729 3 240 3 553 3 689 4 010 4 443 4 964 5 468 5 840
Heat 56 64 70 104 136 169 204 238 241 252 262 270 279 288 300
Other 12 12 14 15 15 16 16 17 18 19 19 20 21 22 23
Cost of sales - 916 -1 060 -1 443 -1 672 -1 949 -2 160 -2 325 -2 638 -2 717 -2 848 -3 085 -3 392 -3 757 -4 130 -4 445
Fuel costs - 585 - 663 - 965 -1 135 -1 327 -1 493 -1 623 -1 897 -1 931 -2 020 -2 211 -2 470 -2 784 -3 102 -3 358
D&A - 74 - 81 - 129 - 151 - 163 - 168 - 176 - 185 - 193 - 202 - 211 - 221 - 231 - 243 - 256
Fixed costs - 257 - 316 - 349 - 386 - 460 - 499 - 525 - 556 - 592 - 627 - 663 - 701 - 742 - 785 - 831
EBITDA 78 148 221 379 682 741 817 1 059 1 307 1 332 1 436 1 583 1 759 1 913 1 996
EBIT 4 67 92 228 520 573 641 874 1 114 1 130 1 225 1 362 1 528 1 670 1 741
EBT - 2 79 88 224 516 570 637 870 1 110 1 127 1 221 1 358 1 524 1 666 1 737
Net income - 2 60 67 170 392 433 484 661 843 856 928 1 032 1 158 1 266 1 320
EBITDA margin 9% 13% 15% 20% 28% 27% 28% 30% 34% 34% 33% 33% 33% 33% 32%
EBIT margin 0% 6% 6% 12% 21% 21% 22% 25% 29% 29% 29% 29% 29% 29% 28%
Net margin 0% 5% 4% 9% 16% 16% 16% 19% 22% 22% 22% 22% 22% 22% 21%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC - 8 - 13 19 - 9 - 15 12 - 13 - 25 - 14 - 7 - 15 - 20 - 24 - 23 - 17
OCF 47 137 218 317 544 617 652 826 1 026 1 055 1 128 1 237 1 370 1 490 1 562
Net capex - 117 - 332 - 662 - 645 - 441 - 357 - 237 - 201 - 208 - 216 - 232 - 254 - 281 - 305 - 321
Acquisitions/divestments 4 230 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 111 - 73 - 648 - 630 - 427 - 343 - 223 - 187 - 195 - 202 - 218 - 241 - 267 - 291 - 307
Equity raised/bought back 406 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 166 - 21 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 549 - 44 - 19 - 19 - 18 - 18 - 17 - 17 - 17 - 17 - 17 - 17 - 17 - 17 - 17
Net CF 485 20 - 448 - 332 99 256 411 622 814 836 892 979 1 085 1 181 1 237
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 4.0 2.9 2.3 1.8 1.6 1.5 1.3 1.2 1.1 1.0 0.9 0.8 0.8 0.7
EV/EBITDA 29.9 20.0 11.6 6.5 5.9 5.4 4.2 3.4 3.3 3.1 2.8 2.5 2.3 2.2
P/E 75.7 67.9 26.6 11.5 10.5 9.4 6.8 5.4 5.3 4.9 4.4 3.9 3.6 3.4
2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 8 672 8 672 8 700 8 808 9 746 9 854 9 962 9 990 9 990 9 990 9 990 9 990 9 990 9 990 9 990
Electricity sales, GWh 38 296 36 481 41 047 41 401 44 334 43 396 40 811 41 179 41 615 41 895 44 495 48 287 52 855 56 729 58 581
Load factor (electricity) 53% 51% 57% 57% 55% 53% 49% 50% 50% 51% 54% 58% 64% 68% 71%
Heat capacity, Gcal/h 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392 2 392
Heat sales, thous. Gcal 7 026 6 769 6 837 6 905 6 974 7 044 7 114 7 185 7 257 7 330 7 403 7 477 7 552 7 627 7 704
Load factor (heat) 34% 32% 33% 33% 33% 34% 34% 34% 35% 35% 35% 36% 36% 36% 37%
Total effective electricity price,
USD/MWh22 28 35 43 52 58 67 79 85 88 90 92 94 96 100
Fuel cost, USD/MWh 15 18 24 27 30 34 40 46 46 48 50 51 53 55 57
EBITDA/kW, USD 9 17 25 43 70 75 82 106 131 133 144 158 176 191 200
OGK-5
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 120/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 92 228 520 573 641 874 1 114 1 130 1 225 1 362 1 528 1 670 1 741
Tax on EBIT - 22 - 55 - 125 - 138 - 154 - 210 - 267 - 271 - 294 - 327 - 367 - 401 - 418
After tax EBIT 70 173 395 436 487 664 846 859 931 1 035 1 161 1 269 1 323
Depreciation 129 151 163 168 176 185 193 202 211 221 231 243 256
Capex - 662 - 645 - 441 - 357 - 237 - 201 - 208 - 216 - 232 - 254 - 281 - 305 - 321
Change in WC 19 - 9 - 15 12 - 13 - 25 - 14 - 7 - 15 - 20 - 24 - 23 - 17
FCFF - 445 - 329 102 259 414 624 817 839 895 982 1 088 1 184 1 240
Discounted FCFF - 420 - 280 78 178 257 349 411 379 364 360 359 352 332
WACC 11.1%
Terminal growth 2.0%
NPV of cash flow 2 720
NPV of terminal value 3 723
Fair EV 6 444
Net debt 2007 118
Minority interest 0
Fair MCap 6 562
FV of common share, USD 0.186
Upside to FV 45%
12m TP, USD 0.209
Upside to TP 64%
Dividend yield 0.0%
Expected total return over 12m 64%
Current price, USD 0.128
Shares outstanding, mn 35 372
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.1% 0.254 0.274 0.299 0.333 0.380
10.1% 0.216 0.231 0.248 0.271 0.302
11.1% 0.186 0.197 0.209 0.225 0.246
12.1% 0.161 0.169 0.179 0.190 0.205
13.1% 0.141 0.147 0.154 0.163 0.173
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.1% 1 005 1 085 1 186 1 321 1 510
10.1% 853 911 982 1 073 1 195
11.1% 732 774 825 890 972
12.1% 632 664 702 749 807
13.1% 550 575 603 638 679
Terminal growth
Electricity Heat Total USD/kW
Konakovskaya GRES 1 246 7 1 253 522 0 1 253 522
Nevinnomysskaya GRES 767 43 809 627 149 958 743
Reftinskaya GRES 3 529 0 3 529 929 143 3 672 966
Sredneuralskaya GRES 1 013 104 1 117 945 163 1 280 1 084
OGK-5 total 6 555 153 6 707 774 455 7 162 826
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 121/183
OGK-6
Strengths Coal plants in European Russia
Weaknesses Below-average electricity load factor
Above-average fuel burn rate
Above-average effective fuel price
Gazprom's corporate governance
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-45%
-35%
-25%
-15%
-5%
5%
15%
OGK-6 RTS Index RTS Electric Utilities Index
Plant Region
Installed
electric
capacity
2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat
sales
2007,
k GCal
GRES-24 Ryazan 310 0 1 824 0
Ryazanskaya GRES Ryazan 2 650 1 234 8 128 2 632
Krasnoyarskaya GRES-2 Krasnoyarsk 1 250 1 176 4 682 1 275
Novocherkasskaya GRES Rostov 2 112 75 9 380 116
Kirishskaya GRES Leningrad 2 100 180 6 645 234
Cherepovetskaya GRES Vologda 630 39 3 648 108
OGK-6 total 9 052 2 704 34 308 4 366
Plant Project
Completion
date
New
electric
capacity,
MW
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
GRES-24 upgrade of 310 MW unit with 110 MW turbine 2009 110 gas 120 - 22
Novocherkasskaya GRES new 330 MW turbine 2011 330 coal 476 - 86
Kirishskaya GRES upgrade of 300 MW 6th unit with 500 MW CCGT 2010 500 gas 543 - 27
Cherepovetskaya GRES new 330 MW 4th unit 2011 330 coal 476 - 188
Gas50%
Coal47%Fuel
oil3%
Gas39%
Coal60%Fuel
oil1%
UES93%
Other minorities
7%
Gazprom60%
Other minorities
40%
OGK-6
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 122/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 1 096 1 283 1 753 2 204 2 689 3 353 3 287 3 277 3 267 3 257 3 251 3 255 3 271 3 296 3 337
Non-cash WC 48 57 68 75 81 95 115 132 148 155 167 184 203 223 251
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 724 1 595 1 560 1 440 1 396 1 479 1 725 2 118 2 675 3 253 3 877 4 582 5 379 6 261 7 268
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 242 - 446 67 653 1 190 1 789 1 501 1 115 564 - 17 - 635 -1 319 -2 082 -2 919 -3 857
Other LT liabilities (+) or assets (-) 177 190 195 187 183 180 176 176 176 176 176 176 176 176 176
Income statement*Revenues 1 026 1 214 1 493 1 703 1 809 2 122 2 585 2 963 3 318 3 477 3 748 4 122 4 550 5 006 5 620
Electricity 944 1 111 1 389 1 573 1 656 1 946 2 382 2 732 3 080 3 228 3 491 3 860 4 282 4 733 5 343
Heat 67 86 85 110 132 155 181 208 214 224 231 235 239 244 247
Other 14 16 19 20 21 21 22 23 24 25 26 27 28 29 31
Cost of sales -1 039 -1 211 -1 568 -1 762 -1 813 -1 960 -2 207 -2 426 -2 563 -2 695 -2 905 -3 172 -3 477 -3 821 -4 271
Fuel costs - 610 - 740 -1 036 -1 168 -1 154 -1 213 -1 386 -1 563 -1 649 -1 733 -1 890 -2 103 -2 349 -2 631 -3 015
D&A - 90 - 92 - 111 - 132 - 151 - 174 - 192 - 200 - 208 - 216 - 224 - 233 - 243 - 254 - 266
Fixed costs - 338 - 379 - 421 - 462 - 508 - 573 - 628 - 663 - 706 - 747 - 790 - 836 - 885 - 936 - 990
EBITDA 82 100 42 79 153 344 578 744 971 1 006 1 076 1 192 1 325 1 448 1 625
EBIT - 8 7 - 69 - 53 2 169 386 544 763 790 851 959 1 082 1 194 1 359
EBT - 33 - 16 - 93 - 77 - 21 146 363 521 740 768 829 936 1 059 1 172 1 337
Net income - 27 - 16 - 93 - 77 - 21 111 276 396 563 583 630 711 805 891 1 016
EBITDA margin 8% 8% 3% 5% 8% 16% 22% 25% 29% 29% 29% 29% 29% 29% 29%
EBIT margin neg 1% neg neg 0% 8% 15% 18% 23% 23% 23% 23% 24% 24% 24%
Net margin neg neg neg neg neg 5% 11% 13% 17% 17% 17% 17% 18% 18% 18%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC 8 - 5 - 10 - 10 - 7 - 16 - 23 - 17 - 16 - 7 - 12 - 17 - 19 - 21 - 28
OCF 69 98 54 87 151 293 468 602 777 814 865 950 1 052 1 147 1 277
Net capex - 61 - 195 - 547 - 664 - 684 - 897 - 189 - 190 - 198 - 205 - 218 - 238 - 259 - 280 - 307
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 61 - 195 - 547 - 664 - 684 - 897 - 189 - 190 - 198 - 205 - 218 - 238 - 259 - 280 - 307
Equity raised/bought back 0 797 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 40 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 13 774 - 24 - 24 - 23 - 23 - 22 - 22 - 22 - 22 - 22 - 22 - 22 - 22 - 22
Net CF - 5 677 - 517 - 600 - 556 - 627 257 389 557 587 624 690 770 845 947
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.7 1.4 1.2 1.1 1.0 0.8 0.7 0.6 0.6 0.6 0.5 0.5 0.4 0.4
EV/EBITDA 20.8 49.8 26.3 13.5 6.0 3.6 2.8 2.1 2.1 1.9 1.7 1.6 1.4 1.3
P/E neg neg neg neg 22.6 9.1 6.4 4.5 4.3 4.0 3.5 3.1 2.8 2.5
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 9 052 9 052 9 052 9 052 9 162 9 662 10 322 10 322 10 322 10 322 10 322 10 322 10 322 10 322 10 322
Electricity sales, GWh 29 919 31 297 34 828 36 551 33 638 34 276 35 759 34 675 35 090 35 472 37 203 40 167 43 429 46 452 50 803
Load factor (electricity) 41% 43% 48% 51% 46% 44% 43% 42% 42% 43% 45% 48% 52% 56% 61%
Heat capacity, Gcal/h 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704 2 704
Heat sales, thous. Gcal 4 422 4 366 4 410 4 454 4 498 4 543 4 589 4 635 4 681 4 728 4 775 4 823 4 871 4 920 4 969
Load factor (heat) 19% 18% 19% 19% 19% 19% 19% 20% 20% 20% 20% 20% 21% 21% 21%
Total effective electricity price,
USD/MWh32 35 40 43 49 57 67 79 88 91 94 96 99 102 105
Fuel cost, USD/MWh 20 24 30 32 34 35 39 45 47 49 51 52 54 57 59
EBITDA/kW, USD 9 11 5 9 17 36 56 72 94 97 104 115 128 140 157
OGK-6
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 123/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT - 69 - 53 2 169 386 544 763 790 851 959 1 082 1 194 1 359
Tax on EBIT 17 13 0 - 41 - 93 - 130 - 183 - 190 - 204 - 230 - 260 - 287 - 326
After tax EBIT - 53 - 40 2 129 293 413 580 600 647 728 822 908 1 033
Depreciation 111 132 151 174 192 200 208 216 224 233 243 254 266
Capex - 547 - 664 - 684 - 897 - 189 - 190 - 198 - 205 - 218 - 238 - 259 - 280 - 307
Change in WC - 10 - 10 - 7 - 16 - 23 - 17 - 16 - 7 - 12 - 17 - 19 - 21 - 28
FCFF - 499 - 582 - 538 - 610 274 406 574 604 641 707 787 862 964
Discounted FCFF - 468 - 486 - 399 - 402 160 211 266 248 234 230 228 221 220
WACC 12.5%
Terminal growth 2.0%
NPV of cash flow 266
NPV of terminal value 2 143
Fair EV 2 409
Net debt 2007e 446
Minority interest 0
Fair MCap 2 855
FV of common share, USD 0.0885
Upside to FV 13%
12m TP, USD 0.102
Upside to TP 30%
Dividend yield 0.0%
Expected total return over 12m 30%
Current price, USD 0.0780
Shares outstanding, mn 32 263
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 0.129 0.140 0.153 0.170 0.193
11.5% 0.106 0.115 0.124 0.137 0.152
12.5% 0.088 0.094 0.102 0.111 0.122
13.5% 0.073 0.078 0.083 0.090 0.098
14.5% 0.061 0.064 0.069 0.074 0.080
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 395 433 480 539 618
11.5% 316 344 379 421 475
12.5% 252 274 299 330 369
13.5% 200 217 236 259 287
14.5% 157 170 184 202 223
Terminal growth
Electricity Heat Total USD/kW
GRES-24 173 0 173 557 - 24 148 479
Ryazanskaya GRES 397 10 407 154 0 407 154
Krasnoyarskaya GRES-2 756 12 769 615 0 769 615
Novocherkasskaya GRES 1 040 3 1 043 494 - 97 947 448
Kirishskaya GRES 203 177 379 181 - 30 349 166
Cherepovetskaya GRES 301 4 305 484 - 212 93 148
OGK-6 total 2 870 206 3 076 340 - 363 2 713 300
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 124/183
TGK-1
Strengths Hydroelectric power plants
Below-average fuel burn rate
Weaknesses Above-average effective fuel price
Gazprom's corporate governance
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-1 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity
2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Nevsky Thermal St. Peterburg/Leningrad 2 806 12 219 11 427 20 318
Nevsky Hydro St. Peterburg/Leningrad 631 n/a 3 404 n/a
Karelsky Thermal Karelia 282 689 988 1 657
Karelsky Hydro Karelia 634 n/a 3 068 n/a
Kolsky Hydro Murmansk 1 593 n/a 6 734 n/a
Apatitsk CHP Murmansk 323 735 442 1 251
Murmansk CHP Murmansk 12 1 111 37 2 172
TGK-1 total 6 280 14 754 26 101 25 397
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Nevsky Thermal expansion and reconstruction 2013 3677 3480 gas 4 060 - 98
Nevsky Hydro expansion and reconstruction 2012 355 n/a n/a 327 174
Karelsky Thermal expansion and reconstruction 2012 182 160 gas 204 - 22
Karelsky Hydro expansion and reconstruction 2015 11 n/a n/a 10 3
Kolsky Hydro expansion and reconstruction 2014 117 n/a n/a 91 59
Murmansk CHP replacement of old capacity with 3x180 MW turbines 2013 540 780 coal 608 18
Gas89%
Coal4%
Fuel oil7%
Gas90%
Coal6%
Fuel oil4%
UES56%
Fortum26%
Norilsk Nickel
7%
Other minorities
11%
Gazprom and af f iliated
46%
Fortum26%
Norilsk Nickel
6%
Other minorities
22%
TGK-1
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 125/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 1 100 1 397 2 375 4 386 5 587 6 341 6 755 6 607 6 465 6 308 6 146 5 982 5 817 5 648 5 478
Non-cash WC 80 95 102 134 170 174 208 242 254 264 274 285 297 309 322
LT investments 49 16 17 16 16 16 15 15 15 15 15 15 15 15 15
Equity 934 2 251 2 295 2 508 3 169 4 072 4 766 5 627 6 569 7 566 8 622 9 742 10 931 12 194 13 539
Minority interest 0 0 0 0 1 1 2 2 3 4 4 5 6 7 8
Net debt (+) or cash (-) 217 - 827 113 1 946 2 521 2 378 2 133 1 157 84 -1 061 -2 269 -3 542 -4 886 -6 307 -7 810
Other LT liabilities (+) or assets (-) 79 84 86 83 81 80 78 78 78 78 78 78 78 78 78
Income statementRevenues 750 989 1 260 1 994 3 016 3 952 4 704 5 479 5 754 5 971 6 209 6 459 6 719 6 992 7 277
Electricity 368 453 598 1 167 2 029 2 787 3 318 3 899 4 139 4 284 4 451 4 627 4 810 5 002 5 202
Heat 353 503 625 787 946 1 122 1 342 1 534 1 566 1 636 1 705 1 777 1 852 1 931 2 013
Other 29 33 38 40 42 43 44 46 49 51 53 55 57 59 62
Cost of sales - 755 -1 010 -1 254 -1 571 -2 057 -2 657 -3 289 -3 802 -3 863 -4 018 -4 192 -4 376 -4 569 -4 771 -4 983
Fuel costs - 330 - 498 - 655 - 831 -1 133 -1 549 -2 060 -2 498 -2 488 -2 577 -2 682 -2 792 -2 908 -3 028 -3 154
D&A - 50 - 71 - 108 - 178 - 266 - 349 - 385 - 409 - 419 - 430 - 441 - 453 - 464 - 476 - 489
Fixed costs - 375 - 440 - 490 - 562 - 658 - 758 - 845 - 896 - 955 -1 011 -1 069 -1 131 -1 197 -1 266 -1 340
EBITDA 51 57 122 610 1 234 1 653 1 809 2 095 2 321 2 394 2 469 2 546 2 627 2 710 2 796
EBIT 1 - 13 14 432 968 1 304 1 424 1 686 1 901 1 964 2 027 2 094 2 162 2 233 2 307
EBT - 13 - 36 - 9 409 945 1 281 1 402 1 665 1 879 1 942 2 006 2 072 2 141 2 212 2 285
Net income - 13 - 36 - 9 310 717 972 777 869 950 1 006 1 065 1 130 1 199 1 275 1 356
EBITDA margin 7% 6% 10% 31% 41% 42% 38% 38% 40% 40% 40% 39% 39% 39% 38%
EBIT margin 0% neg 1% 22% 32% 33% 30% 31% 33% 33% 33% 32% 32% 32% 32%
Net margin neg neg neg 16% 24% 25% 17% 16% 17% 17% 17% 17% 18% 18% 19%
* Non-recurring items and electricity trading activities excluded
Cash flow statement
Change in WC 31 - 8 - 5 - 37 - 38 - 8 - 37 - 35 - 12 - 10 - 11 - 11 - 12 - 12 - 13
OCF 60 59 120 475 969 1 337 1 148 1 266 1 381 1 450 1 519 1 595 1 676 1 763 1 856
Net capex - 126 - 279 -1 044 -2 327 -1 565 -1 220 - 924 - 258 - 276 - 273 - 278 - 287 - 297 - 307 - 317
Acquisitions/divestments 17 35 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 109 - 244 -1 044 -2 327 -1 565 -1 220 - 924 - 258 - 276 - 273 - 278 - 287 - 297 - 307 - 317
Equity raised/bought back 0 1 229 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 84 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 60 1 206 - 24 - 23 - 23 - 22 - 22 - 22 - 22 - 22 - 22 - 22 - 22 - 22 - 22
Net CF 11 1 021 - 948 -1 875 - 619 95 202 986 1 083 1 155 1 220 1 286 1 357 1 434 1 517
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 4.4 3.4 2.2 1.4 1.1 0.9 0.8 0.8 0.7 0.7 0.7 0.6 0.6 0.6
EV/EBITDA 75.2 35.3 7.1 3.5 2.6 2.4 2.1 1.9 1.8 1.8 1.7 1.6 1.6 1.5
P/E neg neg 16.6 7.2 5.3 6.6 5.9 5.4 5.1 4.8 4.6 4.3 4.0 3.8
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 6 237 6 280 6 287 6 863 7 970 8 917 9 756 9 829 9 849 9 854 9 854 9 854 9 854 9 854 9 854
Electricity sales, GWh 21 755 24 159 23 925 28 206 35 890 41 838 46 651 48 253 48 363 48 407 48 622 48 842 49 067 49 298 49 534
Load factor (electricity) 43% 47% 47% 50% 55% 57% 58% 59% 59% 59% 60% 60% 60% 61% 61%
Heat capacity, Gcal/h 13 624 14 754 14 924 15 103 15 494 15 979 16 674 16 719 16 719 16 719 16 719 16 719 16 719 16 719 16 719
Heat sales, thous. Gcal 24 931 25 397 26 022 26 920 28 622 29 949 31 698 32 186 32 411 32 639 32 868 33 100 33 334 33 571 33 810
Load factor (heat) 21% 20% 20% 20% 21% 21% 22% 22% 22% 22% 22% 23% 23% 23% 23%
Effective electricity price,
USD/MWh17 19 25 41 57 67 71 81 86 89 92 95 98 101 105
Fuel cost, USD/MWh 15 21 27 29 32 37 44 52 51 53 55 57 59 61 64
EBITDA/kW, USD 8 9 19 89 155 185 185 213 236 243 251 258 267 275 284
TGK-1
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 126/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 16 220 424 639 770 944 1 127 1 162 1 199 1 237 1 277 1 318 1 360
Tax on EBIT - 4 - 53 - 102 - 153 - 430 - 566 - 685 - 686 - 685 - 682 - 676 - 667 - 655
After tax EBIT 12 167 323 486 340 378 442 476 514 555 601 651 706
Depreciation 92 111 128 146 148 153 158 163 168 173 178 184 190
Capex - 129 - 127 - 117 - 118 - 119 - 118 - 121 - 125 - 130 - 135 - 140 - 145 - 150
Change in WC - 3 - 7 4 3 - 14 - 13 - 10 - 5 - 6 - 6 - 6 - 7 - 7
FCFF - 28 144 337 517 355 401 468 508 546 588 633 683 738
Discounted FCFF - 27 120 250 341 208 209 217 209 200 191 183 176 169
WACC 12.5%
Terminal growth 2.0%
NPV of cash flow 830
NPV of terminal value 3 402
Fair EV 4 231
Net debt 2007e 827
LT investments 22
Minority interest - 8
Fair MCap 5 073
FV of common share, USD 0.00132
Upside to FV -1%
12m TP, USD 0.00151
Upside to TP 13%
Dividend yield 0.0%
Expected total return over 12m 13%
Current price, USD 0.00134
Shares outstanding, mn 3 850 960
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 0.00191 0.00205 0.00223 0.00246 0.00276
11.5% 0.00159 0.00170 0.00183 0.00199 0.00220
12.5% 0.00133 0.00142 0.00151 0.00163 0.00178
13.5% 0.00112 0.00118 0.00126 0.00135 0.00145
14.5% 0.00094 0.00099 0.00105 0.00112 0.00120
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 993 1 081 1 188 1 325 1 504
11.5% 804 869 948 1 045 1 168
12.5% 650 699 758 829 916
13.5% 523 560 605 658 722
14.5% 416 445 480 520 567
Terminal growth
Electricity Heat Total USD/kW
Nevsky Thermal 223 1 250 1 473 525 - 110 1 363 486
Nevsky Hydro 414 n/a 414 656 196 610 967
Karelsky Thermal 83 90 173 613 - 25 148 525
Karelsky Hydro 666 n/a 666 1 051 3 669 1 055
Kolsky Hydro 1 604 n/a 1 604 1 007 66 1 670 1 048
Apatitsk CHP 40 93 133 413 0 133 413
Murmansk CHP - 1 138 137 11 455 20 158 13 154
TGK-1 total 3 029 1 572 4 601 733 150 4 751 757
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 127/183
TGK-2
Strengths Coal plants in European Russia
Foreign strategic investor
Weaknesses Below-average electricity load factor
Above-average effective fuel price
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
TGK-2 RTS Index RTS Electric Utilities Index
Branch Region
Installed electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation 2007,
GWh
Heat sales
2007,
k GCal
Vologda Vologda 40 602 128 980
Kostroma Kostroma 224 1 763 1 165 2 004
Novgorod Novgorod 190 630 802 1 064
Tver Tver 279 2 187 1 485 3 872
Yaroslavl Yaroslavl 801 4 147 2 761 5 757
Arkhangelsk Arkhangelsk 1 049 3 142 3 832 5 189
TGK-2 total 2 583 12 471 10 174 18 865
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Vologda new 95 MW CCGT 2010 95 90 gas 104 29
Kostroma expansion with 160 MW CCGT 2009 160 0 gas 174 14
Novgorod gas expansion with 160 MW CCGT 2010 160 90 gas 173 48
Novgorod coal expansion with 120 MW turbine 2010 120 52 coal 170 - 25
Tver gas expansion with 160 MW CCGT 2009 160 0 gas 172 13
Tver coal expansion with 115 MW turbine 2010 115 175 coal 162 - 34
Yaroslavl expansion with 160 MW CCGT 2010 160 0 gas 172 20
Gas62%
Coal13%
Fuel oil24%
Peat1%
Gas52%
Coal33%
Fuel oil4%
Peat11%
UES49%
Prosperity capital24%
Industrial investments
5%Municipal property
2%State1%
Other minorities
19%
RWE-Sintez consortium
43% Prosperity capital18%
Industrial investments
4%Municipal property
1%State1%
Other minorities
33%
TGK-2
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 128/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 400 474 989 1 487 1 591 1 559 1 528 1 526 1 523 1 519 1 515 1 510 1 505 1 500 1 494
Non-cash WC 49 92 87 83 85 65 70 78 81 85 89 93 97 102 107
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 304 390 785 896 1 139 1 355 1 565 1 827 2 113 2 404 2 702 3 006 3 317 3 634 3 957
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 115 144 257 642 507 239 3 - 252 - 538 - 830 -1 128 -1 433 -1 744 -2 062 -2 386
Other LT liabilities (+) or assets (-) 30 32 33 32 31 30 30 30 30 30 30 30 30 30 30
Income statement*
Revenues 346 745 858 1 037 1 351 1 451 1 564 1 751 1 827 1 904 1 992 2 085 2 183 2 286 2 394
Electricity 128 360 394 547 824 878 918 1 024 1 076 1 114 1 164 1 217 1 272 1 331 1 392
Heat 195 358 434 457 493 538 611 691 713 750 786 825 865 908 953
Other 23 27 30 32 33 34 35 37 39 40 42 44 45 47 49
Cost of sales - 345 - 656 - 822 - 839 - 999 -1 128 -1 245 -1 399 -1 442 -1 512 -1 592 -1 677 -1 767 -1 861 -1 961
Fuel costs - 191 - 469 - 598 - 572 - 670 - 763 - 866 -1 000 -1 019 -1 067 -1 123 -1 183 -1 246 -1 312 -1 382
D&A - 17 - 21 - 35 - 57 - 77 - 89 - 91 - 95 - 99 - 103 - 107 - 111 - 115 - 120 - 124
Fixed costs - 137 - 166 - 189 - 209 - 252 - 276 - 288 - 304 - 324 - 343 - 363 - 384 - 406 - 429 - 454
EBITDA 21 114 76 260 434 417 416 453 490 501 513 526 539 552 565
EBIT 4 92 41 203 357 328 324 358 391 398 407 415 424 432 440
EBT - 6 81 29 191 345 317 313 347 380 387 396 404 413 421 429
Net income - 6 62 22 145 263 241 238 264 289 294 301 307 314 320 326
EBITDA margin 6% 15% 9% 25% 32% 29% 27% 26% 27% 26% 26% 25% 25% 24% 24%
EBIT margin 1% 12% 5% 20% 26% 23% 21% 20% 21% 21% 20% 20% 19% 19% 18%
Net margin neg 8% 3% 14% 19% 17% 15% 15% 16% 15% 15% 15% 14% 14% 14%
Cash flow statement
Change in WC - 39 - 38 7 0 - 3 19 - 6 - 8 - 3 - 3 - 4 - 4 - 4 - 5 - 5
OCF - 25 56 76 215 347 360 334 361 395 404 414 425 435 446 457
Net capex - 31 - 65 - 532 - 606 - 212 - 88 - 90 - 93 - 96 - 99 - 102 - 106 - 110 - 114 - 118
Acquisitions/divestments 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 38 - 64 - 532 - 605 - 211 - 87 - 89 - 92 - 95 - 98 - 102 - 106 - 110 - 114 - 118
Equity raised/bought back 0 0 360 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 84 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 61 - 12 347 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12
Net CF - 2 - 20 - 109 - 403 124 261 233 258 289 294 301 308 314 321 327
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.7 1.5 1.2 0.9 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.5 0.5
EV/EBITDA 11.0 16.5 4.8 2.9 3.0 3.0 2.8 2.5 2.5 2.4 2.4 2.3 2.3 2.2
P/E 23.7 65.5 10.1 5.6 6.1 6.1 5.5 5.1 5.0 4.9 4.8 4.7 4.6 4.5
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 2 453 2 583 2 533 2 648 3 209 3 209 3 209 3 209 3 209 3 209 3 209 3 209 3 209 3 209 3 209
Electricity sales, GWh 8 359 8 710 8 635 9 708 12 617 12 471 12 175 12 210 12 261 12 309 12 462 12 618 12 777 12 940 13 106
Load factor (electricity) 46% 45% 46% 48% 50% 50% 49% 49% 49% 49% 50% 50% 51% 52% 52%
Heat capacity, Gcal/h 12 291 12 471 12 471 11 441 10 860 10 860 10 860 10 860 10 860 10 860 10 860 10 860 10 860 10 860 10 860
Heat sales, thous. Gcal 18 934 18 865 19 054 17 722 17 491 17 657 17 825 17 994 18 165 18 338 18 512 18 689 18 867 19 046 19 228
Load factor (heat) 18% 17% 17% 18% 18% 19% 19% 19% 19% 19% 19% 20% 20% 20% 20%
Effective electricity price,
USD/MWh15 41 46 56 65 70 75 84 88 91 93 96 100 103 106
Fuel cost, USD/MWh 23 54 69 59 53 61 71 82 83 87 90 94 97 101 105
EBITDA/kW, USD 9 44 30 98 135 130 130 141 153 156 160 164 168 172 176
TGK-2
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 129/183
DCF
12m target price, common
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 41 203 357 328 324 358 391 398 407 415 424 432 440
Tax on EBIT - 10 - 49 - 86 - 79 - 78 - 86 - 94 - 96 - 98 - 100 - 102 - 104 - 106
After tax EBIT 31 154 271 249 247 272 297 302 309 316 322 328 335
Depreciation 35 57 77 89 91 95 99 103 107 111 115 120 124
Capex - 532 - 606 - 212 - 88 - 90 - 93 - 96 - 99 - 102 - 106 - 110 - 114 - 118
Change in WC 7 0 - 3 19 - 6 - 8 - 3 - 3 - 4 - 4 - 4 - 5 - 5
FCFF - 459 - 394 133 269 242 266 297 303 309 316 323 329 336
Discounted FCFF - 433 - 334 101 184 148 146 146 134 123 112 103 94 86
WACC 11.4%
Terminal growth 2.0%
NPV of cash flow 611
NPV of terminal value 933
Fair EV 1 544
Net debt 2007e (adj. for SPO in 2008) 212
Minority interest 0
Fair MCap 1 755
Common Preferred
FV, USD 0.00120 0.000734
Upside to FV 20% 1%
12m TP, USD 0.00136 0.000832
Upside to TP 36% 15%
Dividend yield 0.01% 0.01%
Expected total return over 12m 36% 15%
Current price, USD 0.00100 0.000725
Shares outstanding, mn 1 455 996 16 501
Fair discount of preferred shares 39%
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.4% 0.00166 0.00178 0.00192 0.00211 0.00238
10.4% 0.00142 0.00150 0.00161 0.00174 0.00191
11.4% 0.00122 0.00128 0.00136 0.00145 0.00157
12.4% 0.00106 0.00110 0.00116 0.00123 0.00131
13.4% 0.00092 0.00096 0.00100 0.00105 0.00111
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.4% 835 899 981 1 088 1 234
10.4% 700 746 804 878 974
11.4% 589 624 666 718 784
12.4% 498 524 556 594 641
13.4% 421 442 465 494 528
Terminal growth
Electricity Heat Total USD/kW
Vologda 8 21 30 743 32 62 1 554
Kostroma 64 77 141 629 16 157 699
Novgorod 59 39 98 518 21 119 626
Tver 150 273 423 1 516 - 26 397 1 424
Yaroslavl 192 306 498 622 22 520 649
Arkhangelsk 217 242 459 438 0 459 438
TGK-2 total 690 959 1 649 639 65 1 714 664
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 130/183
Mosenergo (TGK-3)
Strengths Above-average electricity load factor
Below-average fuel burn rate
Favourable heat business regulation
Weaknesses Gazprom's corporate governance
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-40%
-30%
-20%
-10%
0%
10%
20%
Mosenergo RTS Index RTS Electric Utilities Index
Plant Region
Installed electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation 2007,
GWh
Heat sales
2007,
k GCal
GES-1 Moscow city 95 951 377 1 759
GRES-3 Moscow region 658 341 180 397
CHP-6 Moscow region 24 139 32 175
CHP-8 Moscow city 605 2 192 2 908 2 179
CHP-9 Moscow city 220 859 1 335 1 313
CHP-11 Moscow city 330 1 011 2 139 2 475
CHP-12 Moscow city 408 2 043 2 824 3 296
CHP-16 Moscow city 360 1 484 2 371 3 660
CHP-17 Moscow region 192 712 805 568
CHP-20 Moscow city 730 2 400 4 423 4 671
CHP-21 Moscow city 1 350 4 618 9 169 10 208
CHP-22 Moscow region 1 320 3 614 8 635 9 039
CHP-23 Moscow city 1 410 4 515 8 962 8 567
CHP-25 Moscow city 1 370 4 088 9 186 6 360
CHP-26 Moscow city 1 410 4 006 8 725 8 450
CHP-27 Moscow region 610 1 276 1 503 2 253
CHP-28 Moscow city 25 40 97 187
Mosenergo total 11 117 34 289 63 673 65 557
Plant Project
Completion
date
New electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial investment
outlay,
USD mn
NPV,
USD mn
CHP-9 new 61.5 MW CCGT 2009 61.5 0 gas 61
CHP-12 new 540 MW CCGT 2010 540 0 gas 533
CHP-16 new 420 MW CCGT 2010 420 0 gas 414
CHP-20 new 420 MW CCGT 2010 420 0 gas 414
CHP-21 new 450 MW CCGT 2008 450 0 gas 444
CHP-25 new 420 MW CCGT 2011 420 0 gas 414
CHP-26 new 420 MW CCGT 2009 420 0 gas 414
CHP-27 2 new 450 MW CCGTs 2011 900 0 gas 888
- 79
Gas98.2%
Coal1.4%
Fuel oil
0.4%
Fuel mix, 2007e
Gas98.5%
Coal1.2%
Fuel oil
0.3%
Fuel mix, 2011e
UES36%
Gazprom50%City of
Moscow5%
Other minorities
9%
Ownership structure, 2007e
Gazprom53%
City of Moscow
27%
Other minorities
20%
Ownership structure, 2008e
Mosenergo (TGK-3)
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 131/183
Financials
Financial ratios
Operational data
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 2 266 5 496 6 154 6 450 7 188 8 127 8 164 8 039 7 912 7 781 7 651 7 523 7 396 7 272 7 148
Non-cash WC 17 477 87 147 215 298 365 426 448 465 488 512 537 564 592
LT investments 13 51 52 50 49 48 47 47 47 47 47 47 47 47 47
Equity 1 485 5 525 5 959 6 386 7 052 7 656 8 516 9 716 11 224 12 783 14 414 16 120 17 907 19 776 21 734
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 581 - 195 - 378 - 422 - 270 161 - 583 -1 847 -3 461 -5 134 -6 872 -8 683 -10 570 -12 538 -14 591
Other LT liabilities (+) or assets (-) 231 695 711 683 669 657 644 644 644 644 644 644 644 644 644
Income statement*Revenues 2 462 2 945 4 075 5 263 6 051 6 952 8 476 9 853 10 348 10 751 11 273 11 826 12 406 13 017 13 660
Electricity 1 126 1 418 2 024 2 795 3 227 3 754 4 723 5 519 5 943 6 149 6 483 6 839 7 214 7 611 8 030
Heat 1 165 1 320 1 814 2 216 2 565 2 929 3 475 4 043 4 101 4 285 4 460 4 644 4 835 5 035 5 243
Other 171 208 237 252 260 269 278 291 304 317 329 343 357 371 386
Cost of sales -2 256 -2 762 -3 516 -4 205 -4 831 -5 799 -6 966 -8 076 -8 155 -8 484 -8 904 -9 349 -9 817 -10 309 -10 827
Fuel costs -1 225 -1 442 -2 052 -2 596 -3 072 -3 855 -4 864 -5 862 -5 814 -6 021 -6 313 -6 623 -6 948 -7 289 -7 647
D&A - 140 - 266 - 309 - 348 - 388 - 446 - 481 - 502 - 518 - 533 - 550 - 567 - 585 - 604 - 623
Fixed costs - 890 -1 055 -1 155 -1 261 -1 371 -1 497 -1 621 -1 712 -1 823 -1 929 -2 041 -2 159 -2 284 -2 417 -2 557
EBITDA 217 341 745 1 275 1 473 1 460 1 847 2 128 2 552 2 636 2 748 2 865 2 989 3 119 3 255
EBIT 77 75 436 927 1 084 1 013 1 366 1 626 2 034 2 102 2 198 2 298 2 404 2 515 2 632
EBT 64 118 402 893 1 052 981 1 334 1 594 2 003 2 071 2 167 2 267 2 373 2 484 2 600
Net income 48 90 305 679 799 746 1 014 1 212 1 522 1 574 1 647 1 723 1 803 1 888 1 976
EBITDA margin 9% 12% 18% 24% 24% 21% 22% 22% 25% 25% 24% 24% 24% 24% 24%
EBIT margin 3% 3% 11% 18% 18% 15% 16% 16% 20% 20% 19% 19% 19% 19% 19%
Net margin 2% 3% 7% 13% 13% 11% 12% 12% 15% 15% 15% 15% 15% 15% 14%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC 18 - 161 397 - 65 - 71 - 88 - 74 - 61 - 22 - 18 - 23 - 24 - 26 - 27 - 28
OCF 253 122 1 045 995 1 149 1 136 1 453 1 684 2 050 2 121 2 205 2 297 2 394 2 496 2 603
Net capex - 487 -1 388 - 835 - 901 -1 261 -1 534 - 673 - 377 - 389 - 401 - 419 - 438 - 457 - 478 - 499
Acquisitions/divestments - 22 - 902 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 508 -2 262 - 804 - 870 -1 231 -1 505 - 644 - 348 - 360 - 372 - 390 - 409 - 428 - 449 - 470
Equity raised/bought back 0 2 374 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 417 - 133 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 391 2 198 - 65 - 65 - 63 - 62 - 60 - 60 - 60 - 60 - 60 - 60 - 60 - 60 - 60
Net CF 135 58 176 61 - 145 - 430 748 1 276 1 629 1 688 1 754 1 828 1 905 1 987 2 072
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 2.3 1.7 1.3 1.1 1.0 0.8 0.7 0.7 0.6 0.6 0.6 0.6 0.5 0.5
EV/EBITDA 20.1 9.2 5.4 4.6 4.7 3.7 3.2 2.7 2.6 2.5 2.4 2.3 2.2 2.1
P/E 78.6 23.0 10.4 8.8 9.4 6.9 5.8 4.6 4.5 4.3 4.1 3.9 3.7 3.6
2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 10 677 11 117 11 567 12 079 12 619 13 459 14 749 14 749 14 749 14 749 14 749 14 749 14 749 14 749 14 749
Electricity sales, GWh 58 600 58 084 62 543 65 286 62 917 66 080 70 188 70 193 70 418 70 590 72 188 73 824 75 500 77 216 78 973
Load factor (electricity) 69% 65% 68% 68% 62% 61% 59% 59% 59% 59% 61% 62% 63% 65% 66%
Heat capacity, Gcal/h 34 174 34 289 34 297 34 297 34 297 34 297 34 297 34 297 34 297 34 297 34 297 34 297 34 297 34 297 34 297
Heat sales, thous. Gcal 70 181 65 557 71 850 72 569 73 294 74 027 74 768 75 515 76 270 77 033 77 803 78 581 79 367 80 161 80 963
Load factor (heat) 23% 22% 24% 24% 24% 25% 25% 25% 25% 26% 26% 26% 26% 27% 27%
Effective electricity price,
USD/MWh19 24 32 43 51 57 67 79 84 87 90 93 96 99 102
Fuel cost, USD/MWh 21 25 33 40 49 58 69 84 83 85 87 90 92 94 97
EBITDA/kW, USD 20 31 64 106 117 108 125 144 173 179 186 194 203 211 221
Mosenergo (TGK-3)
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 132/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 436 927 1 084 1 013 1 366 1 626 2 034 2 102 2 198 2 298 2 404 2 515 2 632
Tax on EBIT - 105 - 222 - 260 - 243 - 328 - 390 - 488 - 505 - 528 - 552 - 577 - 604 - 632
After tax EBIT 331 705 824 770 1 038 1 235 1 546 1 598 1 670 1 747 1 827 1 911 2 000
Depreciation 309 348 388 446 481 502 518 533 550 567 585 604 623
Capex - 835 - 901 -1 261 -1 534 - 673 - 377 - 389 - 401 - 419 - 438 - 457 - 478 - 499
Change in WC 397 - 65 - 71 - 88 - 74 - 61 - 22 - 18 - 23 - 24 - 26 - 27 - 28
FCFF 202 86 - 120 - 406 772 1 300 1 653 1 712 1 778 1 852 1 929 2 011 2 096
Discounted FCFF 189 72 - 88 - 264 446 665 750 688 633 585 540 499 460
WACC 12.8%
Terminal growth 2.0%
NPV of cash flow 5 178
NPV of terminal value 4 336
Fair EV 9 515
Net debt 2007 195
Minority interest 0
Fair MCap 9 710
FV of common share, USD 0.244
Upside to FV 38%
12m TP, USD 0.278
Upside to TP 57%
Dividend yield 2.3%
Expected total return over 12m 60%
Current price, USD 0.177
Shares outstanding, mn 39 749
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 0.331 0.349 0.370 0.397 0.431
11.8% 0.290 0.303 0.319 0.338 0.363
12.8% 0.257 0.266 0.278 0.292 0.310
13.8% 0.228 0.236 0.245 0.256 0.268
14.8% 0.204 0.210 0.217 0.225 0.235
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 1 151 1 212 1 286 1 380 1 501
11.8% 1 008 1 053 1 108 1 176 1 260
12.8% 890 925 966 1 015 1 076
13.8% 791 818 849 886 931
14.8% 707 728 753 781 814
Terminal growth
Electricity Heat Total USD/kW
All plants 5 185 5 646 10 831 973 - 89 10 742 965
Mosenergo 5 185 5 646 10 831 973 - 89 10 742 965
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 133/183
TGK-4
Weaknesses Below-average electricity load factor
Above-average fuel burn rate
Above-average effective fuel price
6-month performance, common
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-4 common RTS Index
RTS Electric Utilities Index
Branch Region
Installed electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation 2007,
GWh
Heat sales
2007,
k GCal
Belgorod Belgorod 142 2 552 664 3 452
Bryansk Bryansk 50 236 158 290
Voronezh Voronezh 180 2 274 894 3 930
Kaluga Kaluga 12 70 24 30
Kursk Kursk 197 2 336 873 2 600
Lipetsk Lipetsk 543 3 103 1 871 4 307
Orel Orel 342 1 129 1 362 1 620
Ryazan Ryazan 100 416 492 575
Smolensk Smolensk 403 1 497 1 851 2 140
Tambov Tambov 315 1 139 1 123 1 413
Tula Tula 1 028 2 984 3 423 5 640
TGK-4 total 3 312 17 735 12 737 25 997
Branch Project*
Completion
date
New electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial investment
outlay,
USD mn
NPV,
USD mn
Belgorod 69 MW CCGT and 70 MW CCGT 2010 136 0 gas 216 - 57
Bryansk 90 MW CCGT 2010 90 0 gas 97 - 4
Voronezh 2x45 MW and 25 MW CCGTs 2009 115 0 gas 122 30
Kaluga 34.5 MW CCGT 2008 34.5 0 gas 36 - 1
Kursk 31.5 MW CCGT and 2 new 45+25 MW turbines 2009 146.5 0 gas 156 23
Lipetsk 52 and 320 MW CCGTs 2010 372 0 gas 458 - 36
Orel 31.5 MW CCGT 2009 31.5 0 gas 33 8
Ryazan 160 MW CCGT 2010 160 0 gas 174 2
Tula 225 MW turbine 2010 225 0 gas 244 - 26
* All projects imply reconstruction/expansion of existing capacity
Gas98%
Coal1%
Fuel oil1%
Gas98%
Coal1%
Fuel oil1%
UES47%
Archivo Ltd.14%
Immenso Enterprises
Ltd.
7%
Other minorities
32%
Onexim Holdings
Ltd.
52%
Archivo Ltd.10%
Immenso Enterprises
Ltd.
5%
Other minorities
33%
TGK-4
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 134/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 961 1 294 1 951 2 376 2 532 2 457 2 383 2 354 2 325 2 294 2 264 2 233 2 202 2 170 2 139
Non-cash WC 93 97 104 114 125 100 112 130 136 141 148 155 162 170 178
LT investments 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Equity 770 842 1 516 1 577 1 826 2 047 2 272 2 580 2 961 3 355 3 765 4 193 4 639 5 104 5 590
Minority interest 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Net debt (+) or cash (-) 201 460 447 826 745 426 141 - 178 - 583 -1 002 -1 436 -1 888 -2 358 -2 847 -3 355
Other LT liabilities (+) or assets (-) 83 89 91 87 85 84 82 82 82 82 82 82 82 82 82
Income statement*
Revenues 660 787 1 027 1 429 1 997 2 243 2 518 2 925 3 043 3 161 3 310 3 466 3 631 3 803 3 984
Electricity 311 353 486 729 1 154 1 253 1 352 1 571 1 669 1 726 1 814 1 907 2 006 2 110 2 219
Heat 322 403 505 663 804 949 1 124 1 310 1 328 1 388 1 446 1 508 1 571 1 638 1 707
Other 27 31 35 38 39 40 42 44 46 47 49 51 53 56 58
Cost of sales - 617 - 752 - 992 -1 251 -1 612 -1 889 -2 156 -2 502 -2 525 -2 626 -2 753 -2 887 -3 027 -3 175 -3 330
Fuel costs - 372 - 460 - 635 - 815 -1 075 -1 291 -1 537 -1 852 -1 837 -1 902 -1 991 -2 084 -2 182 -2 285 -2 393
D&A - 28 - 39 - 63 - 93 - 120 - 141 - 143 - 148 - 153 - 158 - 163 - 168 - 174 - 180 - 186
Fixed costs - 217 - 253 - 293 - 343 - 418 - 457 - 476 - 503 - 535 - 566 - 599 - 634 - 671 - 710 - 751
EBITDA 75 78 103 277 511 501 511 577 677 699 727 755 785 816 849
EBIT 47 39 40 184 391 359 368 429 524 542 564 587 611 637 663
EBT 34 20 20 164 371 340 350 410 506 523 545 568 593 618 644
Net income 25 15 15 125 282 259 266 312 384 397 414 432 450 470 490
EBITDA margin 11% 10% 10% 19% 26% 22% 20% 20% 22% 22% 22% 22% 22% 21% 21%
EBIT margin 7% 5% 4% 13% 20% 16% 15% 15% 17% 17% 17% 17% 17% 17% 17%
Net margin 4% 2% 1% 9% 14% 12% 11% 11% 13% 13% 13% 12% 12% 12% 12%
Cash flow statement
Change in WC - 42 3 - 5 - 15 - 13 23 - 14 - 18 - 5 - 5 - 7 - 7 - 7 - 8 - 8
OCF 14 76 94 223 408 442 413 460 550 568 589 612 635 660 686
Net capex - 89 - 292 - 683 - 607 - 324 - 115 - 116 - 119 - 123 - 127 - 132 - 137 - 142 - 148 - 154
Acquisitions/divestments 12 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 77 - 292 - 683 - 607 - 324 - 115 - 115 - 119 - 123 - 127 - 132 - 137 - 142 - 148 - 154
Equity raised/bought back 0 0 632 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 77 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 60 - 19 612 - 20 - 20 - 19 - 19 - 19 - 19 - 19 - 19 - 19 - 19 - 19 - 19
Net CF - 3 - 235 23 - 404 65 308 279 322 409 423 439 456 474 493 513
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 2.4 1.8 1.3 0.9 0.8 0.7 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.5
EV/EBITDA 24.1 18.3 6.8 3.7 3.8 3.7 3.3 2.8 2.7 2.6 2.5 2.4 2.3 2.2
P/E 137.2 136.5 16.4 7.2 7.9 7.7 6.6 5.3 5.1 4.9 4.7 4.5 4.4 4.2
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 3 312 3 312 3 430 3 757 4 622 4 622 4 622 4 622 4 622 4 622 4 622 4 622 4 622 4 622 4 622
Electricity sales, GWh 11 337 11 074 12 163 14 217 18 837 18 372 17 518 17 519 17 562 17 595 17 900 18 213 18 533 18 861 19 197
Load factor (electricity) 45% 44% 46% 49% 51% 50% 48% 48% 48% 48% 49% 50% 51% 51% 52%
Heat capacity, Gcal/h 17 660 17 735 17 735 17 735 17 735 17 735 17 735 17 735 17 735 17 735 17 735 17 735 17 735 17 735 17 735
Heat sales, thous. Gcal 25 500 25 997 26 256 26 517 26 781 27 048 27 317 27 589 27 863 28 140 28 420 28 703 28 989 29 278 29 569
Load factor (heat) 16% 17% 17% 17% 17% 17% 18% 18% 18% 18% 18% 18% 19% 19% 19%
Total effective electricity
price, USD/MWh27 32 40 51 61 68 77 90 95 98 101 105 108 112 116
Fuel cost, USD/MWh 33 42 52 57 57 70 88 106 105 108 111 114 118 121 125
EBITDA/kW, USD 23 24 30 74 110 108 111 125 146 151 157 163 170 177 184
TGK-4
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 135/183
DCF
12m target price, common
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 40 184 391 359 368 429 524 542 564 587 611 637 663
Tax on EBIT - 10 - 44 - 94 - 86 - 88 - 103 - 126 - 130 - 135 - 141 - 147 - 153 - 159
After tax EBIT 30 140 297 273 280 326 398 412 429 446 465 484 504
Depreciation 63 93 120 141 143 148 153 158 163 168 174 180 186
Capex - 683 - 607 - 324 - 115 - 116 - 119 - 123 - 127 - 132 - 137 - 142 - 148 - 154
Change in WC - 5 - 15 - 13 23 - 14 - 18 - 5 - 5 - 7 - 7 - 7 - 8 - 8
FCFF - 594 - 389 80 323 293 336 423 437 453 470 489 508 527
Discounted FCFF - 559 - 328 60 217 177 181 204 189 175 162 151 140 130
WACC 11.8%
Terminal growth 2.0%
NPV of cash flow 901
NPV of terminal value 1 359
Fair EV 2 259
Net debt 2007e (adj. for SPO in 2008) 165
Minority interest 0
Fair MCap 2 424
Common Preferred
FV, USD 0.00125 0.000623
Upside to FV, USD 19% 12%
12m TP, USD 0.00142 0.000707
Upside to TP 35% 27%
Dividend yield 0.1% 0.5%
Expected total return over 12m 35% 28%
Current price, USD 0.00105 0.000555
Shares outstanding, mn 1 907 202 75 273
Fair discount of preferred shares 50%
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.00175 0.00187 0.00202 0.00222 0.00249
10.8% 0.00149 0.00158 0.00169 0.00182 0.00200
11.8% 0.00127 0.00134 0.00142 0.00152 0.00164
12.8% 0.00110 0.00115 0.00121 0.00128 0.00137
13.8% 0.00095 0.00099 0.00103 0.00109 0.00115
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 951 1 022 1 110 1 225 1 379
10.8% 800 852 915 995 1 099
11.8% 677 716 763 820 892
12.8% 575 605 640 682 733
13.8% 490 513 539 571 609
Terminal growth
Electricity Heat Total USD/kW
Belgorod 110 252 363 2 553 - 64 299 2 103
Bryansk 10 14 24 473 - 5 19 379
Voronezh 54 229 283 1 574 33 317 1 760
Kaluga - 13 1 - 12 - 975 - 1 - 13 -1 056
Kursk 29 165 194 986 26 220 1 116
Lipetsk 180 261 441 812 - 40 401 738
Orel 115 74 189 554 9 199 582
Ryazan 42 29 71 715 2 74 736
Smolensk 168 113 280 695 0 280 695
Tambov 83 80 163 517 0 163 517
Tula 345 253 598 582 - 29 570 554
TGK-4 total 1 123 1 472 2 595 784 - 68 2 527 763
Branch
12m target EV, USD mn
Existing assets New
project Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 136/183
TGK-5
Strengths Coal power plants in European Russia
Below-average fuel burn rate
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-5 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity
2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Kirov Kirov 940 3 369 4 565 6 930
Mariy-El Mariy-El 195 660 1 025 970
Udmurtia Udmurtia 480 2 374 2 708 4 386
Chuvashia Chuvashia 852 2 637 2 725 4 386
TGK-5 total 2 467 9 040 11 023 16 672
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Kirov reconstruction with 70 MW and 140 MW CCGTs 2010 212 168 gas 227 44
Udmurtia reconstruction with 144 MW CCGT 2010 144 116 gas 156 36
Gas89%
Coal7%
Fuel oil1%
Peat3%
Gas69%
Coal23%Fuel oil
1%
Peat7%
UES65%
IES20%
Other minorities
15%
IES46% Russian
Federation25%
Gazprom5%
Other minorities
24%
TGK-5
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 137/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 405 477 692 857 897 887 876 881 886 890 894 898 903 908 913
Non-cash WC 55 60 58 58 62 51 55 64 69 72 76 80 84 89 94
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 395 891 887 877 988 1 109 1 243 1 434 1 670 1 913 2 166 2 430 2 706 2 994 3 294
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 28 - 394 - 178 - 2 - 68 - 209 - 349 - 526 - 752 - 988 -1 234 -1 489 -1 756 -2 034 -2 325
Other LT liabilities (+) or assets (-) 37 40 41 39 39 38 37 37 37 37 37 37 37 37 37
Income statement*
Revenues 416 515 602 752 1 023 1 135 1 239 1 435 1 552 1 625 1 708 1 797 1 890 1 989 2 102
Electricity 228 257 336 406 589 625 665 780 860 894 946 1 001 1 059 1 121 1 191
Heat 161 226 230 308 395 469 532 612 646 683 713 745 777 812 853
Other 27 31 36 38 39 40 42 44 46 47 49 51 53 56 58
Cost of sales - 407 - 505 - 632 - 717 - 852 - 949 -1 033 -1 183 -1 238 -1 303 -1 373 -1 447 -1 525 -1 608 -1 704
Fuel costs - 221 - 289 - 384 - 433 - 514 - 577 - 646 - 775 - 806 - 846 - 891 - 938 - 988 -1 040 -1 105
D&A - 14 - 19 - 29 - 42 - 54 - 64 - 66 - 69 - 72 - 75 - 78 - 81 - 85 - 89 - 92
Fixed costs - 173 - 196 - 219 - 242 - 284 - 309 - 321 - 339 - 361 - 382 - 404 - 428 - 452 - 479 - 506
EBITDA 24 32 1 79 227 253 275 325 389 400 417 435 454 474 495
EBIT 11 12 - 28 37 174 189 209 256 317 326 339 354 369 385 402
EBT 10 9 - 31 34 171 186 206 253 314 323 336 351 366 382 399
Net income 7 7 - 31 26 130 141 157 192 239 245 256 267 278 290 303
EBITDA margin 6% 6% 0% 11% 22% 22% 22% 23% 25% 25% 24% 24% 24% 24% 24%
EBIT margin 3% 2% neg 5% 17% 17% 17% 18% 20% 20% 20% 20% 20% 19% 19%
Net margin 2% 1% neg 3% 13% 12% 13% 13% 15% 15% 15% 15% 15% 15% 14%
Cash flow statement
Change in WC - 10 - 1 3 - 2 - 6 11 - 6 - 9 - 5 - 3 - 4 - 4 - 4 - 4 - 5
OCF 8 29 12 69 181 219 220 255 308 320 333 347 362 377 394
Net capex - 19 - 60 - 231 - 238 - 111 - 72 - 72 - 74 - 76 - 79 - 82 - 86 - 90 - 93 - 98
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 19 - 60 - 231 - 238 - 111 - 72 - 72 - 74 - 76 - 79 - 82 - 86 - 90 - 93 - 98
Equity raised/bought back 0 441 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 17 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 10 438 - 3 - 3 - 3 - 3 - 3 - 3 - 3 - 3 - 3 - 3 - 3 - 3 - 3
Net CF - 1 407 - 222 - 172 67 144 145 178 229 238 248 258 269 281 293
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.1 0.9 0.7 0.5 0.5 0.5 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3
EV/EBITDA 17.7 420.9 7.0 2.5 2.2 2.0 1.7 1.4 1.4 1.3 1.3 1.2 1.2 1.1
P/E 134.3 neg 36.7 7.4 6.8 6.1 5.0 4.0 3.9 3.7 3.6 3.4 3.3 3.1
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 2 467 2 467 2 467 2 467 2 803 2 803 2 803 2 803 2 803 2 803 2 803 2 803 2 803 2 803 2 803
Electricity sales, GWh 9 179 9 705 9 927 9 817 11 099 10 697 9 957 9 958 9 995 10 023 10 287 10 558 10 835 11 118 11 408
Load factor (electricity) 48% 51% 52% 52% 51% 49% 45% 45% 45% 46% 47% 48% 49% 51% 52%
Heat capacity, Gcal/h 9 040 9 040 9 040 9 040 9 324 9 324 9 324 9 324 9 324 9 324 9 324 9 324 9 324 9 324 9 324
Heat sales, thous. Gcal 16 507 16 672 16 839 17 007 17 799 17 971 18 144 18 320 18 497 18 675 18 856 19 038 19 222 19 408 19 596
Load factor (heat) 21% 21% 21% 21% 22% 22% 22% 22% 23% 23% 23% 23% 24% 24% 24%
Effective electricity price,
USD/MWh25 26 34 41 53 58 67 78 86 89 92 95 98 101 104
Fuel cost, USD/MWh 24 30 39 44 46 54 65 78 81 84 87 89 91 94 97
EBITDA/kW, USD 10 13 1 32 81 90 98 116 139 143 149 155 162 169 176
TGK-5
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 138/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT - 28 37 174 189 209 256 317 326 339 354 369 385 402
Tax on EBIT 7 - 9 - 42 - 45 - 50 - 61 - 76 - 78 - 81 - 85 - 89 - 92 - 97
After tax EBIT - 21 28 132 143 159 194 241 247 258 269 280 293 306
Depreciation 29 42 54 64 66 69 72 75 78 81 85 89 92
Capex - 231 - 238 - 111 - 72 - 72 - 74 - 76 - 79 - 82 - 86 - 90 - 93 - 98
Change in WC 3 - 2 - 6 11 - 6 - 9 - 5 - 3 - 4 - 4 - 4 - 4 - 5
FCFF - 220 - 170 69 146 148 180 231 240 250 261 272 283 295
Discounted FCFF - 207 - 143 52 99 89 97 111 104 96 90 84 78 73
WACC 11.8%
Terminal growth 2.0%
NPV of cash flow 624
NPV of terminal value 761
Fair EV 1 384
Net debt 2007e 394
Minority interest 0
Fair MCap 1 778
FV of common share, USD 0.00145
Upside to FV 87%
12m TP, USD 0.00165
Upside to TP 112%
Dividend yield 0.0%
Expected total return over 12m 112%
Current price, USD 0.000775
Shares outstanding, mn 1 230 254
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.00194 0.00204 0.00218 0.00236 0.00259
10.8% 0.00170 0.00178 0.00188 0.00200 0.00216
11.8% 0.00152 0.00157 0.00165 0.00173 0.00184
12.8% 0.00136 0.00140 0.00146 0.00152 0.00160
13.8% 0.00123 0.00126 0.00130 0.00135 0.00141
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 768 821 888 974 1 090
10.8% 655 694 742 802 880
11.8% 563 592 627 670 724
12.8% 487 509 535 567 605
13.8% 423 440 460 483 512
Terminal growth
Electricity Heat Total USD/kW
Kirov 394 197 592 629 49 641 681
Mariy-El 83 32 115 590 0 115 590
Udmurtia 220 119 339 706 40 379 789
Chuvashia 255 159 414 486 0 414 486
TGK-5 total 952 508 1 460 592 89 1 548 628
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 139/183
TGK-6
Weaknesses Below-average electricity load factor
Above-average effective fuel price
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-6 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity,
MW
Installed heat
capacity,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Ivanovo Ivanovo 523 2 213 1 888 2 506
Vladimir Vladimir 407 1 161 2 087 2 047
Nizhny Novgorod Nizhny Novgorod 789 2 154 2 838 3 778
Mordovia Mordovia 349 1 190 1 510 2 175
Penza Penza 405 2 136 1 673 3 698
Dzerzhinsk Nizhny Novgorod 667 1 971 2 502 2 607
TGK-6 total 3 140 10 824 12 499 16 811
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Ivanovo reconstruction 2007 19 0 gas 20 18
Nizhny Novgorod3 new 325 MW CCGT power plant and
reconstruction of old capacity2010 985 1 129 gas 1 171 - 60
Dzerzhinsk reconstruction 2010 135 358 gas 148 31
Gas95%
Coal3%
Fuel oil2%
Gas95%
Coal3%
Fuel oil2%
UES50%
Archivo Ltd.
19%
IES19%
Other minorities
12%
Archivo Ltd.
19%
IES and affiliated
64%
Other minorities
17%
TGK-6
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 140/183
Financials
Financial ratios
Operational data
USD mn 2006e 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 459 536 626 839 1 062 1 264 1 443 1 652 1 858 1 862 1 865 1 869 1 873 1 877 1 880
Non-cash WC 15 21 29 37 46 67 76 97 102 114 120 126 132 138 145
LT investments 162 173 177 170 167 164 161 161 161 161 161 161 161 161 161
Equity 604 631 1 189 1 149 1 160 1 270 1 405 1 635 1 924 2 257 2 604 2 966 3 342 3 733 4 141
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 104 177 - 278 - 27 189 297 346 347 268 - 49 - 387 - 738 -1 105 -1 486 -1 884
Other LT liabilities (+) or assets (-) - 72 - 78 - 79 - 76 - 75 - 73 - 72 - 72 - 72 - 72 - 72 - 72 - 72 - 72 - 72
Income statement
Revenues 548 651 830 1 000 1 118 1 496 1 704 2 170 2 285 2 566 2 688 2 817 2 953 3 096 3 246
Electricity 295 339 441 518 552 836 928 1 247 1 341 1 552 1 633 1 718 1 808 1 902 2 002
Heat 224 280 351 442 525 617 732 877 895 964 1 004 1 046 1 089 1 135 1 182
Other 29 33 37 40 41 42 44 46 48 50 52 54 56 59 61
Cost of sales - 559 - 637 - 833 - 950 -1 032 -1 277 -1 450 -1 822 -1 855 -2 076 -2 179 -2 287 -2 402 -2 522 -2 649
Fuel costs - 344 - 396 - 556 - 635 - 684 - 876 -1 025 -1 343 -1 339 -1 502 -1 573 -1 648 -1 727 -1 810 -1 897
D&A - 39 - 41 - 46 - 52 - 58 - 62 - 72 - 83 - 95 - 103 - 108 - 112 - 117 - 122 - 127
Fixed costs - 177 - 200 - 231 - 263 - 290 - 339 - 353 - 395 - 421 - 471 - 498 - 527 - 558 - 590 - 624
EBITDA 7 31 15 73 114 249 294 398 490 557 580 603 627 653 680
EBIT - 32 - 10 - 30 21 56 187 222 315 395 454 472 491 510 531 553
EBT - 39 - 21 - 42 10 45 176 211 305 384 443 461 480 500 520 542
Net income - 39 - 21 - 42 8 34 134 160 231 292 337 350 365 380 395 412
EBITDA margin 1% 5% 2% 7% 10% 17% 17% 18% 21% 22% 22% 21% 21% 21% 21%
EBIT margin neg neg neg 2% 5% 13% 13% 15% 17% 18% 18% 17% 17% 17% 17%
Net margin neg neg neg 1% 3% 9% 9% 11% 13% 13% 13% 13% 13% 13% 13%
Cash flow statement
Change in WC - 4 - 4 - 7 - 10 - 10 - 22 - 11 - 21 - 5 - 13 - 5 - 6 - 6 - 6 - 7
OCF 26 32 18 61 93 185 232 304 393 438 463 482 501 522 543
Net capex - 22 - 84 - 122 - 294 - 300 - 287 - 277 - 294 - 303 - 107 - 112 - 116 - 121 - 126 - 131
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 5 - 83 - 120 - 293 - 299 - 285 - 275 - 293 - 302 - 106 - 110 - 115 - 120 - 125 - 130
Equity raised/bought back 0 0 569 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 30 - 12 557 - 13 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12
Net CF - 9 - 63 454 - 245 - 218 - 113 - 55 0 79 320 341 355 370 385 401
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.5 1.2 1.0 0.9 0.6 0.6 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3
EV/EBITDA 31.3 62.7 13.3 8.5 3.9 3.3 2.4 2.0 1.7 1.7 1.6 1.5 1.5 1.4
P/E neg neg 178.7 40.0 10.1 8.5 5.9 4.7 4.0 3.9 3.7 3.6 3.4 3.3
2006e 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 3 140 3 140 3 159 3 169 3 169 3 542 3 542 3 867 3 867 4 192 4 192 4 192 4 192 4 192 4 192
Electricity sales, GWh 11 779 10 983 11 526 11 466 10 322 12 660 11 823 13 988 14 030 16 226 16 524 16 830 17 142 17 463 17 791
Load factor (electricity) 48% 45% 47% 46% 42% 45% 42% 45% 45% 48% 49% 50% 51% 52% 53%
Heat capacity, Gcal/h 11 184 10 824 11 120 11 360 11 360 11 583 11 583 11 879 11 879 12 175 12 175 12 175 12 175 12 175 12 175
Heat sales, thous.Gcal 18 004 16 811 17 543 18 244 18 421 19 438 19 613 20 439 20 617 21 446 21 628 21 811 21 997 22 184 22 374
Load factor (heat) 18% 18% 18% 18% 19% 19% 19% 20% 20% 20% 20% 20% 21% 21% 21%
Effective electricity price,
USD/MWh25 31 38 45 53 66 79 89 96 96 99 102 105 109 113
Fuel cost, USD/MWh 29 36 48 55 66 69 87 96 95 93 95 98 101 104 107
EBITDA/kW, USD 2 10 5 23 36 70 83 103 127 133 138 144 150 156 162
TGK-6
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 141/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT - 30 21 56 187 222 315 395 454 472 491 510 531 553
Tax on EBIT 7 - 5 - 13 - 45 - 53 - 76 - 95 - 109 - 113 - 118 - 122 - 127 - 133
After tax EBIT - 23 16 42 142 169 240 300 345 359 373 388 404 420
Depreciation 46 52 58 62 72 83 95 103 108 112 117 122 127
Capex - 122 - 294 - 300 - 287 - 277 - 294 - 303 - 107 - 112 - 116 - 121 - 126 - 131
Change in WC - 7 - 10 - 10 - 22 - 11 - 21 - 5 - 13 - 5 - 6 - 6 - 6 - 7
FCFF - 107 - 236 - 209 - 105 - 47 8 87 328 349 363 378 393 409
Discounted FCFF - 100 - 199 - 158 - 70 - 28 4 42 142 135 125 117 109 101
WACC 11.8%
Terminal growth 2.0%
NPV of cash flow 219
NPV of terminal value 1 055
Fair EV 1 274
Net debt 2007e (adj. for SPO in 2008) 386
Minority interest 0
Fair MCap 1 660
FV of common share, USD 0.00089
Upside to FV 22%
12m TP, USD 0.00102
Upside to TP 39%
Dividend yield 0.0%
Expected total return over 12m 39%
Current price, USD 0.000730
Shares outstanding, mn 1 859 537
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.00124 0.00134 0.00147 0.00163 0.00185
10.8% 0.00105 0.00112 0.00121 0.00133 0.00147
11.8% 0.00090 0.00095 0.00102 0.00110 0.00120
12.8% 0.00077 0.00081 0.00086 0.00092 0.00099
13.8% 0.00067 0.00070 0.00074 0.00078 0.00084
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 585 643 715 809 936
10.8% 473 516 568 633 718
11.8% 384 415 454 501 559
12.8% 311 335 364 398 440
13.8% 251 270 291 317 348
Terminal growth
Electricity Heat Total USD/kW
Ivanovo 66 100 166 318 20 187 357
Vladimir 183 69 252 619 0 252 619
Nizhny Novgorod 202 177 379 480 - 67 311 394
Mordovia 103 81 184 527 0 184 527
Penza 104 138 242 597 0 242 597
Dzerzhinsk 149 67 216 324 35 251 376
TGK-6 total 807 631 1 438 458 - 12 1 426 454
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 142/183
TGK-7
Weaknesses Below-average electricity load factor
Above-average effective fuel price
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-7 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity
2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat
sales
2007,
k GCal
Samara Samara 3 520 16 652 13 617 23 232
Saratov Saratov 1 479 6 065 5 163 7 022
Orenburg Orenburg 1 029 5 010 4 922 9 574
Ulyanovsk Ulyanovsk 852 3 415 2 970 4 192
TGK-7 total 6 880 31 143 26 673 44 020
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Samaranew 200 MW CCGT capacity and
reconstruction of old capacity2011 445 453 gas 486 - 20
Gas99.7%
Fuel oil0.3%
Gas99.2%
Fuel oil0.8%
UES54%
Estone Holdings
Ltd.
8%Emeraldi
Enterprises Ltd.
8%Rubinium
Enterprises Ltd.
8%Prosperity Capital19%
Other minorities
3%
IES 56%
Prosperity Capital16%
Other minorities
28%
TGK-7
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 143/183
Financials
Financial ratios
Operational data
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 1 351 1 473 1 645 1 934 2 045 2 072 2 096 2 158 2 218 2 278 2 337 2 397 2 457 2 517 2 578
Non-cash WC 84 181 115 125 137 146 170 200 211 220 231 242 254 267 281
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 1 152 1 255 1 751 1 800 1 994 2 265 2 640 3 156 3 822 4 510 5 226 5 970 6 745 7 552 8 391
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 69 168 - 226 33 - 34 - 264 - 586 -1 012 -1 606 -2 226 -2 871 -3 544 -4 247 -4 980 -5 746
Other LT liabilities (+) or assets (-) 214 230 235 226 221 217 213 213 213 213 213 213 213 213 213
Income statement*
Revenues 1 224 1 516 1 961 2 375 2 813 3 282 3 823 4 482 4 731 4 927 5 173 5 433 5 707 5 994 6 296
Electricity 531 679 886 1 082 1 330 1 602 1 854 2 207 2 416 2 508 2 652 2 805 2 967 3 138 3 320
Heat 580 717 937 1 146 1 332 1 524 1 807 2 105 2 137 2 235 2 329 2 428 2 532 2 639 2 751
Other 113 121 138 147 152 157 162 170 177 185 192 200 208 216 225
Cost of sales -1 210 -1 451 -1 912 -2 196 -2 490 -2 853 -3 251 -3 778 -3 828 -3 996 -4 205 -4 426 -4 659 -4 905 -5 163
Fuel costs - 659 - 793 -1 188 -1 394 -1 604 -1 900 -2 259 -2 730 -2 713 -2 816 -2 956 -3 105 -3 262 -3 427 -3 599
D&A - 92 - 103 - 104 - 112 - 114 - 109 - 114 - 121 - 128 - 136 - 144 - 152 - 161 - 170 - 179
Fixed costs - 459 - 554 - 620 - 690 - 772 - 844 - 878 - 927 - 987 -1 044 -1 105 -1 169 -1 237 -1 308 -1 384
EBITDA 110 169 153 291 437 537 685 825 1 030 1 067 1 112 1 159 1 208 1 259 1 312
EBIT 18 66 48 179 323 429 571 704 902 931 968 1 006 1 047 1 089 1 133
EBT 14 54 30 160 305 411 554 686 885 914 950 989 1 029 1 071 1 115
Net income 11 41 23 122 232 312 421 522 672 694 722 752 782 814 848
EBITDA margin 9% 11% 8% 12% 16% 16% 18% 18% 22% 22% 21% 21% 21% 21% 21%
EBIT margin 1% 4% 2% 8% 11% 13% 15% 16% 19% 19% 19% 19% 18% 18% 18%
Net margin 1% 3% 1% 5% 8% 10% 11% 12% 14% 14% 14% 14% 14% 14% 13%
Cash flow statement
Change in WC - 63 - 91 69 - 15 - 15 - 12 - 27 - 30 - 11 - 9 - 11 - 12 - 12 - 13 - 14
OCF 21 53 214 237 349 427 525 630 807 839 873 910 948 989 1 031
Net capex - 88 - 129 - 242 - 473 - 264 - 176 - 177 - 183 - 189 - 196 - 204 - 212 - 221 - 231 - 241
Acquisitions/divestments 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 75 - 126 - 241 - 473 - 264 - 176 - 177 - 182 - 189 - 195 - 203 - 212 - 221 - 230 - 240
Equity raised/bought back 0 0 439 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 82 82 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 77 66 420 - 19 - 19 - 18 - 18 - 18 - 18 - 18 - 18 - 18 - 18 - 18 - 18
Net CF 23 - 6 393 - 255 67 233 330 430 600 626 651 680 709 740 773
* Non-recurring items and electricity trading activities excluded
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.6 1.2 1.0 0.9 0.7 0.6 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4
EV/EBITDA 14.4 15.9 8.4 5.6 4.5 3.6 2.9 2.4 2.3 2.2 2.1 2.0 1.9 1.9
P/E 65.5 119.7 22.2 11.6 8.6 6.4 5.2 4.0 3.9 3.7 3.6 3.4 3.3 3.2
2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 6 880 6 880 6 880 6 947 7 230 7 313 7 313 7 313 7 313 7 313 7 313 7 313 7 313 7 313 7 313
Electricity sales, GWh 23 693 23 227 23 829 24 195 24 259 24 129 22 789 22 892 23 067 23 228 23 848 24 483 25 132 25 797 26 477
Load factor (electricity) 45% 44% 45% 46% 44% 43% 40% 40% 41% 41% 42% 43% 44% 46% 47%
Heat capacity, Gcal/h 30 368 31 143 31 143 31 230 31 443 31 556 31 556 31 556 31 556 31 556 31 556 31 556 31 556 31 556 31 556
Heat sales, thous. Gcal 44 494 44 020 44 460 45 128 46 042 46 741 47 199 47 661 48 128 48 599 49 075 49 556 50 042 50 532 51 027
Load factor (heat) 17% 16% 16% 16% 17% 17% 17% 17% 17% 18% 18% 18% 18% 18% 18%
Effective electricity price,
USD/MWh22 29 37 45 55 66 81 96 105 108 111 115 118 122 125
Fuel cost, USD/MWh 28 34 50 58 66 79 99 119 118 121 124 127 130 133 136
EBITDA/kW, USD 16 25 22 42 60 73 94 113 141 146 152 158 165 172 179
TGK-7
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 144/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 48 179 323 429 571 704 902 931 968 1 006 1 047 1 089 1 133
Tax on EBIT - 12 - 43 - 77 - 103 - 137 - 169 - 216 - 223 - 232 - 242 - 251 - 261 - 272
After tax EBIT 37 136 245 326 434 535 685 708 736 765 795 827 861
Depreciation 104 112 114 109 114 121 128 136 144 152 161 170 179
Capex - 242 - 473 - 264 - 176 - 177 - 183 - 189 - 196 - 204 - 212 - 221 - 231 - 241
Change in WC 69 - 15 - 15 - 12 - 27 - 30 - 11 - 9 - 11 - 12 - 12 - 13 - 14
FCFF - 32 - 241 80 247 343 443 613 639 665 693 723 754 786
Discounted FCFF - 30 - 203 60 166 207 239 296 276 256 239 223 208 194
WACC 11.8%
Terminal growth 2.0%
NPV of cash flow 2 134
NPV of terminal value 2 024
Fair EV 4 158
Net debt 2007 (adj. for SPO in 2008) 266
Minority interest 0
Fair MCap 4 425
FV of common shares, USD 0.148
Upside to FV 64%
12m TP, USD 0.168
Upside to TP 87%
Dividend yield 0.1%
Expected total return over 12m 87%
Current price, USD 0.090
Shares outstanding, mn 29 975
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.199 0.211 0.226 0.245 0.271
10.8% 0.174 0.183 0.194 0.207 0.224
11.8% 0.154 0.160 0.168 0.178 0.190
12.8% 0.137 0.142 0.148 0.155 0.163
13.8% 0.123 0.126 0.131 0.136 0.143
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 810 860 924 1 006 1 117
10.8% 702 739 785 842 916
11.8% 614 642 676 717 768
12.8% 542 563 588 618 655
13.8% 481 497 516 539 566
Terminal growth
Electricity Heat Total USD/kW
Samara 902 1 319 2 221 631 - 22 2 199 625
Saratov 355 476 831 562 0 831 562
Orenburg 622 516 1 138 1 106 0 1 138 1 106
Ulyanovsk 221 262 483 567 0 483 567
TGK-7 total 2 100 2 574 4 673 679 - 22 4 651 676
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 145/183
TGK-8
Strengths Favourable heat business regulation
Weaknesses Below-average electricity load factor
Above-average fuel burn rate
Above-average effective fuel price
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-20%
-10%
0%
10%
20%
30%
40%
TGK-8 RTS Index RTS Electric Utilities Index
Branch Region
Installed electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation 2007,
GWh
Heat sales
2007,
k GCal
Astrakhan Astrakhan 480 1 834 2 924 1 836
Volgograd Volgograd 1 501 5 880 3 762 6 758
Dagestan Dagestan 44 527 91 665
Kuban Krasnodar 696 856 5 297 978
Rostov City Rostov 160 1 814 759 2 547
Rostov Region Rostov 460 2 198 1 029 919
Stavropol Stavropol 12 272 28 204
Hydro Krasnodar/Rostov 249 0 852 0
TGK-8 total 3 602 13 381 14 743 13 908
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Astrakhannew 410 MW CCGT
and reconstruction with 110 MW CCGT2010 520 0 gas 565 192
Volgograd reconstruction with 180 MW CCGT 2014 180 0 gas 215 - 5
Kuban reconstruction with new 410 MW CCGT 2010 410 0 gas 445 - 3
Gas99.9%
Fuel oil
0.1%
Gas98.9%
Fuel oil
1.1%
UES64%
Promregionholding17%
Energostrategia19%
Other minorities
18%
Lukoil82%
TGK-8
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 146/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 512 600 1 050 1 423 1 609 1 634 1 657 1 709 1 688 1 666 1 644 1 622 1 599 1 577 1 555
Non-cash WC 64 67 74 74 86 73 81 94 102 106 111 116 122 128 134
LT investments 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Equity 396 1 362 1 392 1 390 1 593 1 788 1 975 2 235 2 578 2 932 3 303 3 691 4 097 4 522 4 965
Minority interest 0 0 0 - 1 - 4 - 8 - 14 - 21 - 30 - 40 - 50 - 61 - 72 - 84 - 97
Net debt (+) or cash (-) 117 - 761 - 335 40 34 - 152 - 312 - 514 - 879 -1 262 -1 660 -2 075 -2 509 -2 962 -3 435
Other LT liabilities (+) or assets (-) 63 68 69 66 65 64 63 63 63 63 63 63 63 63 63
Income statement*
Revenues 519 618 814 1 016 1 457 1 631 1 820 2 111 2 287 2 374 2 487 2 606 2 732 2 864 3 001
Electricity 309 363 500 623 994 1 095 1 197 1 399 1 557 1 610 1 691 1 777 1 868 1 963 2 063
Heat 184 224 279 357 425 496 582 670 685 717 748 779 812 846 882
Other 26 30 34 37 38 39 40 42 44 46 48 50 52 54 56
Cost of sales - 534 - 631 - 814 - 941 -1 148 -1 327 -1 490 -1 716 -1 769 -1 841 -1 934 -2 032 -2 136 -2 245 -2 359
Fuel costs - 313 - 369 - 504 - 574 - 695 - 819 - 962 -1 158 -1 176 -1 217 -1 276 -1 340 -1 406 -1 476 -1 550
D&A - 17 - 25 - 42 - 65 - 89 - 111 - 115 - 122 - 128 - 132 - 137 - 142 - 146 - 151 - 157
Fixed costs - 205 - 237 - 269 - 302 - 363 - 397 - 413 - 436 - 465 - 492 - 521 - 551 - 583 - 617 - 652
EBITDA 10 23 53 153 411 428 459 532 661 681 706 732 760 789 817
EBIT - 7 - 3 11 88 322 317 343 409 533 548 569 591 614 637 661
EBT - 14 - 15 - 2 75 309 305 331 397 521 536 557 579 602 626 649
Net income - 14 - 14 - 2 55 226 223 220 259 342 354 370 387 405 424 444
EBITDA margin 2% 4% 6% 15% 28% 26% 25% 25% 29% 29% 28% 28% 28% 28% 27%
EBIT margin neg neg 1% 9% 22% 19% 19% 19% 23% 23% 23% 23% 22% 22% 22%
Net margin neg neg neg 5% 16% 14% 12% 12% 15% 15% 15% 15% 15% 15% 15%
Cash flow statement
Change in WC - 40 1 - 5 - 4 - 14 12 - 10 - 13 - 8 - 4 - 5 - 5 - 6 - 6 - 6
OCF - 40 27 48 131 323 367 346 391 487 508 528 551 574 598 623
Net capex - 21 - 74 - 474 - 488 - 305 - 167 - 170 - 175 - 107 - 110 - 115 - 119 - 124 - 129 - 134
Acquisitions/divestments 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 15 - 74 - 474 - 488 - 305 - 167 - 170 - 175 - 107 - 110 - 115 - 119 - 124 - 129 - 134
Equity raised/bought back 0 910 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 81 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 67 898 - 13 - 13 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12 - 12
Net CF 12 851 - 438 - 369 5 188 164 204 369 386 402 419 438 458 477
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 4.5 3.4 2.7 1.9 1.7 1.5 1.3 1.2 1.2 1.1 1.1 1.0 1.0 0.9
EV/EBITDA 122.8 52.6 18.1 6.7 6.5 6.0 5.2 4.2 4.1 3.9 3.8 3.6 3.5 3.4
P/E neg neg 62.4 15.2 15.4 15.6 13.2 10.0 9.7 9.3 8.9 8.5 8.1 7.7
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 3 602 3 602 3 602 3 602 4 263 4 263 4 263 4 263 4 263 4 263 4 263 4 263 4 263 4 263 4 263
Electricity sales, GWh 13 739 13 261 14 404 14 284 17 456 16 983 16 114 16 115 17 044 17 076 17 377 17 684 17 999 18 322 18 652
Load factor (electricity) 48% 47% 51% 50% 51% 50% 47% 47% 50% 50% 51% 51% 52% 53% 54%
Heat capacity, Gcal/h 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381 13 381
Heat sales, thous. Gcal 14 497 13 908 14 047 14 187 14 329 14 473 14 617 14 763 14 911 15 060 15 211 15 363 15 516 15 672 15 828
Load factor (heat) 12% 12% 12% 12% 12% 12% 12% 13% 13% 13% 13% 13% 13% 13% 14%
Effective electricity price,
USD/MWh22 27 35 44 57 65 74 87 91 94 97 101 104 107 111
Fuel cost, USD/MWh 23 28 35 40 40 48 60 72 69 71 73 76 78 81 83
EBITDA/kW, USD 3 6 15 42 96 100 108 125 155 160 166 172 178 185 192
TGK-8
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 147/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 11 88 322 317 343 409 533 548 569 591 614 637 661
Tax on EBIT - 3 - 21 - 77 - 76 - 107 - 132 - 169 - 172 - 176 - 180 - 184 - 188 - 191
After tax EBIT 8 67 245 241 237 278 364 376 393 411 430 449 469
Depreciation 42 65 89 111 115 122 128 132 137 142 146 151 157
Capex - 474 - 488 - 305 - 167 - 170 - 175 - 107 - 110 - 115 - 119 - 124 - 129 - 134
Change in WC - 5 - 4 - 14 12 - 10 - 13 - 8 - 4 - 5 - 5 - 6 - 6 - 6
FCFF - 428 - 360 15 197 173 212 377 394 410 428 446 466 486
Discounted FCFF - 403 - 303 11 133 104 114 182 170 158 148 138 129 120
WACC 11.8%
Terminal growth 2.0%
NPV of cash flow 701
NPV of terminal value 1 252
Fair EV 1 953
Net debt 2007e 761
LT investments 29
Minority interest - 99
Fair MCap 2 644
FV of common share, USD 0.00128
Upside to FV -23%
12m TP, USD 0.00146
Upside to TP -12%
Dividend yield 0.0%
Expected total return over 12m -12%
Current price, USD 0.00167
Shares outstanding, mn 2 061 574
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.00174 0.00184 0.00198 0.00215 0.00238
10.8% 0.00151 0.00159 0.00169 0.00181 0.00196
11.8% 0.00133 0.00139 0.00146 0.00155 0.00166
12.8% 0.00118 0.00123 0.00128 0.00134 0.00142
13.8% 0.00106 0.00109 0.00113 0.00118 0.00124
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 760 820 895 992 1 123
10.8% 635 679 733 800 888
11.8% 534 567 606 655 716
12.8% 450 475 505 540 584
13.8% 380 400 422 449 481
Terminal growth
Electricity Heat Total USD/kW
Astrakhan 133 88 221 461 215 436 908
Volgograd 250 401 650 433 - 5 645 430
Dagestan 6 40 46 1 041 0 46 1 041
Kuban 432 30 461 663 - 3 459 659
Rostov City 52 182 234 1 460 0 234 1 460
Rostov Region - 5 43 38 83 0 38 83
Stavropol - 1 22 21 1 745 0 21 1 745
Hydro 305 0 305 1 224 0 305 1 224
TGK-8 total 1 171 805 1 976 549 207 2 183 606
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 148/183
TGK-9
Strengths Above-average electricity load factor
Above-average heat load factor
Coal plants in European Russia
Weaknesses Above-average fuel burn rate
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-9 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Perm Perm 1 359 6 806 7 107 15 800
Sverdlovsk Sverdlovsk 1 230 7 242 6 355 19 900
Komi Komi 690 2 400 2 832 5 800
TGK-9 total 3 280 16 448 16 294 41 500
Branch Project name
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Permnew 418 MW CCGT and reconstruction
of old capacity2012 800.7 844 gas 904 137
Sverdlovsk new 1041 MW CCGT 2015 1 041 1 120 gas 1 247 83
Gas81%
Coal17%
Fuel oil2%
Gas82%
Coal16%
Fuel oil2%
UES50%
BNP Paribas
Securities
Services 15%
IES and
af f iliated
19%
Other minorities
16%
IES and
af f iliated
76%
Other minorities
24%
TGK-9
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 149/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 644 742 846 1 105 1 595 2 083 2 399 2 663 2 980 2 993 3 007 3 020 3 032 3 044 3 056
Non-cash WC 285 290 286 250 182 103 136 162 174 187 196 206 215 226 237
LT investments 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Equity 748 1 508 1 612 1 691 1 800 1 956 2 256 2 669 3 171 3 721 4 292 4 887 5 505 6 149 6 819
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 176 - 481 - 484 - 340 - 28 226 275 152 - 22 - 544 -1 093 -1 666 -2 262 -2 883 -3 530
Other LT liabilities (+) or assets (-) 6 6 7 6 6 6 6 6 6 6 6 6 6 6 6
Income statement
Revenues 946 1 148 1 466 1 778 1 950 2 314 3 052 3 639 3 899 4 206 4 404 4 613 4 833 5 064 5 307
Electricity 421 491 634 766 785 974 1 427 1 745 1 944 2 138 2 244 2 356 2 474 2 598 2 730
Heat 480 605 773 949 1 099 1 273 1 556 1 822 1 879 1 988 2 078 2 172 2 270 2 373 2 481
Other 45 52 60 63 65 68 70 73 76 79 83 86 90 93 97
Cost of sales - 849 -1 068 -1 333 -1 541 -1 716 -2 017 -2 558 -3 044 -3 184 -3 426 -3 594 -3 771 -3 958 -4 154 -4 361
Fuel costs - 497 - 650 - 872 -1 030 -1 152 -1 388 -1 836 -2 255 -2 320 -2 489 -2 604 -2 726 -2 854 -2 989 -3 130
D&A - 18 - 44 - 49 - 56 - 70 - 85 - 104 - 121 - 138 - 151 - 157 - 164 - 171 - 179 - 187
Fixed costs - 334 - 375 - 411 - 455 - 493 - 544 - 618 - 667 - 726 - 787 - 833 - 881 - 932 - 986 -1 044
EBITDA 96 103 158 267 278 354 569 687 822 898 934 971 1 010 1 051 1 094
EBIT 78 58 109 211 208 270 465 566 684 747 776 807 839 872 907
EBT 71 41 91 192 190 252 448 549 667 730 759 790 822 855 890
Net income 54 31 69 146 144 192 341 417 507 555 577 600 625 650 676
EBITDA margin 10% 9% 11% 15% 14% 15% 19% 19% 21% 21% 21% 21% 21% 21% 21%
EBIT margin 8% 5% 7% 12% 11% 12% 15% 16% 18% 18% 18% 17% 17% 17% 17%
Net margin 6% 3% 5% 8% 7% 8% 11% 11% 13% 13% 13% 13% 13% 13% 13%
Cash flow statement
Change in WC - 21 15 10 25 64 76 - 35 - 26 - 12 - 14 - 9 - 9 - 10 - 10 - 11
OCF 1 108 147 246 296 370 427 529 651 709 742 772 803 836 869
Net capex - 65 - 93 - 135 - 355 - 587 - 609 - 463 - 388 - 458 - 164 - 171 - 177 - 184 - 191 - 199
Acquisitions/divestments 0 - 6 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 78 - 99 - 134 - 354 - 586 - 608 - 461 - 387 - 457 - 163 - 170 - 176 - 183 - 190 - 198
Equity raised/bought back 0 646 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 58 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 58 627 - 20 - 20 - 19 - 19 - 18 - 18 - 18 - 18 - 18 - 18 - 18 - 18 - 18
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.6 1.3 1.0 1.0 0.8 0.6 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4
EV/EBITDA 18.2 11.8 7.0 6.7 5.3 3.3 2.7 2.3 2.1 2.0 1.9 1.8 1.8 1.7
P/E 75.9 34.1 16.1 16.3 12.2 6.9 5.6 4.6 4.2 4.1 3.9 3.8 3.6 3.5
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 3 280 3 280 3 322 3 442 3 442 3 642 4 410 4 610 4 810 5 051 5 051 5 051 5 051 5 051 5 051
Electricity sales, GWh 13 617 13 919 14 521 15 275 14 136 15 019 19 442 20 801 22 202 23 866 24 199 24 540 24 889 25 245 25 610
Load factor (electricity) 55% 57% 58% 59% 54% 54% 56% 57% 59% 60% 61% 62% 63% 63% 64%
Heat capacity, Gcal/h 16 448 16 448 16 448 16 528 16 528 16 752 17 633 17 857 18 081 18 305 18 305 18 305 18 305 18 305 18 305
Heat sales, thous. Gcal 40 963 41 500 41 915 42 490 42 911 43 827 46 185 47 109 48 038 48 971 49 417 49 869 50 324 50 785 51 249
Load factor (heat) 28% 29% 29% 29% 30% 30% 30% 30% 30% 31% 31% 31% 31% 32% 32%
Effective electricity price,
USD/MWh31 35 44 50 56 65 73 84 88 90 93 96 99 103 107
Fuel cost, USD/MWh 36 47 60 67 82 92 94 108 104 104 108 111 115 118 122
EBITDA/kW, USD 29 31 48 78 81 97 129 149 171 178 185 192 200 208 217
TGK-9
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 150/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 109 211 208 270 465 566 684 747 776 807 839 872 907
Tax on EBIT - 26 - 51 - 50 - 65 - 112 - 136 - 164 - 179 - 186 - 194 - 201 - 209 - 218
After tax EBIT 83 160 158 205 354 430 520 568 590 613 638 663 689
Depreciation 49 56 70 85 104 121 138 151 157 164 171 179 187
Capex - 135 - 355 - 587 - 609 - 463 - 388 - 458 - 164 - 171 - 177 - 184 - 191 - 199
Change in WC 10 25 64 76 - 35 - 26 - 12 - 14 - 9 - 9 - 10 - 10 - 11
FCFF 7 - 113 - 295 - 243 - 40 137 189 540 568 591 615 640 667
Discounted FCFF 7 - 95 - 222 - 164 - 24 74 91 233 219 204 190 177 165
WACC 11.8%
Terminal growth 2.0%
NPV of cash flow 854
NPV of terminal value 1 717
Fair EV 2 571
Net debt 2007e 481
Minority interest 0
Fair MCap 3 052
FV of common share, USD 0.000390
Upside to FV 30%
12m TP, USD 0.000439
Upside to TP 46%
Dividend yield 1.9%
Expected total return over 12m 48%
Current price, USD 0.000300
Shares outstanding, mn 7 824 457
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.000529 0.000568 0.000616 0.000679 0.000763
10.8% 0.000454 0.000482 0.000516 0.000560 0.000616
11.8% 0.000393 0.000414 0.000439 0.000470 0.000510
12.8% 0.000343 0.000359 0.000378 0.000401 0.000429
13.8% 0.000302 0.000314 0.000329 0.000346 0.000367
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 1 088 1 177 1 291 1 437 1 634
10.8% 910 976 1 057 1 159 1 291
11.8% 767 817 876 949 1 041
12.8% 651 689 733 787 853
13.8% 555 584 618 658 707
Terminal growth
Electricity Heat Total USD/kW
Perm 493 643 1 136 836 153 1 290 949
Sverdlovsk 473 784 1 258 1 022 93 1 350 1 098
Komi - 64 300 236 343 0 236 343
TGK-9 total 903 1 727 2 630 802 246 2 876 877
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 151/183
TGK-10
Strengths Above-average electricity load factor
Below-average fuel burn rate
Below-average effective fuel price
Foreign strategic investor
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
TGK-10 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity 2007,
MW
Installed
heat
capacity
2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales 2007,
k GCal
Chelyabinsk Chelyabinsk 1 094 6 277 6 890 12 138
Tyumen Tyumen 1 679 6 278 11 906 9 282
Kurgan Kurgan 480 2 016 1 931 2 501
Khantymansiysk Khantymansiysk 0 0 0 0
TGK-10 total 3 253 14 571 20 727 23 922
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Chelyabinsk new 220 MW CCGT 2010 220 146 gas 239 52
Tyumennew 450 MW CCGT, new 210 MW turbine,
reconstruction with 190 MW CCGT2012 850 435 gas 939 309
Khantymansiysk new plant with 3x400 MW CCGTs 2012 1 200 380 gas 1 342 653
Gas93.91%
Coal6.04%
Fuel oil
0.05%
Gas94.46%
Coal5.49%
Fuel oil
0.04%
UES82%
Russian Federation
6%Renaissance Securities
Ltd.
7%
Other minorities
5%
Fortum76%
Other minorities
17%Renaissance
Securities Ltd.
4%
Russian Federation
3%
TGK-10
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 152/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 706 799 1 449 2 124 2 611 2 992 3 137 3 137 3 136 3 134 3 132 3 129 3 127 3 125 3 123
Non-cash WC 113 124 122 132 130 102 129 148 155 161 169 177 186 195 204
LT investments 29 31 31 30 30 29 28 28 28 28 28 28 28 28 28
Equity 816 926 2 868 2 914 3 161 3 461 3 888 4 453 5 111 5 788 6 492 7 224 7 985 8 775 9 598
Minority interest 0 1 3 5 9 12 17 23 31 39 48 57 67 77 88
Net debt (+) or cash (-) 32 25 -1 269 - 633 - 400 - 350 - 611 -1 162 -1 822 -2 504 -3 211 -3 946 -4 710 -5 505 -6 330
Other LT liabilities (+) or assets (-) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Income statement*
Revenues 685 864 1 053 1 474 1 925 2 286 2 885 3 325 3 486 3 620 3 792 3 973 4 164 4 364 4 575
Electricity 383 477 614 898 1 221 1 459 1 900 2 192 2 329 2 410 2 530 2 658 2 792 2 934 3 084
Heat 253 329 374 507 633 753 909 1 054 1 073 1 124 1 172 1 222 1 274 1 329 1 386
Other 50 57 65 69 71 74 76 80 83 87 90 94 98 102 106
Cost of sales - 637 - 786 - 990 -1 241 -1 501 -1 788 -2 211 -2 552 -2 586 -2 694 -2 829 -2 973 -3 124 -3 283 -3 450
Fuel costs - 330 - 431 - 579 - 744 - 917 -1 141 -1 479 -1 777 -1 764 -1 827 -1 915 -2 009 -2 107 -2 210 -2 319
D&A - 49 - 53 - 74 - 106 - 125 - 131 - 146 - 156 - 163 - 169 - 176 - 183 - 191 - 198 - 206
Fixed costs - 258 - 302 - 337 - 392 - 459 - 517 - 586 - 619 - 659 - 698 - 738 - 781 - 826 - 874 - 925
EBITDA 90 124 129 330 540 619 811 919 1 052 1 085 1 127 1 172 1 218 1 267 1 318
EBIT 42 71 55 224 414 488 665 763 889 915 951 989 1 028 1 069 1 111
EBT 37 66 51 219 410 484 660 758 885 911 947 984 1 023 1 064 1 107
Net income 29 49 38 163 305 361 492 565 659 679 706 733 763 793 825
EBITDA margin 13% 14% 12% 22% 28% 27% 28% 28% 30% 30% 30% 29% 29% 29% 29%
EBIT margin 6% 8% 5% 15% 22% 21% 23% 23% 26% 25% 25% 25% 25% 24% 24%
Net margin 4% 6% 4% 11% 16% 16% 17% 17% 19% 19% 19% 18% 18% 18% 18%
Cash flow statement
Change in WC - 14 - 2 5 - 15 - 1 26 - 29 - 20 - 7 - 6 - 8 - 8 - 9 - 9 - 9
OCF 78 106 122 262 440 528 624 717 832 860 892 927 964 1 002 1 042
Net capex - 85 - 93 - 698 - 854 - 659 - 566 - 349 - 157 - 162 - 167 - 174 - 181 - 188 - 196 - 204
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 85 - 93 - 698 - 854 - 659 - 566 - 349 - 157 - 162 - 167 - 174 - 181 - 188 - 196 - 204
Equity raised/bought back 0 0 1 862 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 4 - 5 1 857 - 5 - 5 - 4 - 4 - 4 - 4 - 4 - 4 - 4 - 4 - 4 - 4
Net CF - 11 9 1 280 - 597 - 223 - 42 270 556 666 689 714 742 771 802 834
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 2.7 2.2 1.6 1.2 1.0 0.8 0.7 0.7 0.6 0.6 0.6 0.6 0.5 0.5
EV/EBITDA 18.9 18.1 7.1 4.3 3.8 2.9 2.5 2.2 2.2 2.1 2.0 1.9 1.8 1.8
P/E 82.3 107.6 24.8 13.3 11.2 8.2 7.2 6.1 6.0 5.7 5.5 5.3 5.1 4.9
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 3 073 3 253 3 265 3 665 4 285 4 685 5 535 5 535 5 535 5 535 5 535 5 535 5 535 5 535 5 535
Electricity sales, GWh 16 793 18 549 18 373 20 332 22 345 24 259 27 973 27 975 28 044 28 097 28 590 29 095 29 612 30 142 30 684
Load factor (electricity) 70% 73% 72% 70% 65% 65% 63% 63% 63% 63% 64% 65% 66% 68% 69%
Heat capacity, Gcal/h 14 268 14 571 14 571 14 826 14 972 14 972 15 152 15 152 15 152 15 152 15 152 15 152 15 152 15 152 15 152
Heat sales, thous. Gcal 24 738 23 922 25 838 26 655 27 236 27 499 28 160 28 428 28 700 28 974 29 251 29 531 29 814 30 099 30 387
Load factor (heat) 20% 19% 20% 21% 21% 21% 21% 21% 22% 22% 22% 22% 22% 23% 23%
Effective electricity price,
USD/MWh23 26 33 44 55 60 68 78 83 86 88 91 94 97 100
Fuel cost, USD/MWh 20 23 31 37 41 47 53 64 63 65 67 69 71 73 76
EBITDA/kW, USD 29 38 40 90 126 132 147 166 190 196 204 212 220 229 238
TGK-10
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 153/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 55 224 414 488 665 763 889 915 951 989 1 028 1 069 1 111
Tax on EBIT - 13 - 54 - 99 - 117 - 160 - 183 - 213 - 220 - 228 - 237 - 247 - 256 - 267
After tax EBIT 42 170 315 371 505 580 676 696 723 751 781 812 845
Depreciation 74 106 125 131 146 156 163 169 176 183 191 198 206
Capex - 698 - 854 - 659 - 566 - 349 - 157 - 162 - 167 - 174 - 181 - 188 - 196 - 204
Change in WC 5 - 15 - 1 26 - 29 - 20 - 7 - 6 - 8 - 8 - 9 - 9 - 9
FCFF - 578 - 593 - 220 - 39 273 559 669 692 717 745 775 805 837
Discounted FCFF - 545 - 502 - 167 - 26 167 307 329 306 284 265 247 231 215
WACC 11.4%
Terminal growth 2.0%
NPV of cash flow 1 113
NPV of terminal value 2 326
Fair EV 3 439
Net debt 2007e (adj. for SPO in 2008) 1 816
Minority interest - 100
Fair MCap 5 155
FV of common share, USD 5.87
Upside to FV 27%
12m TP, USD 6.65
Upside to TP 44%
Dividend yield 0.1%
Expected total return over 12m 44%
Current price, USD 4.61
Shares outstanding, mn 879
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.4% 7.81 8.29 8.90 9.70 10.79
10.4% 6.85 7.20 7.63 8.18 8.90
11.4% 6.08 6.34 6.65 7.04 7.53
12.4% 5.44 5.64 5.87 6.16 6.51
13.4% 4.92 5.07 5.25 5.46 5.71
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.4% 1 486 1 613 1 775 1 986 2 276
10.4% 1 231 1 324 1 438 1 584 1 774
11.4% 1 026 1 095 1 178 1 281 1 412
12.4% 858 910 972 1 047 1 140
13.4% 718 758 805 861 929
Terminal growth
Electricity Heat Total USD/kW
Chelyabinsk 576 457 1 034 945 58 1 091 998
Tyumen 1 094 358 1 451 864 344 1 796 1 069
Kurgan 88 133 221 460 0 221 460
Khantymansiysk 0 0 0 0 728 728 0
TGK-10 total 1 758 948 2 706 832 1 130 3 835 1 179
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 154/183
TGK-11
Strengths Favourable heat business regulation
Weaknesses Below-average electricity load factor
Gas-fired plants in Siberia
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-40%
-30%
-20%
-10%
0%
10%
20%
TGK-11 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Tomskenergo Tomsk 421 2 371 1 959 3 530
Omsk GC Omsk 1 605 5 831 6 137 10 185
TGK-11 total 2 026 8 202 8 096 13 715
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Tomskenergo replacement of old capacity 2008 50 105 gas 54 1
Omsk GCnew 285 MW turbine, reconstruction with
2x60 CCGT, 3x30 MW turbines2016 495 702 gas 556 - 143
Gas51.0%
Coal48.2%
Fuel oil
0.8%
Gas44.2%
Coal55.1%
Fuel oil
0.7%
UES50.5%
SUEK26.4%
Rosnef t5.3%
Other minorities
17.8%
E428.9%
SUEK26.4%
Gazprom5.3%
Rosneft5.3%
Other minorities
34.1%
TGK-11
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 155/183
Financials
Financial ratios
Operational data
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 482 540 654 817 988 1 126 1 148 1 177 1 195 1 212 1 229 1 246 1 262 1 279 1 296
Non-cash WC 0 4 11 19 27 38 51 61 68 71 75 79 83 88 92
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 407 471 542 578 607 648 776 983 1 260 1 547 1 845 2 156 2 480 2 818 3 170
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 14 9 57 195 345 455 362 195 - 57 - 323 - 601 - 891 -1 194 -1 511 -1 842
Other LT liabilities (+) or assets (-) 60 65 66 64 62 61 60 60 60 60 60 60 60 60 60
Income statement*
Revenues 439 502 639 711 749 856 1 142 1 364 1 523 1 598 1 690 1 778 1 871 1 968 2 072
Electricity 178 210 249 286 302 375 589 728 845 883 931 983 1 037 1 095 1 156
Heat 235 261 356 389 409 442 512 594 633 669 712 746 782 820 860
Other 26 30 34 36 38 39 40 42 44 46 48 49 51 54 56
Cost of sales - 414 - 459 - 562 - 634 - 696 - 789 - 956 -1 090 -1 157 -1 219 -1 296 -1 367 -1 442 -1 522 -1 606
Fuel costs - 180 - 203 - 282 - 325 - 360 - 421 - 548 - 655 - 691 - 726 - 775 - 817 - 861 - 907 - 956
D&A - 28 - 30 - 35 - 41 - 46 - 50 - 55 - 59 - 63 - 66 - 69 - 73 - 76 - 80 - 84
Fixed costs - 206 - 225 - 246 - 269 - 290 - 317 - 353 - 376 - 403 - 427 - 451 - 478 - 505 - 535 - 566
EBITDA 55 75 114 120 102 121 244 336 431 448 467 487 508 530 553
EBIT 27 44 79 79 56 70 188 276 369 382 398 414 432 450 469
EBT 24 43 78 78 54 69 187 275 367 381 396 413 431 449 468
Net income 18 33 59 59 41 53 142 209 279 289 301 314 327 341 356
EBITDA margin 12% 15% 18% 17% 14% 14% 21% 25% 28% 28% 28% 27% 27% 27% 27%
EBIT margin 6% 9% 12% 11% 7% 8% 16% 20% 24% 24% 24% 23% 23% 23% 23%
Net margin 4% 7% 9% 8% 6% 6% 12% 15% 18% 18% 18% 18% 17% 17% 17%
Cash flow statement
Change in WC - 10 - 5 - 7 - 8 - 8 - 12 - 14 - 10 - 7 - 3 - 4 - 4 - 4 - 4 - 5
OCF 41 60 88 93 81 92 185 260 336 353 368 384 401 418 436
Net capex - 31 - 53 - 135 - 234 - 235 - 209 - 99 - 89 - 80 - 83 - 86 - 90 - 93 - 97 - 101
Acquisitions/divestments 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 29 - 53 - 135 - 234 - 235 - 209 - 99 - 89 - 80 - 83 - 86 - 90 - 93 - 97 - 101
Equity raised/bought back 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt - 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 8 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1
Net CF 4 5 - 48 - 142 - 156 - 118 85 169 254 269 280 293 306 320 334
* Non-recurring items and electricity trading activities excluded
2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.2 0.9 0.8 0.8 0.7 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3
EV/EBITDA 7.8 5.1 4.9 5.7 4.8 2.4 1.7 1.4 1.3 1.2 1.2 1.1 1.1 1.1
P/E 17.5 9.7 9.7 13.9 10.9 4.0 2.7 2.1 2.0 1.9 1.8 1.8 1.7 1.6
2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 2 032 2 026 2 026 2 076 2 076 2 196 2 511 2 541 2 571 2 571 2 571 2 571 2 571 2 571 2 571
Electricity sales, GWh 7 165 7 083 7 117 7 576 7 442 7 926 9 957 9 893 10 141 10 200 10 307 10 506 10 709 10 917 11 129
Load factor (electricity) 47% 46% 47% 49% 48% 48% 51% 50% 51% 51% 52% 53% 54% 55% 56%
Heat capacity, Gcal/h 8 241 8 202 8 202 8 307 8 307 8 414 8 859 8 934 9 009 9 009 9 009 9 009 9 009 9 009 9 009
Heat sales, thous. Gcal 15 243 13 715 15 475 15 860 16 016 16 409 17 543 17 868 18 195 18 360 18 526 18 693 18 862 19 033 19 206
Load factor (heat) 21% 19% 22% 22% 22% 22% 23% 23% 23% 23% 23% 24% 24% 24% 24%
Effective electricity price,
USD/MWh25 30 35 38 41 47 59 74 83 87 90 94 97 100 104
Fuel cost, USD/MWh 25 29 40 43 48 53 55 66 68 71 75 78 80 83 86
EBITDA/kW, USD 27 37 56 58 49 55 97 132 168 174 182 189 198 206 215
TGK-11
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 156/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 79 79 56 70 188 276 369 382 398 414 432 450 469
Tax on EBIT - 19 - 19 - 13 - 17 - 45 - 66 - 89 - 92 - 95 - 99 - 104 - 108 - 113
After tax EBIT 60 60 42 54 143 210 280 290 302 315 328 342 357
Depreciation 35 41 46 50 55 59 63 66 69 73 76 80 84
Capex - 135 - 234 - 235 - 209 - 99 - 89 - 80 - 83 - 86 - 90 - 93 - 97 - 101
Change in WC - 7 - 8 - 8 - 12 - 14 - 10 - 7 - 3 - 4 - 4 - 4 - 4 - 5
FCFF - 47 - 141 - 155 - 117 86 170 255 270 281 294 307 321 335
Discounted FCFF - 44 - 116 - 111 - 74 48 83 109 101 93 85 78 71 65
WACC 13.9%
Terminal growth 2.0%
NPV of cash flow 389
NPV of terminal value 562
Fair EV 951
Net debt 2007e - 9
Minority interest 0
Fair MCap 943
FV of common share, USD 0.00184
Upside to FV 64%
12m TP, USD 0.00215
Upside to TP 92%
Dividend yield 0.0%
Expected total return over 12m 92%
Current price, USD 0.00112
Shares outstanding, mn 512 828
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
11.9% 0.00268 0.00284 0.00303 0.00327 0.00357
12.9% 0.00228 0.00240 0.00255 0.00272 0.00293
13.9% 0.00194 0.00204 0.00215 0.00228 0.00244
14.9% 0.00166 0.00174 0.00182 0.00192 0.00204
15.9% 0.00142 0.00148 0.00155 0.00163 0.00172
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
11.9% 666 705 753 812 885
12.9% 566 597 633 676 729
13.9% 484 507 535 567 606
14.9% 415 433 454 479 508
15.9% 356 370 387 406 429
Terminal growth
Electricity Heat Total USD/kW
Tomskenergo 126 235 362 859 1 362 860
Omsk GC 410 475 885 552 - 163 722 450
TGK-11 total 536 711 1 247 615 - 162 1 084 535
Branch
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 157/183
Kuzbassenergo (TGK-12)
Strengths Above-average electricity load factor
Favourable heat business regulation
Weaknesses Above-average fuel burn rate
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Kuzbassenergo RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Kuzbass Kemerovo 3 603 5 339 20 029 9 350
Barnaul Altai 784 3 503 3 202 5 280
Kuzbassenergo total 4 387 8 842 23 232 14 630
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Kuzbass Reconstruction and expansion 2011 1 112 0 coal 1 608 - 10
Gas5.8%
Coal92.4%
Fuel oil
1.7%
Fuel mix, 2007e
Gas5.0%
Coal93.6%
Fuel oil
1.4%
Fuel mix, 2011e
UES49%
SUEK45%
Other minorities
6%
Ownership structure, 2007e
SUEK55%
Other minorities
41%
Gazprom4%
Ownership structure, 2008e
Kuzbassenergo (TGK-12)
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 158/183
Financials
Financial ratios
Operational data
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 534 1 096 1 353 1 873 2 406 2 648 2 588 2 574 2 558 2 542 2 525 2 509 2 493 2 478 2 461
Non-cash WC 9 65 22 32 43 67 78 91 103 108 113 120 127 134 141
LT investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Equity 521 1 245 1 261 1 224 1 236 1 394 1 678 2 148 2 761 3 394 4 049 4 734 5 449 6 194 6 958
Minority interest 82 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Net debt (+) or cash (-) 40 - 223 - 28 544 1 079 1 189 858 387 - 229 - 873 -1 540 -2 234 -2 958 -3 711 -4 486
Other LT liabilities (+) or assets (-) - 100 138 141 135 133 130 128 128 128 128 128 128 128 128 128
Income statement*Revenues 697 754 873 1 014 1 131 1 500 1 744 2 031 2 306 2 420 2 546 2 694 2 852 3 013 3 156
Electricity 497 465 516 633 734 1 085 1 301 1 548 1 794 1 878 1 974 2 092 2 218 2 344 2 448
Heat 159 249 311 332 346 363 389 426 452 480 508 536 565 597 632
Other 41 41 46 49 51 52 54 57 59 62 64 67 70 72 75
Cost of sales - 658 - 741 - 889 - 996 -1 082 -1 259 -1 331 -1 406 -1 491 -1 580 -1 675 -1 785 -1 902 -2 024 -2 140
Fuel costs - 296 - 382 - 492 - 548 - 578 - 663 - 708 - 751 - 798 - 850 - 908 - 977 -1 051 -1 128 -1 197
D&A - 57 - 63 - 74 - 97 - 127 - 157 - 166 - 172 - 179 - 186 - 192 - 200 - 207 - 215 - 223
Fixed costs - 305 - 296 - 324 - 351 - 377 - 439 - 457 - 482 - 514 - 544 - 575 - 609 - 644 - 681 - 721
EBITDA 96 76 58 115 176 399 579 797 994 1 026 1 063 1 109 1 157 1 204 1 239
EBIT 39 13 - 15 18 48 241 413 624 815 840 871 909 950 989 1 016
EBT 39 8 - 16 18 48 241 413 624 815 840 870 909 950 989 1 016
Net income 79 6 - 16 14 37 183 314 474 619 639 662 691 722 752 772
EBITDA margin 14% 10% 7% 11% 16% 27% 33% 39% 43% 42% 42% 41% 41% 40% 39%
EBIT margin 6% 2% neg 2% 4% 16% 24% 31% 35% 35% 34% 34% 33% 33% 32%
Net margin 11% 1% neg 1% 3% 12% 18% 23% 27% 26% 26% 26% 25% 25% 24%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC - 21 - 67 44 - 10 - 12 - 25 - 12 - 13 - 12 - 5 - 6 - 7 - 7 - 7 - 6
OCF 62 - 29 105 100 152 316 468 634 786 819 849 884 922 960 989
Net capex - 46 - 273 - 304 - 682 - 702 - 448 - 156 - 158 - 164 - 169 - 176 - 183 - 191 - 199 - 206
Acquisitions/divestments - 3 266 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 53 - 6 - 304 - 682 - 702 - 448 - 156 - 158 - 164 - 169 - 176 - 183 - 191 - 199 - 206
Equity raised/bought back 0 294 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 5 - 49 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 21 238 0 0 0 0 0 0 0 0 0 0 0 0 0
Net CF - 11 203 - 198 - 583 - 551 - 132 311 476 622 650 673 701 731 760 783
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.9 1.6 1.4 1.3 1.0 0.8 0.7 0.6 0.6 0.6 0.5 0.5 0.5 0.5
EV/EBITDA 18.8 24.6 12.5 8.2 3.6 2.5 1.8 1.4 1.4 1.3 1.3 1.2 1.2 1.2
P/E 265.8 neg 122.2 45.1 9.0 5.3 3.5 2.7 2.6 2.5 2.4 2.3 2.2 2.1
2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 5 556 4 387 4 387 4 387 4 387 5 132 5 132 5 132 5 132 5 132 5 132 5 132 5 132 5 132 5 132
Electricity sales, GWh 24 791 20 677 21 231 21 303 21 002 24 209 24 033 23 335 23 462 23 619 23 903 24 430 24 969 25 417 25 498
Load factor (electricity) 57% 60% 62% 62% 61% 60% 59% 57% 58% 58% 59% 60% 62% 63% 63%
Heat capacity, Gcal/h 10 000 8 842 8 842 8 842 8 842 8 842 8 842 8 842 8 842 8 842 8 842 8 842 8 842 8 842 8 842
Heat sales, thous. Gcal 16 682 14 630 14 777 14 924 15 074 15 224 15 377 15 530 15 686 15 843 16 001 16 161 16 323 16 486 16 651
Load factor (heat) 19% 19% 19% 19% 19% 20% 20% 20% 20% 20% 21% 21% 21% 21% 21%
Effective electricity price,
USD/MWh20 22 24 30 35 45 54 66 76 80 83 86 89 92 96
Fuel cost, USD/MWh 12 18 23 26 28 27 29 32 34 36 38 40 42 44 47
EBITDA/kW, USD 17 17 13 26 40 78 113 155 194 200 207 216 226 235 241
Kuzbassenergo (TGK-12)
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 159/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT - 15 18 48 241 413 624 815 840 871 909 950 989 1 016
Tax on EBIT 4 - 4 - 12 - 58 - 99 - 150 - 196 - 202 - 209 - 218 - 228 - 237 - 244
After tax EBIT - 12 14 37 183 314 474 619 639 662 691 722 752 772
Depreciation 74 97 127 157 166 172 179 186 192 200 207 215 223
Capex - 304 - 682 - 702 - 448 - 156 - 158 - 164 - 169 - 176 - 183 - 191 - 199 - 206
Change in WC 44 - 10 - 12 - 25 - 12 - 13 - 12 - 5 - 6 - 7 - 7 - 7 - 6
FCFF - 198 - 583 - 551 - 132 312 476 622 650 673 701 731 760 783
Discounted FCFF - 186 - 488 - 412 - 88 185 252 294 274 253 235 218 203 186
WACC 12.1%
Terminal growth 2.0%
NPV of cash flow 927
NPV of terminal value 1 872
Fair EV 2 799
Net debt 2007 223
Minority interest 0
Fair MCap 3 022
FV of common share, USD 0.0428
Upside to FV 83%
12m TP, USD 0.0490
Upside to TP 109%
Dividend yield 0%
Expected total return over 12m 109%
Current price, USD 0.0235
Shares outstanding, mn 70 616
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.1% 0.0608 0.0653 0.0709 0.0781 0.0876
11.1% 0.0513 0.0546 0.0586 0.0637 0.0701
12.1% 0.0435 0.0460 0.0490 0.0526 0.0572
13.1% 0.0370 0.0390 0.0412 0.0439 0.0472
14.1% 0.0317 0.0332 0.0349 0.0369 0.0394
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.1% 903 973 1 062 1 175 1 325
11.1% 752 804 868 947 1 049
12.1% 629 668 715 773 845
13.1% 527 557 593 636 688
14.1% 443 466 493 525 564
Terminal growth
Electricity Heat Total USD/kW
Kuzbass 2 028 476 2 504 695 - 12 2 493 692
Barnaul 236 412 648 827 0 648 827
Kuzbassenergo total 2 265 888 3 153 719 - 12 3 141 716
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 160/183
TGK-13
Strengths Below-average effective fuel price
Favourable heat business regulation
Weaknesses Above-average fuel burn rate
Risks related to lawsuit from Rosneft
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-13 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Krasnoyarsk Krasnoyarsk 2 205 6 920 10 452 11 834
Khakassia Khakassia 270 481 1 078 1 251
TGK-13 total 2 475 7 401 11 530 13 085
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Krasnoyarsk2 new 185 MW and 30 MW turbines,
reconstruction of existing capacity2010 442 540 coal 625 125
Coal98.9%
Fuel oil
1.1%
Coal99.1%
Fuel oil
0.9%
UES57%
SUEK35%
Other minorities
8%
SUEK47%
Gazprom5%
Other minorities
26%
KIT Finance4%
Metropol3%
Donalink Ltd.15%
TGK-13
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 161/183
Financials
Financial ratios
Operational data
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 1 127 1 192 1 391 1 509 1 661 1 702 1 676 1 680 1 683 1 686 1 688 1 691 1 693 1 697 1 700
Non-cash WC 9 16 17 22 27 35 41 48 55 58 61 64 68 72 76
LT investments 74 83 91 127 208 343 436 555 693 847 1 018 1 208 1 419 1 653 1 913
Equity 1 004 1 030 1 277 1 259 1 312 1 478 1 687 2 033 2 476 2 940 3 427 3 942 4 486 5 065 5 682
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) 34 93 49 234 422 444 310 94 - 200 - 505 - 816 -1 135 -1 462 -1 799 -2 148
Other LT liabilities (+) or assets (-) 172 168 172 165 162 159 156 156 156 156 156 156 156 156 156
Income statement*
Revenues 319 401 480 600 650 792 925 1 086 1 244 1 304 1 369 1 443 1 522 1 610 1 704
Electricity 102 162 198 301 350 480 597 732 866 903 945 998 1 053 1 116 1 183
Heat 199 219 259 275 274 286 302 326 348 370 391 412 434 458 483
Other 17 20 23 25 25 26 27 28 30 31 32 33 35 36 38
Cost of sales - 378 - 455 - 523 - 593 - 629 - 678 - 709 - 746 - 795 - 844 - 895 - 952 -1 014 -1 079 -1 149
Fuel costs - 119 - 146 - 190 - 228 - 243 - 269 - 283 - 297 - 319 - 341 - 365 - 394 - 425 - 458 - 493
D&A - 71 - 76 - 83 - 90 - 93 - 85 - 89 - 92 - 96 - 100 - 105 - 109 - 114 - 118 - 123
Fixed costs - 188 - 232 - 249 - 276 - 294 - 324 - 337 - 356 - 380 - 402 - 425 - 450 - 476 - 503 - 532
EBITDA 17 30 48 104 122 207 314 442 555 571 589 611 633 661 690
EBIT - 54 - 47 - 35 14 29 122 225 349 458 470 484 501 520 543 567
EBT - 52 - 48 - 40 45 103 253 315 460 588 616 647 683 723 769 820
Net income - 52 - 48 - 40 34 78 193 240 350 447 468 492 519 549 585 623
EBITDA margin 5% 7% 10% 17% 19% 26% 34% 41% 45% 44% 43% 42% 42% 41% 40%
EBIT margin neg neg neg 2% 4% 15% 24% 32% 37% 36% 35% 35% 34% 34% 33%
Net margin neg neg neg 6% 12% 24% 26% 32% 36% 36% 36% 36% 36% 36% 37%
Cash flow statement
Change in WC - 3 - 10 0 - 6 - 5 - 9 - 7 - 7 - 7 - 3 - 3 - 3 - 4 - 4 - 4
OCF 9 19 57 87 92 137 231 324 407 420 431 443 456 472 489
Net capex - 29 - 64 - 253 - 268 - 276 - 158 - 95 - 96 - 100 - 103 - 107 - 112 - 117 - 122 - 127
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 29 - 63 - 253 - 268 - 276 - 158 - 95 - 96 - 100 - 103 - 107 - 112 - 117 - 122 - 127
Equity raised/bought back 0 0 251 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 29 57 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 24 48 241 - 10 - 10 - 10 - 10 - 10 - 10 - 10 - 10 - 10 - 10 - 10 - 10
Net CF 4 3 45 - 191 - 194 - 31 127 218 297 308 314 322 330 341 352
* Non-recurring items and electricity trading activities excluded
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 2.9 2.4 1.9 1.8 1.5 1.3 1.1 0.9 0.9 0.8 0.8 0.8 0.7 0.7
EV/EBITDA 39.1 24.1 11.1 9.5 5.6 3.7 2.6 2.1 2.0 2.0 1.9 1.8 1.8 1.7
P/E neg neg 38.8 16.8 6.8 5.5 3.8 2.9 2.8 2.7 2.5 2.4 2.2 2.1
2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 2 475 2 475 2 535 2 720 2 757 2 972 2 972 2 977 2 977 2 977 2 977 2 977 2 977 2 977 2 977
Electricity sales, GWh 9 019 10 107 10 529 11 808 11 811 12 508 12 409 12 047 12 118 12 206 12 364 12 658 12 959 13 266 13 580
Load factor (electricity) 48% 53% 55% 57% 56% 55% 54% 52% 53% 53% 54% 55% 56% 58% 59%
Heat capacity, Gcal/h 7 401 7 401 7 319 7 589 7 589 7 859 7 859 7 859 7 859 7 859 7 859 7 859 7 859 7 859 7 859
Heat sales, thous. Gcal 14 461 13 085 13 074 13 796 13 928 14 653 14 787 14 923 15 061 15 200 15 340 15 481 15 624 15 769 15 915
Load factor (heat) 22% 20% 20% 21% 21% 21% 21% 22% 22% 22% 22% 22% 23% 23% 23%
Effective electricity price,
USD/MWh11 16 19 25 30 38 48 61 71 74 76 79 81 84 87
Fuel cost, USD/MWh 13 14 18 19 21 21 23 25 26 28 30 31 33 34 36
EBITDA/kW, USD 7 12 19 38 44 70 106 148 186 192 198 205 213 222 232
TGK-13
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 162/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT - 35 14 29 122 225 349 458 470 484 501 520 543 567
Tax on EBIT 8 - 3 - 7 - 29 - 54 - 84 - 110 - 113 - 116 - 120 - 125 - 130 - 136
After tax EBIT - 27 11 22 93 171 265 348 357 368 381 395 412 431
Depreciation 83 90 93 85 89 92 96 100 105 109 114 118 123
Capex - 253 - 268 - 276 - 158 - 95 - 96 - 100 - 103 - 107 - 112 - 117 - 122 - 127
Change in WC 0 - 6 - 5 - 9 - 7 - 7 - 7 - 3 - 3 - 3 - 4 - 4 - 4
FCFF - 197 - 173 - 166 11 158 254 338 352 363 375 388 405 423
Discounted FCFF - 185 - 145 - 124 7 94 135 160 148 136 126 116 108 100
WACC 12.1%
Terminal growth 2.0%
NPV of cash flows 676
NPV of terminal value 1 011
Fair EV 1 687
Net debt 2007 (adj. for SPO in 2008) 156
25% stake in Kransoyarsk GES at
target value 909
Fair MCap 2 753
FV of common share, USD 0.0173
Upside to FV 110%
12m TP, USD 0.0198
Upside to TP 140%
Dividend yield 0.0%
Expected total return over 12m 140%
Current price, USD 0.00825
Shares outstanding, mn 159 149
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.1% 0.0227 0.0238 0.0251 0.0268 0.0291
11.1% 0.0204 0.0212 0.0221 0.0233 0.0249
12.1% 0.0185 0.0191 0.0198 0.0207 0.0218
13.1% 0.0169 0.0174 0.0179 0.0185 0.0193
14.1% 0.0156 0.0159 0.0163 0.0168 0.0174
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.1% 948 1 016 1 100 1 208 1 352
11.1% 801 851 912 989 1 086
12.1% 681 719 764 819 888
13.1% 582 611 645 686 736
14.1% 499 522 548 579 615
Terminal growth
Electricity Heat Total USD/kW
Krasnoyarsk 1 007 550 1 557 706 140 1 698 770
Khakassia 137 58 195 724 0 195 724
TGK-13 total 1 144 609 1 753 708 140 1 893 765
Branch
12m Target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 163/183
TGK-14
Strengths Favourable heat business regulation
Weaknesses Below-average electricity load factor
Above-average fuel burn rate
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
TGK-14 RTS Index RTS Electric Utilities Index
Branch Region
Installed
electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation
2007,
GWh
Heat sales
2007,
k GCal
Buryatia Buryatia 130 744 366 1 270
Chita Chita 513 1 533 2 000 2 696
TGK-14 total 643 2 277 2 365 3 966
Branch Project
Completion
date
New
electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial
investment
outlay,
USD mn
NPV,
USD mn
Buryatia 2 new 20 MW turbines 2010 40 0 coal 56 - 25
Chita new 6 MW turbine 2008 6 34 coal 8 1
Coal99.8%
Fuel oil
0.2%
Coal99.7%
Fuel oil
0.3%
State50%
Norilsk Nickel28%
Other minorities
22%
Norilsk Nickel28%
Other minorities
22%
Energopromsbyt(51% owned by
Russian
Railways)50%
TGK-14
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 164/183
Financials
Financial ratios
Operational data
USD mn 2006 2007е 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 148 166 211 235 236 238 240 246 252 258 263 269 274 280 286
Non-cash WC 5 5 6 7 9 10 11 13 14 15 16 17 18 19 21
LT investments 5 5 6 5 5 5 5 5 5 5 5 5 5 5 5
Equity 165 185 208 218 231 245 273 323 388 455 525 598 674 754 837
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) - 7 - 8 16 30 19 8 - 16 - 59 - 116 - 177 - 241 - 307 - 376 - 449 - 525
Other LT liabilities (+) or assets (-) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Income statement*
Revenues 173 150 180 200 214 225 253 288 324 343 362 385 408 434 461
Electricity 62 59 60 75 85 91 112 137 162 170 180 191 204 217 231
Heat 101 80 106 112 115 119 126 136 146 155 165 175 185 197 209
Other 10 11 13 14 14 15 15 16 17 17 18 19 19 20 21
Cost of sales - 155 - 140 - 154 - 175 - 190 - 200 - 210 - 222 - 237 - 253 - 269 - 287 - 306 - 327 - 349
Fuel costs - 73 - 64 - 77 - 90 - 98 - 103 - 109 - 115 - 124 - 133 - 142 - 153 - 165 - 177 - 191
D&A - 9 - 9 - 11 - 12 - 12 - 12 - 12 - 13 - 14 - 15 - 15 - 16 - 17 - 18 - 19
Fixed costs - 73 - 67 - 67 - 73 - 79 - 85 - 88 - 93 - 99 - 105 - 111 - 118 - 124 - 132 - 139
EBITDA 27 19 36 38 36 37 56 80 101 105 109 114 119 125 130
EBIT 18 10 26 26 24 25 44 67 87 90 93 98 102 106 111
EBT 17 10 25 25 23 24 43 66 86 89 93 97 101 106 110
Net income 13 7 19 19 18 19 33 50 66 68 71 74 77 80 84
EBITDA margin 16% 13% 20% 19% 17% 16% 22% 28% 31% 31% 30% 30% 29% 29% 28%
EBIT margin 11% 7% 14% 13% 11% 11% 17% 23% 27% 26% 26% 25% 25% 25% 24%
Net margin 8% 5% 10% 9% 8% 8% 13% 17% 20% 20% 19% 19% 19% 19% 18%
Cash flow statement
Change in WC - 4 0 - 1 - 1 - 1 - 1 - 1 - 2 - 2 - 1 - 1 - 1 - 1 - 1 - 1
OCF 17 18 29 30 29 30 44 62 79 82 86 90 94 98 103
Net capex - 2 - 17 - 52 - 45 - 18 - 18 - 19 - 19 - 20 - 20 - 21 - 22 - 23 - 24 - 25
Acquisitions/divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 9 - 16 - 51 - 45 - 17 - 18 - 18 - 19 - 19 - 20 - 21 - 22 - 22 - 23 - 24
Equity raised/bought back 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1
Net CF 8 0 - 23 - 16 11 11 25 43 58 61 64 67 70 73 77
* Non-recurring items and electricity trading activities excluded
2007е 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 1.6 1.4 1.2 1.1 1.1 1.0 0.8 0.8 0.7 0.7 0.6 0.6 0.6 0.5
EV/EBITDA 12.6 6.8 6.5 6.7 6.6 4.4 3.1 2.4 2.3 2.2 2.1 2.1 2.0 1.9
P/E 34.6 13.4 13.4 14.2 13.7 7.7 5.0 3.8 3.7 3.6 3.4 3.3 3.1 3.0
2006 2007е 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 643 643 519 539 559 559 559 559 559 559 559 559 559 559 559
Electricity sales, GWh 2 344 1 997 1 830 1 991 2 071 1 992 1 975 1 909 1 921 1 936 1 963 2 013 2 064 2 117 2 170
Load factor (electricity) 49% 42% 46% 48% 48% 46% 45% 44% 44% 45% 45% 46% 48% 49% 50%
Heat capacity, Gcal/h 3 120 2 277 2 311 2 311 2 311 2 311 2 311 2 311 2 311 2 311 2 311 2 311 2 311 2 311 2 311
Heat sales, thous. Gcal 5 352 3 966 4 080 4 120 4 160 4 201 4 243 4 284 4 326 4 369 4 412 4 455 4 499 4 543 4 588
Load factor (heat) 20% 20% 20% 20% 21% 21% 21% 21% 21% 22% 22% 22% 22% 22% 23%
Effective electricity price,
USD/MWh26 29 33 37 41 46 57 72 84 88 91 95 99 102 106
Fuel cost, USD/MWh 31 32 42 45 48 52 55 61 65 69 72 76 80 84 88
EBITDA/kW, USD 42 30 70 70 65 66 100 143 181 187 195 204 213 223 233
TGK-14
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 165/183
DCF
12m target price
12m target EV/capacity
Valuation
USD mn 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 10 26 26 24 25 44 67 87 90 93 98 102 106 111
Tax on EBIT - 2 - 6 - 6 - 6 - 6 - 10 - 16 - 21 - 22 - 22 - 23 - 24 - 26 - 27
After tax EBIT 8 19 19 18 19 33 51 66 68 71 74 77 81 84
Depreciation 9 11 12 12 12 12 13 14 15 15 16 17 18 19
Capex - 17 - 52 - 45 - 18 - 18 - 19 - 19 - 20 - 20 - 21 - 22 - 23 - 24 - 25
Change in WC 0 - 1 - 1 - 1 - 1 - 1 - 2 - 2 - 1 - 1 - 1 - 1 - 1 - 1
FCFF 1 - 23 - 15 11 11 25 43 59 62 65 67 71 74 77
Discounted FCFF 1 - 21 - 13 8 7 15 22 27 25 23 21 20 18 17
WACC 12.8%
Terminal growth 2.0%
NPV of cash flow 169
NPV of terminal value 160
Fair EV 330
Net debt 2007e 8
Minority interest 0
Fair MCap 338
FV of common share, USD 0.000434
Upside to FV 34%
12m TP, USD 0.000501
Upside to TP 54%
Dividend yield 0.0%
Expected total return over 12m 54%
Current price, USD 0.000325
Shares outstanding, mn 777 946
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 0.000601 0.000634 0.000674 0.000725 0.000790
11.8% 0.000524 0.000548 0.000578 0.000614 0.000660
12.8% 0.000460 0.000478 0.000501 0.000527 0.000560
13.8% 0.000406 0.000421 0.000438 0.000458 0.000482
14.8% 0.000361 0.000372 0.000385 0.000401 0.000419
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 696 735 783 843 920
11.8% 605 634 669 712 766
12.8% 530 552 578 610 648
13.8% 466 483 503 527 556
14.8% 413 426 442 460 481
Terminal growth
Electricity Heat Total USD/kW
Buryatia 0 105 105 806 - 28 77 588
Chita 160 135 295 574 1 296 576
TGK-14 total 160 240 400 621 - 28 372 578
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 166/183
Bashkirenergo
Strengths Above-average electricity load factor
Favourable heat business regulation
Weaknesses Poor corporate governance
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
Operational data
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Bashkirenergo common RTS Index
RTS Electric Utilities Index
Branch Region
Installed electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation 2007,
GWh
Heat sales
2007,
k GCal
Bashkirenergo Thermal Bashkiria 4 933 17 349 24 506 31 657
Bashkirenergo Hydro Bashkiria 213 0 908 0
Bashkirenergo total 5 147 17 349 25 414 31 657
Branch Project
Completion
date
New electric
capacity,
MW
New heat
capacity,
Gcal/h
Fuel
type
Initial investment
outlay,
USD mn
NPV,
USD mn
Bashkirenergo Thermal new 450 MW CCGT 2012 450 0 gas 500 98
Gas92.5%
Coal1.4%
Fuel oil6.1%
Fuel mix, 2007e
Gas92.7%
Coal1.4%
Fuel oil5.9%
Fuel mix, 2011e
UES21%
Bashnef t12%
Novo-Ufa Oil Ref inery
12% Ufanef tekhim13%
Ufa Oil Ref inery
12%
Other minorities
30%
Ownership structure, 2007e
Bashnef t12%
Novo-Ufa Oil Ref inery
12%
Ufanef tekhim13%
Ufa Oil Ref inery
12%
Unitrade21%
Other minorities
30%
Ownership structure, 2008e
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 5 131 5 147 5 139 5 139 5 339 5 339 5 589 5 589 5 589 5 589 5 589 5 589 5 589 5 589 5 589
Electricity sales, GWh 21 000 21 204 21 700 21 466 20 690 19 832 19 913 19 915 19 995 20 055 20 620 21 198 21 790 22 396 23 017
Load factor (electricity) 56% 56% 58% 57% 53% 50% 48% 48% 48% 48% 50% 51% 52% 54% 55%
Heat capacity, Gcal/h 17 336 17 349 17 349 17 349 17 349 17 349 17 349 17 349 17 349 17 349 17 349 17 349 17 349 17 349 17 349
Heat sales, thous. Gcal 32 991 31 657 31 974 32 293 32 616 32 942 33 272 33 605 33 941 34 280 34 623 34 969 35 319 35 672 36 029
Load factor (heat) 22% 21% 21% 21% 21% 22% 22% 22% 22% 23% 23% 23% 23% 23% 24%
Bashkirenergo
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 167/183
DCF, generation assets
Sum-of-parts valuation
12m target price
12m target EV/capacity
Valuation, generation assets
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
USD mn 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020
EBIT - 11 101 185 207 367 474 639 659 691 725 760 797 837
Tax on EBIT 3 - 24 - 44 - 50 - 105 - 137 - 182 - 187 - 194 - 201 - 208 - 216 - 224
After tax EBIT - 8 77 141 158 262 337 457 472 497 524 552 581 613
Depreciation 60 84 108 135 141 148 153 159 165 171 178 185 192
Capex - 218 - 224 - 229 - 233 - 187 - 138 - 142 - 147 - 154 - 160 - 168 - 175 - 183
Change in WC - 4 - 7 2 13 - 21 - 19 - 9 - 6 - 8 - 8 - 8 - 9 - 9
FCFF - 171 - 71 22 72 195 328 458 479 501 526 553 582 612
WACC 12.6%
Terminal growth 2.0%
NPV of cash flow 1 331 50%
NPV of terminal value 1 329 50%
Fair EV 2 660
Excl.
investment
projects
Incl.
investment
projects
Fair EV of generation, USD mn 2 561 2 660
Fair EV of grids, USD mn 1 133 1 133
Total Fair EV, USD mn 3 695 3 793
Net debt 2007e, USD mn - 49 - 49
Fair MCap, USD mn 3 645 3 744
Common shares outstanding, mn 1 043 1 043
Preferred shares outstanding, mn 50 50
FV of common share, USD 3.43 3.52
12m TP of common share, USD 3.94 4.04
Current common share price, USD 1.59 1.59
Upside to TP, common share 148% 155%
FV of preferred share, USD 1.46 1.50
12m TP of preferred share, USD 1.68 1.72
Current preferred share price, USD 1.56 1.56
Upside to TP, preferred share 8% 11%
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.6% 4.64 4.84 5.09 5.40 5.82
11.6% 4.17 4.32 4.51 4.73 5.02
12.6% 3.79 3.91 4.04 4.21 4.41
13.6% 3.47 3.56 3.67 3.79 3.94
14.6% 3.20 3.27 3.35 3.45 3.56
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.6% 950 991 1 042 1 106 1 189
11.6% 856 887 924 970 1 027
12.6% 779 802 830 863 904
13.6% 714 732 753 778 809
14.6% 660 674 690 709 732
Terminal growth
Electricity Heat Total USD/kW
Bashkirenergo Thermal 1 678 1 009 2 687 545 111 2 798 567
Bashkirenergo Hydro 199 0 199 932 0 199 932
Bashkirenergo total 1 876 1 009 2 886 561 111 2 996 582
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 168/183
Irkutskenergo
Strengths Hydro power plants
Below-average fuel burn rate
Effective fuel price Below-average
Favourable heat business regulation
Weaknesses Poor corporate governance, transfer
pricing risks
6-month performance
Assets
New investment projects
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
Operational data
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Irkutskenergo
RTS Index
RTS Electric Utilities Index
Branch Region
Installed electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation 2007,
GWh
Heat sales
2007,
k GCal
Irkutskenergo Thermal Irkutsk 3 878 13 002 10 840 23 985
Irkutskenergo Hydro Irkutsk 9 002 0 47 625 0
Irkutskenergo total 12 880 13 002 58 465 23 985
Branch Project
Completion
date
New electric
capacity,
MW
New heat
capacity,
Gcal/h Fuel type
Initial investment
outlay,
USD mn
NPV,
USD mn
Irkutskenergo Thermal new turbine 2015 300 gas 353 - 105
Irkutskenergo Thermal new power plant & new unit 2016 1 320 coal 2 081 - 204
Coal99.5%
Fuel oil
0.5%
Fuel mix, 2007e
Coal99.5%
Fuel oil
0.5%
Fuel mix, 2011e
Russian Federation
40%Nominal holders
47%
Other minorities
13%
Ownership structure, 2007e
Russian Federation
40% Nominal holders
47%
Other minorities
13%
Ownership structure, 2008e
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 12 880 12 880 12 880 12 880 12 880 12 880 12 955 13 360 13 765 14 170 14 500 14 500 14 500 14 500 14 500
Electricity sales, GWh 54 768 52 339 50 790 51 049 50 865 50 433 50 840 53 176 55 938 58 715 61 060 61 332 61 611 61 896 62 188
Load factor (electricity) 50% 52% 50% 51% 50% 50% 50% 51% 52% 52% 53% 53% 54% 54% 54%
Heat capacity, Gcal/h 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002 13 002
Heat sales, Gcal th 24 590 23 985 24 225 24 467 24 712 24 959 25 209 25 461 25 716 25 973 26 232 26 495 26 760 27 027 27 298
Load factor (heat) 22% 21% 21% 21% 22% 22% 22% 22% 23% 23% 23% 23% 23% 24% 24%
Irkutskenergo
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 169/183
DCF, generation assets
Sum-of-parts valuation
12m target price
12m target EV/capacity
Valuation, generation assets
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 184 543 840 1 288 1 925 2 812 3 607 3 807 4 014 4 148 4 287 4 432 4 581
Tax on EBIT - 44 - 130 - 202 - 309 -1 151 -1 768 -2 300 -2 329 -2 348 -2 341 -2 324 -2 297 -2 257
After tax EBIT 140 412 639 979 774 1 044 1 307 1 479 1 665 1 807 1 963 2 135 2 324
Depreciation 185 173 158 144 174 211 244 271 290 307 324 341 360
Capex - 278 - 315 - 513 - 722 - 915 - 923 - 751 - 568 - 405 - 419 - 433 - 448 - 463
Change in WC - 15 - 21 - 35 - 55 - 34 - 47 - 44 - 17 - 16 - 11 - 11 - 12 - 12
FCFF 31 250 249 347 - 2 285 756 1 164 1 534 1 684 1 843 2 017 2 209
Discounted FCFF 29 205 180 220 - 1 140 327 443 514 496 478 460 443
WACC 13.6%
Terminal growth 2.0%
NPV of cash flow 3 939
NPV of terminal value 3 883
Fair EV 7 822
Excl.
investment
projects
Inlc.
investment
projects
Fair EV of generation, USD mn 8 131 7 822
Fair EV of grids, USD mn 975 975
Total fair EV, USD mn 9 106 8 797
Total 12m Target EV, USD mn 10 352 10 001
Net debt 2007e, USD mn - 23 - 23
Fair MCap, USD mn 9 084 8 774
Common shares outstanding, mn 4 767 4 767
FV of common share, USD 1.91 1.84
12m TP, USD 2.21 2.14
Current price, USD 0.88 0.88
Upside to TP 152% 143%
WACC
11.6% 2.51 2.63 2.78 2.96 3.19
12.6% 2.23 2.32 2.43 2.56 2.72
13.6% 1.99 2.06 2.14 2.24 2.36
14.6% 1.79 1.84 1.91 1.98 2.07
15.6% 1.62 1.67 1.72 1.77 1.84
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
11.6% 910 954 1 007 1 072 1 155
12.6% 806 839 879 927 986
13.6% 720 746 776 812 855
14.6% 648 669 692 719 752
15.6% 588 604 622 643 668
Terminal growth
Electricity Heat Total USD/kW
Irkutskenergo Thermal 1 470 786 2 256 582 - 351 1 905 491
Irkutskenergo Hydro 6 988 0 6 988 776 0 6 988 776
Irkutskenergo total 8 458 786 9 244 718 - 351 8 893 690
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 170/183
Novosibirskenergo
Strengths Below-average fuel burn rate
Weaknesses Below-average electricity load factor
Poor corporate governance
6-month performance
Assets
Fuel mix Ownership structure
2007e 2011e 2007e 2008e
Operational data
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Novosibirskenergo common
RTS Index
RTS Electric Utilities Index
Gas7.5%
Coal92.0%
Fuel oil0.5%
Fuel mix, 2007e
Gas7.5%
Coal92.0%
Fuel oil0.5%
Fuel mix, 2011e
UES14%
Power Measurement
25%Ferncote Ltd
11%
Romos Ltd11%
IK Gazinvest
AM
7%Troika Dialog
AM
7%
UFG IS
Trading
Ltd7%
Other24%
Ownership structure, 2007e
Renaissance Capital14%
Power Measurement
25%Ferncote Ltd
11%
Romos Ltd11%
IK Gazinvest
AM
7%Troika Dialog
AM
7%
UFGIS
Trading
Ltd7%
Other24%
Ownership structure, 2008e
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522 2 522
Electricity sales, GWh 9 838 9 313 9 590 9 844 9 664 9 239 9 150 8 795 8 860 8 939 9 084 9 351 9 625 9 905 10 191
Load factor (electricity) 49% 47% 48% 49% 48% 46% 46% 44% 44% 45% 45% 47% 48% 50% 51%
Heat capacity, Gcal/h 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246 7 246
Heat sales, Gcal th 13 041 13 171 13 303 13 436 13 571 13 706 13 843 13 982 14 122 14 263 14 405 14 549 14 695 14 842 14 990
Load factor (heat) 21% 21% 21% 21% 21% 22% 22% 22% 22% 22% 23% 23% 23% 23% 24%
Branch Region
Installed electric
capacity 2007,
MW
Installed heat
capacity 2007,
Gcal/h
Electricity
generation 2007,
GWh
Heat sales
2007,
k GCal
Novosibirskenergo Novosibirsk 2 522 7 246 10 304 13 171
Novosibirskenergo
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 171/183
DCF, generation assets
Sum-of-parts valuation
12m target price, common
12m target EV/capacity
Valuation, generation assets
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 45 42 41 64 156 273 372 383 396 411 427 444 462
Tax on EBIT - 11 - 10 - 10 - 15 - 38 - 65 - 89 - 92 - 95 - 99 - 103 - 107 - 111
After tax EBIT 34 32 31 49 119 207 283 291 301 313 325 338 351
Depreciation 83 74 62 50 52 55 58 61 64 68 71 75 79
Capex - 66 - 69 - 70 - 71 - 73 - 73 - 76 - 79 - 82 - 85 - 89 - 93 - 98
Change in WC 13 27 31 35 - 7 - 7 - 7 - 3 - 3 - 4 - 4 - 4 - 4
FCFF 64 64 54 63 92 182 258 271 280 291 303 315 327
Discounted FCFF 60 53 40 42 53 94 119 111 102 94 87 80 74
WACC 12.6%
Terminal growth 2.0%
NPV of cash flow 1 008
NPV of terminal value 711
Fair EV 1 719
Fair EV of generation, USD mn 1 719
Fair EV of grids, USD mn 572
Total fair EV, USD mn 2 291
Net debt 2007e, USD mn - 223
Fair Mcap, USD mn 2 068
Common shares outstanding, mn 14
Preferred shares outstanding, mn 3
FV of common share, USD 138.2
FV of preferred share, USD 78.1
12m TP of common share, USD 158.8
12m TP of preferred share, USD 89.7
Current common share price, USD 70.5
Current preferred share price, USD 46.0
Upside to TP, common share 125%
Upside to TP, preferred share 95%
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.6% 182.1 189.9 199.4 211.4 227.1
12.6% 149.3 153.6 158.8 165.1 172.9
13.6% 136.8 140.2 144.1 148.8 154.5
14.6% 126.3 128.9 132.0 135.5 139.8
Terminal growth WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.6% 1 158 1 203 1 258 1 328 1 419
11.6% 1 054 1 087 1 128 1 177 1 240
12.6% 967 993 1 023 1 059 1 104
13.6% 895 915 937 965 998
14.6% 834 849 867 887 912
Electricity Heat Total USD/kW
Novosibirskenergo 836 1 097 1 933 767 0 1 933 767
Plant
12m target EV, USD mn
Existing assets New
projects Total USD/kW
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 172/183
RusHydro
Strengths Hydro power plants
Weaknesses Below-average electricity load factor
Transfer pricing risks
6-month performance
Assets
New investment projects
Ownership structure
2007e 1H08e 2H08e
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Hydro OGK RTS Index RTS Electric Utilities Index
Region Project
Completion
date
New electric
capacity,
MW
Initial investment
outlay,
USD mn
NPV,
USD mn
European Russia Zhigulyevskaya GES, Kamskaya GES,
Sulakenergo, Kaskad Nizhnecherekskih
GES, Gotsatlinskiye GES, Zaramagskiye
GES, Small GES
2010 587 1 124 231
Siberia Boguchanskaya GES 2013 3 000 2 539 92
Isolated Bureyskaya GES 2013 335 994 51
Zagorskaya GAES Zagorskaya GAES-2 2012 840 1 820 7
UES96%
Russian Federation
2%
Option program operator
2%
Ownership structure, 2007e
UES78%
Russian Federation
1%Minorities
21%
Ownership structure, 1H08
Russian Federation
60%
Option program operator
2%
Other minorities
38%
Ownership structure, 2H08e
Region
Installed electric
capacity 2007,
MW
Electricity
generation
2007,
GWh
European Russia 12 600 50 014
Siberia 7 176 22 779
Isolated 3 067 8 976
Zagorskaya GAES 1 200 1 934
RusHydro total 24 043 83 704
RusHydro
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 173/183
Financials
Financial ratios
Operational data
USD mn 2006 2007е 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheetFixed assets 3 985 5 773 7 689 8 447 9 496 10 229 10 415 10 398 10 375 10 346 10 309 10 266 10 216 10 158 10 092
Non-cash WC 415 739 810 742 597 245 299 377 435 451 467 484 501 519 538
LT investments 147 158 162 155 152 149 147 147 147 147 147 147 147 147 147
Equity 3 109 4 976 9 745 10 788 12 686 15 373 17 074 19 415 21 973 24 774 27 840 31 201 34 886 38 930 43 371
Minority interest 797 855 874 839 823 807 792 792 792 792 792 792 792 792 792
Net debt (+) or cash (-) 413 595 -2 208 -2 523 -3 499 -5 787 -7 232 -9 512 -12 035 -14 849 -17 935 -21 323 -25 041 -29 125 -33 613
Other LT liabilities (+)
or assets (-) 228 245 250 240 235 231 226 226 226 226 226 226 226 226 226
Income statement*Revenues 745 1 609 2 343 3 116 4 186 5 507 6 714 8 450 9 765 10 116 10 477 10 852 11 241 11 645 12 064
Electricity 601 1 443 2 155 2 917 3 980 5 294 6 493 8 220 9 523 9 865 10 216 10 580 10 958 11 350 11 758
Other 144 165 188 200 206 214 220 231 241 251 261 272 283 295 307
Cost of sales - 591 - 762 - 953 -1 131 -1 323 -1 554 -1 668 -1 813 -1 915 -2 014 -2 118 -2 227 -2 342 -2 462 -2 589
D&A - 114 - 163 - 257 - 352 - 446 - 557 - 595 - 626 - 651 - 676 - 703 - 730 - 758 - 786 - 816
Fixed costs - 478 - 599 - 697 - 779 - 877 - 998 -1 074 -1 187 -1 264 -1 338 -1 415 -1 497 -1 584 -1 676 -1 773
EBITDA 267 1 010 1 646 2 338 3 309 4 510 5 640 7 263 8 500 8 778 9 062 9 354 9 657 9 969 10 291
EBIT 153 847 1 390 1 986 2 863 3 953 5 046 6 637 7 849 8 102 8 359 8 625 8 899 9 182 9 475
EBT 141 788 1 327 1 924 2 803 3 894 4 988 6 579 7 792 8 044 8 301 8 567 8 841 9 125 9 417
Net income 87 599 1 009 1 462 2 130 2 960 2 010 2 363 2 583 2 827 3 096 3 393 3 720 4 083 4 483
EBITDA margin 36% 63% 70% 75% 79% 82% 84% 86% 87% 87% 86% 86% 86% 86% 85%
EBIT margin 21% 53% 59% 64% 68% 72% 75% 79% 80% 80% 80% 79% 79% 79% 79%
Net margin 12% 37% 43% 47% 51% 54% 30% 28% 26% 28% 30% 31% 33% 35% 37%
* Non-recurring items and electricity trading activities excluded
Cash flow statementChange in WC - 542 - 282 - 54 37 132 343 - 59 - 78 - 59 - 16 - 16 - 17 - 18 - 18 - 19
OCF - 343 539 1 274 1 912 2 768 3 918 2 603 2 969 3 232 3 545 3 840 4 163 4 518 4 908 5 337
Net capex - 571 -1 601 -2 022 -1 439 -1 673 -1 481 - 977 - 610 - 628 - 647 - 666 - 686 - 707 - 728 - 750 Acquisitions/
divestments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 657 -1 599 -2 020 -1 438 -1 671 -1 480 - 976 - 608 - 626 - 645 - 665 - 685 - 705 - 726 - 748
Equity raised/bought
back 736 975 3 594 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 450 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 1 160 915 3 531 - 63 - 61 - 60 - 59 - 59 - 59 - 59 - 59 - 59 - 59 - 59 - 59
Net CF 160 - 145 2 784 412 1 036 2 378 1 569 2 302 2 547 2 841 3 116 3 419 3 754 4 123 4 530
2007е 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 12.2 8.3 6.3 4.7 3.6 2.9 2.3 2.0 1.9 1.9 1.8 1.7 1.7 1.6
EV/EBITDA 19.4 11.9 8.4 5.9 4.3 3.5 2.7 2.3 2.2 2.2 2.1 2.0 2.0 1.9
P/E 37.6 22.3 15.4 10.6 7.6 11.2 9.5 8.7 8.0 7.3 6.6 6.1 5.5 5.0
2006 2007е 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric
capacity,
MW
21 708 24 043 25 073 25 388 26 134 27 365 28 325 29 705 29 705 29 705 29 705 29 705 29 705 29 705 29 705
Electricity
sales,
GWh
73 112 81 495 84 146 87 156 94 096 101 506 108 258 124 175 124 175 124 175 124 175 124 175 124 175 124 175 124 175
Load factor 39% 40% 39% 40% 42% 44% 45% 49% 49% 49% 49% 49% 49% 49% 49%
Effective
electricity
price,
USD/MWh
8 18 26 33 42 52 60 66 77 79 82 85 88 91 95
EBITDA/kW,
USD12 42 66 92 127 165 199 245 286 296 305 315 325 336 346
RusHydro
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 174/183
DCF
12m target price, common
12m target EV/capacity
Valuation
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 1 390 1 986 2 863 3 953 5 046 6 637 7 849 8 102 8 359 8 625 8 899 9 182 9 475
Tax on EBIT - 334 - 477 - 687 - 949 -3 012 -4 253 -5 248 -5 255 -5 242 -5 209 -5 154 -5 074 -4 965
After tax EBIT 1 056 1 509 2 176 3 004 2 033 2 384 2 602 2 847 3 117 3 415 3 745 4 108 4 510
Depreciation 257 352 446 557 595 626 651 676 703 730 758 786 816
Capex -2 022 -1 439 -1 673 -1 481 - 977 - 610 - 628 - 647 - 666 - 686 - 707 - 728 - 750
Change in WC - 54 37 132 343 - 59 - 78 - 59 - 16 - 16 - 17 - 18 - 18 - 19
FCFF - 763 459 1 081 2 423 1 592 2 322 2 566 2 861 3 138 3 442 3 778 4 149 4 558
Discounted FCFF - 715 382 802 1 597 932 1 209 1 188 1 177 1 148 1 119 1 092 1 066 1 041
WACC 12.5%
Terminal growth 2.0%
NPV of cash flow 12 048
NPV of terminal value 10 131
Fair EV 22 178
Net debt 2007e adj for state injection 2 960
Minority interest -
Fair MCap 25 391
FV of common share, USD 0.096
Upside to FV 13%
12m TP, USD 0.110
Upside to TP 29%
Dividend yield 0.2%
Expected total return over 12m 30%
Current price, USD 0.085
Shares outstanding
(expected after UES breakup), mn 265 739
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 0.128 0.134 0.142 0.151 0.164
11.5% 0.114 0.118 0.124 0.131 0.140
12.5% 0.102 0.106 0.110 0.115 0.121
13.5% 0.092 0.095 0.098 0.102 0.107
14.5% 0.084 0.086 0.089 0.092 0.095
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 1 230 1 298 1 382 1 488 1 627
11.5% 1 079 1 129 1 190 1 266 1 361
12.5% 954 992 1 038 1 093 1 161
13.5% 850 879 914 955 1 005
14.5% 762 785 812 843 880
Terminal growth
Existing assets USD/kW New projects Total USD/kW
European Russia 14 912 1 183 260 15 172 1 204
Siberia 7 689 1 072 104 7 793 1 086
Isolated 736 240 57 793 259
Zagorskaya GAES 1 183 986 8 1 190 992
RusHydro total 24 520 1 020 428 24 948 1 038
12m target EV, USD mn
Plant
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 175/183
Krasnoyarsk GES
6-month performance
Ownership structure
2007 2008e
Assets
Financials
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Krasnoyarskaya GES
RTS Index
RTS Electric Utilities Index
Helington Commodities
Ltd.
52%
Elmstone Ventures Ltd.
16%
TGK-1325%
Other minorities
7%
Ownership structure, 2007
Helington Commodities
Ltd.
52%
Elmstone Ventures Ltd.
16%
TGK-1325%
Other minorities
7%
Ownership structure, 2H08e
Company Region
Installed electric
capacity 2007,
MW
Electricity
generation 2007,
GWh
Krasnoyarsk GES Krasnoyarsk 6 000 20 762
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed assets 151 173 260 328 400 467 532 605 677 748 818 887 954 1 020 1 085
Non-cash WC - 4 - 5 - 2 1 13 38 54 75 93 96 99 103 106 110 114
LT investments 15 31 31 30 29 29 28 28 28 28 28 28 28 28 28
Equity 186 218 247 396 720 1 266 1 637 2 115 2 668 3 283 3 967 4 726 5 569 6 506 7 547
Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net debt (+) or cash (-) - 17 - 14 48 - 31 - 273 - 727 -1 018 -1 401 -1 864 -2 405 -3 015 -3 703 -4 475 -5 342 -6 315
Other LT liabilities (+) or assets (-) - 7 - 6 - 6 - 6 - 5 - 5 - 5 - 5 - 5 - 5 - 5 - 5 - 5 - 5 - 5
Income statement*
Revenues 72 77 102 296 537 851 1 209 1 673 2 079 2 154 2 230 2 308 2 389 2 473 2 561
Electricity 72 77 102 296 536 850 1 209 1 672 2 079 2 153 2 229 2 307 2 389 2 473 2 560
Cost of sales - 48 - 55 - 67 - 79 - 91 - 104 - 112 - 122 - 132 - 142 - 152 - 163 - 174 - 186 - 199
D&A - 3 - 4 - 8 - 12 - 17 - 23 - 27 - 31 - 35 - 39 - 44 - 48 - 53 - 58 - 63
Fixed costs - 45 - 47 - 59 - 66 - 74 - 81 - 85 - 91 - 97 - 102 - 108 - 115 - 121 - 128 - 136
EBITDA 27 24 39 226 459 766 1 120 1 577 1 978 2 047 2 116 2 188 2 262 2 339 2 419
EBIT 24 19 31 213 442 743 1 093 1 547 1 943 2 007 2 072 2 140 2 209 2 281 2 356
EBT 27 20 31 213 442 743 1 093 1 547 1 943 2 007 2 073 2 140 2 209 2 281 2 356
Net income 20 16 24 162 336 564 399 482 559 621 690 766 851 946 1 051
EBITDA margin 38% 31% 38% 76% 86% 90% 93% 94% 95% 95% 95% 95% 95% 95% 94%
EBIT margin 33% 25% 31% 72% 82% 87% 90% 92% 93% 93% 93% 93% 92% 92% 92%
Net margin 28% 20% 23% 55% 63% 66% 33% 29% 27% 29% 31% 33% 36% 38% 41%
Cash flow statement
Change in WC 2 1 - 3 - 3 - 12 - 26 - 17 - 21 - 18 - 3 - 3 - 4 - 4 - 4 - 4
OCF 25 18 29 172 341 562 409 492 575 657 730 811 901 1 000 1 110
Net capex - 11 - 14 - 90 - 93 - 96 - 99 - 102 - 105 - 108 - 111 - 114 - 118 - 121 - 125 - 129
Acquisitions/divestments 0 - 7 0 0 0 0 0 0 0 0 0 0 0 0 0
ICF - 11 - 20 - 90 - 93 - 96 - 99 - 102 - 105 - 108 - 111 - 114 - 118 - 121 - 125 - 129
Equity raised/bought back 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Change in debt 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
FCF 0 - 2 0 0 0 0 0 0 0 0 0 0 0 0 0
Net CF 13 - 4 - 62 79 245 463 308 387 468 546 616 694 780 875 982
* Non-recurring items and electricity trading activities excluded
Krasnoyarsk GES
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 176/183
Financial ratios
Operational data
DCF
12m target price
12m target EV/capacity
Valuation
2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EV/Sales 20.0 15.1 5.2 2.9 1.8 1.3 0.9 0.7 0.7 0.7 0.7 0.6 0.6 0.6
EV/EBITDA 65.4 39.2 6.8 3.4 2.0 1.4 1.0 0.8 0.8 0.7 0.7 0.7 0.7 0.6
P/E 99.8 65.6 9.6 4.6 2.8 3.9 3.2 2.8 2.5 2.3 2.0 1.8 1.6 1.5
2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Electric capacity, MW 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000 6 000
Electricity sales, GWh 21 621 20 631 19 163 19 163 19 163 19 163 19 163 19 163 19 163 19 163 19 163 19 163 19 163 19 163 19 163
Load factor 41% 40% 37% 37% 37% 37% 37% 37% 37% 37% 37% 37% 37% 37% 37%
Effective electricity price,
USD/MWh3 4 5 15 28 44 63 87 108 112 116 120 125 129 134
EBITDA/kW, USD 5 4 7 38 77 128 187 263 330 341 353 365 377 390 403
USD mn 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
EBIT 31 213 442 743 1 093 1 547 1 943 2 007 2 072 2 140 2 209 2 281 2 356
Tax on EBIT - 7 - 51 - 106 - 178 - 694 -1 065 -1 384 -1 386 -1 383 -1 373 -1 358 -1 335 -1 305
After tax EBIT 24 162 336 564 399 482 559 621 690 766 851 946 1 051
Depreciation 8 12 17 23 27 31 35 39 44 48 53 58 63
Capex - 90 - 93 - 96 - 99 - 102 - 105 - 108 - 111 - 114 - 118 - 121 - 125 - 129
Change in WC - 3 - 3 - 12 - 26 - 17 - 21 - 18 - 3 - 3 - 4 - 4 - 4 - 4
FCFF - 62 79 245 463 308 387 468 546 616 694 780 875 982
Discounted FCFF - 57 63 171 280 161 176 184 187 183 178 174 169 165
WACC 15.3%
Terminal growth 2.0%
NPV of cash flow 2 035
NPV of terminal value 1 265
Fair EV 3 300
Net debt 2007 14
Minority interest 0
Fair MCap 3 314
FV, USD 8.47
Upside to FV 113%
12m TP, USD 10.1
Upside to TP 153%
Dividend yield 0.2%
Expected total return over 12m 153%
Current price, USD 3.98
Shares outstanding, mn 391
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
13.3% 11.8 12.2 12.7 13.3 14.1
14.3% 10.6 10.9 11.3 11.7 12.3
15.3% 9.51 9.77 10.1 10.4 10.8
16.3% 8.61 8.82 9.06 9.34 9.66
17.3% 7.84 8.01 8.20 8.41 8.66
Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0%
13.3% 742 770 802 840 887
14.3% 664 685 710 739 774
15.3% 598 615 634 656 683
16.3% 542 555 570 587 608
17.3% 493 503 515 529 545
Terminal growth
Existing assets USD/kW New projects Total USD/kW
Krasnoyarsk GES 3 804 634 0 3 804 634
12m target EV, USD mn
Plant
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 177/183
Appendix 4: List of figures
Figure 1: Power consumption, government forecast vs. Glitnir ...................................................................................................................................... 5
Figure 2: Load factors, generation companies ............................................................................................................................................................... 6
Figure 3: Effective electricity prices ............................................................................................................................................................................... 7
Figure 4: Valuation summary, Russian generation ........................................................................................................................................................ 9
Figure 5:Summary, foreign generation ........................................................................................................................................................................ 10
Figure 6: Valuation summary, integrated ..................................................................................................................................................................... 11
Figure 7: Valuation summary, distribution ................................................................................................................................................................... 11
Figure 8: Valuation summary, transmission ................................................................................................................................................................. 13
Figure 9: Price performance ........................................................................................................................................................................................ 14
Figure 10: Capacity and generation by country ........................................................................................................................................................... 16
Figure 11: Capacity and generation by type, 2007 ...................................................................................................................................................... 16
Figure 12: Average load factor by type of capacity, 2007 ............................................................................................................................................ 16
Figure 13: Fuel balance in Russia, 2006 ..................................................................................................................................................................... 17
Figure 14: Electricity consumption breakdown, 2007 ................................................................................................................................................... 17
Figure 15: GDP and power consumption ..................................................................................................................................................................... 18
Figure 16: Installed electric capacity, maximum load, reserve margin, Russia total ..................................................................................................... 18
Figure 17: Peak consumption, January 23, 2006 ........................................................................................................................................................ 19
Figure 18: Split of capacity by period of commissioning .............................................................................................................................................. 19
Figure 19: Asset depreciation by segment .................................................................................................................................................................. 19
Figure 20: Average fuel burn rate, Russia total ........................................................................................................................................................... 20
Figure 21: Capex requirements, government base scenario ....................................................................................................................................... 20
Figure 22: UES reorganization .................................................................................................................................................................................... 22
Figure 23: Map of generation companies .................................................................................................................................................................... 24
Figure 24: Consolidation of RusHydro ......................................................................................................................................................................... 25
Figure 25: Interregional power distribution companies (MRSKs) ................................................................................................................................. 26
Figure 26: Distribution segment restructuring .............................................................................................................................................................. 26
Figure 27: Lenenergo shareholder structure, post-additional share issue .................................................................................................................... 27
Figure 28: Additional share issues .............................................................................................................................................................................. 27
Figure 29: FSK consolidation ...................................................................................................................................................................................... 28
Figure 30: Restructuring scheme, timeline .................................................................................................................................................................. 28
Figure 31: Far East Energy Company and isolated AO-energos ................................................................................................................................. 29
Figure 32: Reorganization of Far East and isolated AO-energos ................................................................................................................................. 29
Figure 33: Target structure of Far East and isolated AO-energos ................................................................................................................................ 29
Figure 34: InterRAO Russian power plants ................................................................................................................................................................. 30
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Figure 35: Formation of InterRAO ............................................................................................................................................................................... 30
Figure 36: InterRAO ownership after UES breakup ..................................................................................................................................................... 30
Figure 37: UES spinoff structure ................................................................................................................................................................................. 31
Figure 38: Large minorities’ equity swaps during UES breakup ................................................................................................................................... 32
Figure 39: ―For‖ and ―against‖ baskets ........................................................................................................................................................................ 33
Figure 40: Timeline of corporate actions for local shares ............................................................................................................................................. 35
Figure 41: Timeline of corporate actions for depositary receipts .................................................................................................................................. 35
Figure 42: Generation company privatisation deals ..................................................................................................................................................... 37
Figure 43: EV/Capacity implied in deals ...................................................................................................................................................................... 38
Figure 44: Forthcoming placements ............................................................................................................................................................................ 38
Figure 45: Ownership structure of generation assets by installed capacity .................................................................................................................. 39
Figure 46: Ownership by energy zone, European Russia ............................................................................................................................................ 39
Figure 47: Distribution company ownership ................................................................................................................................................................. 39
Figure 48: Supply company auctions .......................................................................................................................................................................... 40
Figure 49: Forthcoming supply company auctions ....................................................................................................................................................... 41
Figure 50: Regulated electricity tariff, 2008e ............................................................................................................................................................... 42
Figure 51: Regulated capacity tariff, 2008e ................................................................................................................................................................. 42
Figure 52: Average growth of power tariffs vs. inflation ............................................................................................................................................... 43
Figure 53: UES profitability since 2001........................................................................................................................................................................ 43
Figure 54: Capacity payment as % of total revenues, 2006 ......................................................................................................................................... 44
Figure 55: Electricity market liberalisation schedule .................................................................................................................................................... 45
Figure 56: Hourly electricity prices and volumes on April 29, 2008 .............................................................................................................................. 46
Figure 57: Seasonal dynamics .................................................................................................................................................................................... 46
Figure 58: Pricing & energy zones .............................................................................................................................................................................. 47
Figure 59: Generation by fuel type, 2007 .................................................................................................................................................................... 47
Figure 60: Electricity price dynamics ........................................................................................................................................................................... 48
Figure 61: Share of heat in total revenues, 2007 ......................................................................................................................................................... 49
Figure 62: GDP growth vs. heat consumption ............................................................................................................................................................. 50
Figure 63: Heat sales, 2006 ........................................................................................................................................................................................ 50
Figure 64: Heat tariff and heat operating profit margin, 2006 ....................................................................................................................................... 51
Figure 65: Fuel balance, Russia total, 2006 ................................................................................................................................................................ 54
Figure 66: Prices by fuel type, 2007 ............................................................................................................................................................................ 54
Figure 67: Gas production by producer, 2007 ............................................................................................................................................................. 54
Figure 68: Gas tariffs by region, 2008 ......................................................................................................................................................................... 55
Figure 69: Penetration of gas transportation network .................................................................................................................................................. 55
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Figure 70: Thermal market, by market share ............................................................................................................................................................... 56
Figure 71: Fuel consumption vs. power consumption growth ...................................................................................................................................... 57
Figure 72: Change in average fuel burn rate, government forecast ............................................................................................................................. 57
Figure 73: Government fuel mix forecast ..................................................................................................................................................................... 57
Figure 74: Macro assumptions .................................................................................................................................................................................... 58
Figure 75: Oil and gas prices forecast through 2020 ................................................................................................................................................... 58
Figure 76: Gas tariff hike schedule .............................................................................................................................................................................. 59
Figure 77: Domestic gas price forecast ....................................................................................................................................................................... 59
Figure 78: Domestic fuel price forecast ....................................................................................................................................................................... 60
Figure 79: Government forecast for power consumption growth .................................................................................................................................. 60
Figure 80: Electricity consumption vs. GDP, 2007 (PPP) ............................................................................................................................................ 61
Figure 81: Electricity consumption forecast, Russia total ............................................................................................................................................. 61
Figure 82: Government forecast for installed capacity ................................................................................................................................................. 61
Figure 83: Installed electric capacity ........................................................................................................................................................................... 63
Figure 84: Electricity generation .................................................................................................................................................................................. 63
Figure 85: Average load factor .................................................................................................................................................................................... 64
Figure 86: Merit order curve, 2007 .............................................................................................................................................................................. 65
Figure 87: Merit order curve, 2012e ............................................................................................................................................................................ 65
Figure 88: New-entrant assumptions ........................................................................................................................................................................... 66
Figure 89: Cost of new entrant, total ........................................................................................................................................................................... 66
Figure 90: Cost of new entrant by region ..................................................................................................................................................................... 67
Figure 91: Price dynamics on ATS vs. fuel cost of new entrant ................................................................................................................................... 67
Figure 92: Electricity price forecast ............................................................................................................................................................................. 68
Figure 93: Capacity payment forecast ......................................................................................................................................................................... 69
Figure 94: Total effective price .................................................................................................................................................................................... 69
Figure 95: Heat business operating margin ................................................................................................................................................................. 71
Figure 96: Fuel burn rates in electricity production, 2007 ............................................................................................................................................ 71
Figure 97: Fuel burn rates in heat production, 2007 .................................................................................................................................................... 72
Figure 98: Fixed cost of electric capacity, USD/kW, 2006 and 2011e .......................................................................................................................... 73
Figure 99: Fixed cost of heat capacity, 2006 and 2011e .............................................................................................................................................. 73
Figure 100: Market risk calculation .............................................................................................................................................................................. 74
Figure 101: Discount rate calculation, generation companies ...................................................................................................................................... 75
Figure 102: EBITDA/kW .............................................................................................................................................................................................. 76
Figure 103: Valuation results....................................................................................................................................................................................... 77
Figure 104: Target price sensitivity analysis, generation companies ........................................................................................................................... 79
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Figure 105: RCN vs. overall grid size .......................................................................................................................................................................... 81
Figure 106: RCN vs. grid length .................................................................................................................................................................................. 82
Figure 107: RCN vs. electricity throughput .................................................................................................................................................................. 82
Figure 108: RCN and DRC, Russian vs. foreign distribution grids ............................................................................................................................... 83
Figure 109: Capex by source of financing, MRSKs ..................................................................................................................................................... 84
Figure 110: Debt to assets,* 1H07 and 2010e ............................................................................................................................................................. 85
Figure 111: Capital structure, distribution sector ......................................................................................................................................................... 85
Figure 112: Cost of equity calculation, MRSKs ............................................................................................................................................................ 86
Figure 113: Target price calculation, MRSKs .............................................................................................................................................................. 87
Figure 114: Implied distribution tariff, USD/MWh ......................................................................................................................................................... 88
Figure 115: Sensitivity analysis, MRSKs ..................................................................................................................................................................... 89
Figure 116: Peer group, distribution companies .......................................................................................................................................................... 91
Figure 117: RCN and DRC, FSK and foreign peers .................................................................................................................................................... 92
Figure 118: FSK capex through 2012 .......................................................................................................................................................................... 93
Figure 119: Cost of equity calculation, FSK ................................................................................................................................................................. 93
Figure 120: FSK target price calculation ...................................................................................................................................................................... 93
Figure 121: Valuation without capex or state injection ................................................................................................................................................. 94
Figure 122: Target price, regional transmission companies ......................................................................................................................................... 94
Figure 123: Transmission tariff .................................................................................................................................................................................... 94
Figure 124: FSK, revenues ......................................................................................................................................................................................... 94
Figure 125: FSK, EBIT margin .................................................................................................................................................................................... 95
Figure 126: Sensitivity to year of introduction .............................................................................................................................................................. 95
Figure 127: Sensitivity to DRC estimate ...................................................................................................................................................................... 95
Figure 128: Sensitivity to RCN appreciation rate ......................................................................................................................................................... 95
Figure 129: Peer comparison, FSK ............................................................................................................................................................................. 96
Figure 130: Sum-of-parts valuation, independent AO-energos .................................................................................................................................... 97
Figure 131: Sum-of-parts valuation, Far East Energy Company .................................................................................................................................. 98
Figure 132: UES basket indicative valuation ............................................................................................................................................................... 99
Figure 133: MRSK Holding valuation ........................................................................................................................................................................ 100
Figure 134: Sum-of-parts valuation, Far East Energy Holding ................................................................................................................................... 101
Figure 135: Sum-of-parts valuation, InterRAO sum ................................................................................................................................................... 101
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Disclosures Glitnir banki hf. and/or Glitnir Securities and/or Glitnir AB and/or Glitnir Pankki Oy and/or CJSC Glitnir Securities and/or their affiliate(s) are or may be regularly doing proprietary trading in equity securities of this company.
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BUY: Our target price is more than 20% above the current share price
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