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Russian power utilities

Uncertainty means opportunity


June 25, 2008
Utilities
Initiation

Sector report
June 25, 2008

TOP PICKS Russian power utilities: Uncertainty means opportunity


Market
price, Over the last several months, the stock performance of utility companies has been heavily
Ticker Jun 19 12m TP Upside impacted by acquisition activity and the restructuring of UES. Once these factors have been played
Generation out (which, for most stocks, we expect by autumn), the companies’ underlying fundamentals
OGKB RU 0.088 0.172 95% should become the main driver of their share price performance.
OGKD RU 0.080 0.166 108%
OGKE RU 0.128 0.209 64%
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
MSNG RU 0.177 0.278 57%
decide on key issues that will determine cash flow to shareholders: namely, the capacity market for
TGKE RU 0.00078 0.00165 112%
generation companies, and the parameters of regulatory asset base (RAB) regulation for grid
TGKG RU 0.090 0.168 87% companies.
TGKK RU 0.00112 0.00215 92%
KZBE RU 0.0235 0.0490 109% These crucial decisions essentially involve political will. The state is facing a trade-off between
TGKM RU 0.0083 0.0198 140% keeping electricity tariffs low, which would help restrain inflation, and switching to market-based
KRSG RU 4.0 10.1 153%
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
Distribution
companies.
MRKC RU 0.0519 0.0840 62%
MRKK RU 11.5 28.1 145% While the government is likely to create all the conditions necessary to attract new investments,
MRKP RU 0.0141 0.0226 61% existing assets face the highest regulatory risk in our view. In the generation segment the major
MRKS RU 0.0183 0.0291 59% risk is discrimination between old and new generators; in the grid segment, the major risk is the
MRKV RU 0.0073 0.0191 162% initial value of the regulatory asset base, which is to be determined by the regulator.
MRKZ RU 0.0111 0.0218 96%
We expect the generation segment’s revenues to be fully liberalised by 2014 and RAB regulation
Integrated
to be completely introduced in the distribution and transmission segments by 2011 and 2012,
BEGY RU 1.59 4.04 155%
respectively. Our assumptions imply an 18.8% CAGR in 2008-2014 of the total price received by
IRGZ RU 0.88 2.14 143% generators, and an average tariff CAGR through the RAB introduction date of 14.9% in both the
NVNG RU 71 159 125% distribution and transmission segments.
CONTACT
Under these assumptions we are initiating coverage on 51 currently listed utility stocks with 36
Ilya Koupreyev
BUY, 6 HOLD, and 9 REDUCE recommendations.
Ilya.Koupreyev@glitnir.ru
+7 495 545 0535 Upside is distributed unevenly across the companies, with a 58% average for generation
Dmitry Astakhov companies and a 38% average for distribution companies. At current OTC forward prices, we see
Dmitry.Astakhov@glitnir.ru a modest upside of 10% for the Federal Grid Company (FSK).
+7 495 545 0535
We expect the following events to become potential triggers for utility stocks through the end of this
15% RTS utilities year:
10% RTSI
MICEX
5%
0%
Announcement of capacity market rules for generation companies
-5%
-10% Announcement of RAB regulation parameters for several pilot distribution companies
-15%
-20%
-25%
-30%
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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 2/183
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 3/183
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 4/183
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

CAGR
2 000 base
3.7%
1 800 CAGR
1 600 base
CAGR
3.6%
base
1 400
5.2%
1 200 CAGR
TWh

Glitnir
1 000 CAGR
2.5%
CAGR Glitnir
800 Glitnir 3.4% 2.4%

600

Government base scenario Glitnir forecast

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 5/183
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

90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%

Hydro existing Nuclear existing Hydro existing CHP existing


CHP existing GRES existing
New generation GRES existing New generation

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 6/183
Figure 3: Effective electricity prices

European Russia Siberia

120 100
90
100
80
70
80
60

USD/MWh

USD/MWh
60 50
40
40
30

20 20
10
0 0

Average effective capacity payment Average effective capacity payment


Average effective electricity price Average effective electricity price

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 7/183
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 8/183
Target prices and investment recommendations
Figure 4: Valuation summary, Russian generation
Mid- EV / EV /
market Capacity, Output
price as MCap, EV, EV / EBITDA P/E USD/kW 2007,
Share Curr- FV per of Jun Upside USD USD Cur- Tar- Cur- Tar-
Company Country BB ticker type Rating ency share 12m TP 19, 2008 to TP mn mn 2008e 2009e 2010e 2008e 2009e 2010e rent get rent 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
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-3)
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
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-12)
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

Source: RTS, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 9/183
Figure 5:Summary, foreign generation
Mid- EV / EV / Output
market Capacity, 2007,
price as MCap, EV, EV / EBITDA P/E USD/kW USD/MWh
Share Curr- FV per of Jun Upside USD USD Cur- Tar- Cur- Tar-
Company Country BB ticker type Rating ency share 12m TP 19, 2008 to TP mn mn 2008e 2009e 2010e 2008e 2009e 2010e rent get rent 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

Source: Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 10/183
Figure 6: Valuation summary, integrated
EV / EV / Output
Market Capacity, 2007,
price as EV / EV / USD/kW USD/MWh
Share Cur- FV per of Jun Upside MCap, EV, Sales EBITDA P/E Cur- Tar- Cur- Tar-
Company Country BB ticker type Rating rency share 12m TP 19, 2008* to TP USD mn USD mn 2007 2007 2007 rent get rent 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

Source: Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 11/183
Figure 7: Valuation summary, distribution

EV /
Market Through- EV / Grid
price put 2006, length,
as of Up- MCap, EV, EV/Sales EV / EBITDA P/E USD/MWh USD th/km
Share Cur- FV per Jun 19, side USD USD P/B, Cur- Tar- Cur- Tar-
Company Country BB ticker type Rating rency share 12m TP 2008* to TP mn mn 2006 2011e 2006 2011e 2006 2011e 2007e rent get rent 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
Czech
Prazska Energetika PREN 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
Republic
Eletropaulo Metropolitana
Eletricidade de Sao 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
Paulo SA
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
Luxem-
Cegedel LTL
bourg VST1L LH common 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

Source: Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 12/183
Figure 8: Valuation summary, transmission

Market EV / Grid EV /
price as length, Through-
FV per of Jun Up- MCap, EV, EV / EV / USD put 2006,
Share Cur- share, 12m 19, side USD USD Sales EBITDA P/E P/B thous. USD/
Company Country BB ticker type Rating rency USD TP 2008* to TP mn mn 2006 2006 2006 2006 /km 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
Italy TRN IM common EUR 3.05 2.88 6% 8 991 13 156 8.5 11.9 18.4 3.2 317 41.6
Nazionale SpA
Cia de Transmissao
Brazil
de Energia Eletrica Paulista
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
Latin
Interconexion Electrica SA ISA CB common COP n/a 7 710 n/a 5 029 5 027 5.6 10.1 78.9 1.7 134 96.0
America
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

Source: Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 13/183
Figure 9: Price performance

Price as Relative to RTS Electric Utilities


Share of Jun 1 year Price performance (absolute) Relative to RTS Index Index
Company BB ticker type 19, 2008 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%
Source: Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 14/183
Price performance (continued)

Price as Relative to RTS Electric Utilities


Share of Jun 1 year Price performance (absolute) Relative to RTS Index Index
Company BB ticker type 19, 2008 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%

Source: Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 15/183
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

4 500
1 200
4 000
1 000 3 500
800 3 000
2 500

k GWh
600

GW
2 000
400 1 500
1 000
200
500
0 0
China

Canada
India
Russia

Ukraine
USA

Germany

France
Brazil

Spain
Italy
Japan

China

Russia

Germany
France
Canada

UK
India

Brazil

Italy
USA

Japan

S. Korea
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

Thermal Thermal
66% 67%

Nuclear Nuclear
12% 16% Hydro
Hydro
22% 17%

Source: UES, Glitnir estimates Source: UES, Glitnir estimates

Figure 12: Average load factor by type of capacity, 2007

90% 78%
80%
70% 55%
60% 50%
50% 43%
40%
30%
20%
10%
0%
Nuclear Hydro Thermal Thermal
GRES CHP

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 16/183
Figure 13: Fuel balance in Russia, 2006

Gas
70%

Coal
26%

Fuel oil
Other 3%
1%

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

Industrial
consumers
62%

Households
20%
Agriculture
2%
Non-industrial Transportation
consumers, 6%
other
10%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 17/183
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

80% 8.1%

70% 7.4%
60% 6.4%
50% 7.2%
7.3%
40%
4.7%
30% 5.1% 2.0%
10.0% 4.5%
20% 2.3%
2.8% 1.7%
10% 6.4% 1.5% 0.0%
1.4% 3.7%
-5.3%
0%
-1.5% -0.8% 2.3%
-10%
1996 1998 2000 2002 2004 2006
Cumulative GDP growth, % Cumulative power consumption, %

Source: Rosstat, Glitnir calculations

Figure 16: Installed electric capacity, maximum load, reserve margin,


Russia total

240
Installed electric capacity
200

Maximum load
160
GW

120

80

40

40% Reserve margin, %

20%

0%
1992 1994 1996 1998 2000 2002 2004 2006

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 18/183
Figure 17: Peak consumption, January 23, 2006

50

40

GW
30

20

10

0
Volga Siberia South North- Urals Center
West
Reserve Maximum load

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

70
60
50
40
30
GW

20
10
0
Bef ore 1950s 1960s 1970s 1980s 1990s-
1950 2000s
Nuclear Hydro Thermal

Source: UES

Figure 19: Asset depreciation by segment

80%
70%
60%
50%
40%
30%
20%
10%
0%
Electricity Electricity Electricity Heating
and heat transmission distribution grid
generation

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 19/183
Figure 20: Average fuel burn rate, Russia total

360
340
320
300
New coal-f ired

g/kWh
280 plant
260
240
220 New gas-f ired
plant
200
1998 2007

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

600

500

400
USD bn

300

200

100

0
2006-2015 2016-2020
Hydro Nuclear Distribution
Transmission Thermal

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 20/183
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 21/183
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 22/183
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 23/183
Figure 23: Map of generation companies

Source: Company data


CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 24/183
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 25/183
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

Minorities
State StateMinorities State Minorities Minorities
UES State
52% 48% 52% 48% 48%
52% 48% 52%
43 - 100 %
stakes UES MRSK Holding
RSK 1 UES MRSK Holding
RSK 2
45 - 100 %
RSK 3 50 - 70stakes
% 45 - 100 %
... stakes
stakes
MRSK 1 MRSK 1
RSK 61 MRSK 1 MRSK 2 MRSK 1
MRSK 2
MRSK 2 ... MRSK 2
...
... MRSK 11 ... MRSK 11
MRSK 11 MRSK 11

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.
CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 26/183
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

UES
44%

Other
minorities
11%

St. Petersburg
VTB government
22% 23%

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


New Placement
Start End
shares, price,
date date mn 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

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 27/183
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

Oct 15-30, 2007


Jun - Jul 2007 FSK BoD
MSK MSK EGM
appraisals
approvement July
Preparation of Jul - Oct 2007 Dec 2007 FSK local share
f airness UES BoD FSK EGM listing
opinion UES EGM MSK EGMs FSK DRs issue

2Q07 3Q07 4Q07 1Q08 2Q08 3Q08

Dec 07 - Mar 08 June 2008 June 2008 Jul - Aug 2008


MSK share FSK Conversion of Registration of
buyout additional MSK shares FSK additional
share issue into FSK share issue
registration shares report

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 28/183
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 29/183
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 30/183
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

28 holdings to be created with UES


26 companies left after
stakes in OGKs/TGKs, RusHydro, FSK,
UES breakup
InterRAO transferred to these holdings

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)
Mergers
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
Not to be merged
Shareholder holdings
26 MRSK Holding 24 MRSK Holding
27 Far East Energy Holding 25 Far East Energy Holding
28 InterRAO Holding 26 InterRAO
Merger

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 31/183
Figure 38: Large minorities’ equity swaps during UES breakup

UES
stake
as of Initial allocation Change of ownership After minority swaps
Apr 1, Norilsk Norilsk Norilsk
Company 2007 State Gazprom Nickel SUEK Other State Gazprom Nickel SUEK Other State Gazprom 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%

Source: UES, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 32/183
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

Voting FOR issue no. 1


on EGM agenda or not Voting AGAINST issue
participating no. 1 on EGM agenda
("FOR basket") ("AGAINST basket")

Underlying Underlying Underlying Underlying


shares per shares per shares per shares per
UES UES UES UES
Company Ticker common preferred common 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

Source: UES

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 33/183
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 34/183
Figure 40: Timeline of corporate actions for local shares

EGM RusHydro UES shares excluded f rom UES shares stop trading Shares of underlying companies Far East Energy Holding
Record date lists in Russia RTS and MICEX Indices on stock exchanges companies start trading lists in Russia
Aug 23 Feb Apr 30 Jun 7 Jul 9 Sep

Non-trading period

Aug Sep
3Q07 Feb 2008 Apr 2008 May 2008 Jun 2008 Jul 2008 2008
2008

Futures on UES shares Record date for


UES EGM UES shares cancelled FSK share MRSK Holding
last trading day - May 29 UES breakup (holders of
on reorganization (UES ceases to exist) listing share listing
last delivery date - May 30 local shares)
Oct 26 Jul 1 July Sep
Jun 6

Source: UES, RusHydro, FSK

Figure 41: Timeline of corporate actions for depositary receipts

DRs of underlying Far East Energy


EGM UES DRs UES DRs stop DRs/cash-out Cash-out period
companies are received by Holding
Record date exclusion f rom MCSI trading election period Jul 21
investors DRs issue
Aug 23 indices Jun 3 Jun 6 - Jul 7 (1-3 months)
Jul 7- Jul 21 Dec

3Q07 May 2008 Jun 2008 Jul 2008 Dec 2008

Record date for Depositary banks


UES EGM on DR issue books UES ceases FSK, RusHydro, InterRAO MRSK Holding
UES breakup (DR receive shares of
reorganization close, DRs cancelled to exist DRs issue DRs issue
holders) underlying companies
Oct 26 May 30 Jul 1 Jul Dec
Jun 6 Jul 4

Source: UES, RusHydro, InterRAO, FSK

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 35/183
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 36/183
Figure 42: Generation company privatisation deals
Implied
Additional State- Total Priced EV /
share attributed post- Deal paid per Installed
issue, post- stake, post- money value, share, Capacity,
Company Deal type Buyer Date money, % money, % stake, % USD mn USD 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
Energopromsbyt (Russian
TGK-14 Additional share issue & sale of state-attributed stake Jun-08 43% 19% 62% 264 0.00031 368
Railways & ESN Group)
Total 34 958

Source: Company data, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 37/183
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

900

800 Mosenergo
OGK-4
OGK-5 TGK-10
700 TGK-1
TGK-9
Mosenergo
600 OGK-3 TGK-8 TGK-2
TGK-5 TGK-4
500 OGK-2 OGK-6
Yuzhnokuzbasskaya
GRES Novosibirskenergo TGK-7
USD/kW

400 TGK-12 TGK-6 Bashkirenergo


OGK-5 Zapadno- TGK-11
Sibirskaya CHP TGK-14
300

200

100

0
Jul 06 Oct 06 Jan 07 Apr 07 Aug 07 Nov 07 Feb 08 Jun 08 Sep 08

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


Additional State- Total
share attributed post-
issue, post- stake, post- money
Company Deal type Possible buyer Date money, % money, % stake, %
Kuzbassenergo (TGK-12) Sale of state-attributed stake SUEK Jun-08 17% 17%
Additional share issue & sale of
OGK-1 IES n/a 34% 41% 75%
state-attributed stake
TGK-11 Additional share issue E4 Group n/a 26% 26%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 38/183
Figure 45: Ownership structure of generation assets by installed
capacity

European Russia Siberia

Norilsk Nickel &


State Onexim
Other 32% Bazel
Bashkirian 7% 4%
42%
ref ineries
4% SUEK
Lukoil 15%
2%
Fortum Gazprom
Gazprom E.On
2% 24%
3% 3%
RWE & Sintez
1% State Group E4
E.On Norilsk Nickel & 16% 10%
5% Enel IES Onexim Other
6% 10% 8% 5% Energopromsbyt
2%

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

Installed Strategic
electric Norilsk shareholder
capacity Nickel & RWE & Bashkiria to be
Region 2007, MW State Gazprom Onexim IES Enel E.On Sintez Fortum Lukoil refineries 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%

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


Tyumenenergo
Lenenergo
Moscow City Dist. Co.
Moscow Unified Dist. Co.
MRSK Volga
MRSK Urals
MRSK Siberia
MRSK North-West
MRSK Center and Volga
MRSK North Caucasus
MRSK South
MRSK Center

0% 20% 40% 60% 80% 100%


MRSK Holding Minorities

Source: Company data, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 39/183
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

Implied
Price Premium EV/
UES paid at over Electricity Implied
RTS stake auction, starting sales, EV/
Company ticker auctioned USD mn price USD/MWh 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

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 40/183
Figure 49: Forthcoming supply company auctions

Implied
EV/
UES stake Starting Electricity Implied
RTS to be Expected price, sales, EV/
Company ticker auctioned date USD mn USD/MWh 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

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 41/183
Figure 50: Regulated electricity tariff, 2008e

50

45

40

35

30

USD/MWh
25

20

15

10

Novosibirskenergo

Irkutskenergo
Krasnoyarsk GES
OGK-6
OGK-3

OGK-1

OGK-5

OGK-2

OGK-4
TGK-10
TGK-14

TGK-12

TGK-13
HydroOGK
TGK-11
TGK-2
TGK-9

TGK-7
TGK-8
TGK-6

TGK-4

TGK-5
TGK-3

TGK-1
Source: Company data

Figure 51: Regulated capacity tariff, 2008e

80

70

60

50
USD/kW per year

40

30

20

10

0
Novosibirskenergo

Irkutskenergo

Krasnoyarsk GES
OGK-6
OGK-5

OGK-1
OGK-4

OGK-3

OGK-2
TGK-10

TGK-14
TGK-12

TGK-13
HydroOGK
TGK-11
TGK-9

TGK-4
TGK-3

TGK-5

TGK-6
TGK-7

TGK-8
TGK-1

TGK-2

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 42/183
Figure 52: Average growth of power tariffs vs. inflation

30% Average retail


electricity tarif f
25% growth, %
20% Inf lation, %
15%
10%
5%
0%
2001 2002 2003 2004 2005 2006 2007

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

40 12%
35
10%
30
8%
25
USD bn

20 6%
15
4%
10
2%
5
0 0%
2001 2002 2003 2004 2005 2006
Revenues, USD bn Net income margin, % ROE, %

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 43/183
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

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Nuclear Hydro CCGT CHP GRES

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 44/183
Figure 55: Electricity market liberalisation schedule

100% 100%
90% 80%
Excluding
80% volumes sold
70% to households 60%
60% 50%
50%
40% 30%
25%
30%
20% 15%
5% 10%
10%
0%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 45/183
Figure 56: Hourly electricity prices and volumes on April 29, 2008

European Russia Siberia

40 21
120 35 36 20
110 32 20
100 30
28 20
90 25
80 24
20

USD/MWh
thous. MWh
70 20 20

USD/MWh
thous. MWh

60 20
16
50 15 19
40 12
30 10 8 19
20 5 4 19
10
0 0 0 19
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour Hour
Purchased electricity, thous. MWh Equilibrium price, USD/MWh
Purchased electricity, thous. MWh Equilibrium price, USD/MWh

Source: ATS Source: ATS

Figure 57: Seasonal dynamics

European Russia Siberia

60 Repair and
Winter
Repair and 35 maintenance
season Winter
50 maintenance period season
period 30
40
25
USD/MWh

30

USD/MWh
20

20 15

10 10

5
0
Jun 07

Jan 08
May 07

May 08
Aug 07
Jul 07

Sep 07

Oct 07

Nov 07

Dec 07
Apr 07

Apr 08
Mar 08

Jun 07

Jul 07

Aug 07

Mar 08
Jan 08
May 07

May 08
Sep 07

Oct 07

Nov 07

Dec 07
Apr 07

Apr 08
Source: ATS Source Source: ATS

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 46/183
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

Thermal gas Thermal gas


58.1% 4.0%

Hydro
45.0%
Thermal
Nuclear coal
23.2% 7.7%
Thermal
Thermal Thermal
Hydro Thermal f uel f uel oil coal
9.8% other oil 0.5% 50.6%
0.1% 1.0%

Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 47/183
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

60
35

50 30

40 25

30.3 20 20.1
USD/MWh

30 25.6

USD/MWh
19.7 16.9
16.4 15
20
10
10 5 5.9
4.6
0 0

Jun 07

Aug 07
Jul 07
Mar 07

Mar 08
Jan 07

Jan 08
Feb 07

Feb 08
Nov 06
Dec 06

Nov 07
Dec 07
May 07
Sep 06

Sep 07
Oct 06

Oct 07
Apr 07

Apr 08
Jan 07

Jun 07

Jan 08
May 07

Jul 07
Nov 06
Dec 06

Nov 07
Dec 07
Aug 07
Sep 06

Sep 07
Apr 07

Apr 08
Oct 06

Oct 07

Feb 08
Feb 07
Mar 07

Mar 08

Actual price Average actual price Actual price Average actual price

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 48/183
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
Share of heat in total revenues, 2007
vertically integrated utilities.

Figure 61: Share of heat in total revenues, 2007


70%
60%
50%
40%
30%
20%
10%
0%
Novosibirskenergo
TGK-4

TGK-1
TGK-2

TGK-7
TGK-3
TGK-5
TGK-6

TGK-8
TGK-9

OGK-6
OGK-5
OGK-4
OGK-3

OGK-1
OGK-2
TGK-14

TGK-13

TGK-10
TGK-11

TGK-12
Bashkirenergo

Irkutskenergo

Source: Company data

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 49/183
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

90%
80% 8.1%

70% 7.4%
60% 6.4%
50% 7.2%
40% 7.3%

30% 4.7%
5.1% 2.8%
20% 10.0% 3.4% 0.9% 0.2% -4.4%
10.3%
10% 6.4%
1.4% -5.3%
3.2% 1.8%
0% 1.6%
-2.9%
-10% -4.8%
1996 1998 2000 2002 2004 2006
Cumulative GDP growth, % Heat output growth cumulative

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

Boilers
50.4%
Electric
power
plants
44.1%

Other
5.5%
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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 50/183
Figure 64: Heat tariff and heat operating profit margin, 2006
25 40%

30%
20
20%

15
10%

USD/GCal
0%
10

-10%
5
-20%

0 -30%

Novosibirskenergo

Bashkirenergo

Kuzbassenergo
Mosenergo

Irkutskenergo
OGK-5

OGK-6
OGK-2

OGK-4

OGK-3

OGK-1
TGK-10

TGK-14
TGK-13
TGK-11
TGK-5

TGK-8
TGK-6

TGK-1

TGK-9
TGK-4

TGK-7
TGK-2

Far East GC
Heat tariff, 2006 (USD/Gcal) EBIT margin, heat, 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)

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 51/183
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 52/183
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 53/183
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

Gas
70%

Coal
26%

Fuel oil
Other 3%
1%

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

180 168
160
140
120
100
80 55 49
USD/tf e

60 34
40
20
0
Fuel oil Coal Gas Coal
(European Russia) (Siberia)

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

Gazprom
84%

Other
4%
TNK-BP
1% Novatek
Surgutnef tegaz Rosnef t 4%
2% Lukoil 3%
2%

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%.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 54/183
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

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,
68.0
Novosibirsk
Vladimir, Ivanovo, Kostroma, Lipetsk, Tambov, Tver, Saratov, Karelia,
71.2
Leningrad region, St. Petersburg, Novgorod
Belgorod, Bryansk, Volgograd, Voronezh, Kaluga, Kursk, Moscow, Moscow
73.5
region, Orel, Ryazan, Smolensk, Tula, Pskov, Altai, Kemerovo
Rostov 76.1
Adygea, Dagestan, Ingushetia, Kabardino-Balkaria, Karachayevo-Cherkessia,
76.7
North Ossetia, Chechnya, Krasnodar, Stavropol
Kaliningrad 86.2

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

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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


Other SUEK
37% 36%

Lutek
2%
Evraz Kuzbassrazrezugol
Group SDS- Mechel 16%
2% Ugol 6%
Holding
Company
2%
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%.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 56/183
Figure 71: Fuel consumption vs. power consumption growth

80%
70%
60%
50%
40%
30%
20%
10%
0%
2006 2010e 2015e 2020e
Power consumption cumulative growth
Fuel consumption cumulative growth

Source: Ministry of Industry and Energy

Figure 72: Change in average fuel burn rate, government forecast

340 336
334
330
320 316
gfe/kWh

310
300
290
280 286
270
2006 2010e 2015e 2020e

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

100%

80% 25% 29% 36% 39%


60%

40%
68% 65% 60% 56%
20%

0%
2006 2010e 2015e 2020e
Gas Coal Fuel oil Other

Source: Ministry of Industry and Energy

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 57/183
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

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

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%
500 120 GDP.
through 2020 for Russia’s
450
400 100
Fuel prices
350 80gas team forecast an average Brent price of USD 100/bbl for 2008, to
300 Our international oil and
USD/mcm
USD/bbl

250 decrease to USD 85/bbl 60by 2011. We indexed Brent prices by 3.0% per year beginning in 2014,
200 which is generally in line with the historical average US inflation rate.
150 40
100 Figure2075: Oil and gas prices forecast through 2020
50
0 5000 140
450 120
400
350 100
USD/bbl

Gas price in Europe ** Brent300


* 80
USD/mcm

250
200 60
150 40
100
50 20
0 0

Gas price in Europe, USD/mcm Brent, USD/bbl

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%.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 58/183
Figure 76: Gas tariff hike schedule

Net back
parity as of
2006
140
102 125 (22%)
120 91 (12%)
81 (13%)
100 72 (13%)
63 (13%)

USD/mcm
80 51 (25%)
60 (15%)

40
20
0

Jul 07

Jul 10

Jul 11
Jul 08

Jul 09
Jan 08

Jan 09

Jan 10
Jan 07

Jan 11

Jan 12
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

500
450
400
350
300
250
USD/mcm

200
150 111% in RUB terms required hike to
reach net-back parity in 2011 based
100
on government scenario
50
0
2007 2009e 2011e 2013e 2015e 2017e 2019e
Domestic gas price (our forecast)
Gas price in Europe
Net back gas price level
Domestic gas price (government 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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 59/183
Figure 78: Domestic fuel price forecast

300

250

200

150

USD/tfe
100

50

0
2006 2008e 2010e 2012e 2014e 2016e 2018e 2020e
Gas Fuel oil Coal (European Russia) Coal (Siberia)

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


CAGR
max
govt.
CAGR base govt. scenario scenario
2007- 2011- 2016- 2007- 2007-
2010 2015 2020 2020 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
5.2% 3.6% 3.7% 4.1% 5.3%
(incl. Far East and Isolated)

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 60/183
Figure 80: Electricity consumption vs. GDP, 2007 (PPP)

2.0
1.8
1.6
1.4
1.2
1.0

kWh/USD
0.8
0.6
0.4
0.2
0

Finland

China

Poland

Netherlands
Canada

Belarus

Hungary
Czech Republic
Australia
Russia

India
Switzerland

United Kingdom

Argentina
Ireland
Ukraine

Kazakhstan

World

Germany
Sweden

France
Iceland
Norway

Turkey
United States

Brazil

Greece
Mexico
Spain

Latvia

Italy
Tajikistan

Japan
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

2 000 CAGR 2007-2020 max scenario 5.3% CAGR


base
1 800 3.7%
CAGR
1 600 base
CAGR 3.6%
1 400
base
1 200 5.2% CAGR
TWh

Glitnir
1 000 CAGR 2.5%
CAGR Glitnir
800 Glitnir 2.4%
3.4%
600

Government base scenario Government max scenario Glitnir f orecast

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


500
450
400
350
300
GW

250
200
150
100
50
0
2006 2010e 2015e 2020e
Old capacity
Total capacity, base scenario
Total capacity, max growth scenario

Source: Ministry of Industry and Energy

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 61/183
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 62/183
Figure 83: Installed electric capacity

European Russia Siberia

200 60
180
160 50
140 40
120
100 30
80

GW
GW
60 20
40
10
20
0 0

New generation GRES existing New generation GRES existing


CHP existing Nuclear existing CHP existing Nuclear existing
Hydro existing Hydro existing

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

1 200 300
1 000 250
800 200
600 150
400 100
TWh

TWh

200 50
0 0

New generation GRES existing New generation GRES existing


CHP existing Nuclear existing CHP existing Nuclear existing
Hydro existing Hydro existing

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 63/183
Figure 85: Average load factor

European Russia Siberia

90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%

Hydro existing Nuclear existing Hydro existing CHP existing


CHP existing GRES existing
GRES existing New generation
New generation

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).

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 64/183
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

45 25
40
35 20 Thermal
Thermal
30
USD/MWh

USD/MWh
15
25
20 Nuclear Hydro
Hydro 10
15
10
5
5
0 0
0 20 40 60 80 100 120 140 0 10 20 30 40
GW
GW

Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates

Figure 87: Merit order curve, 2012e

European Russia Siberia

90
80 40
70 35
Thermal
60 30 Thermal
50
USD/MWh

25
USD/MWh

40 20 Hydro
Nuclear
30 Hydro 15
20 10
10 5
0 0
0 20 40 60 80 100 120 140 160 180 0 10 20 30 40
GW GW

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 65/183
Figure 88: New-entrant assumptions

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

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

100
90
80
70
USD/MWh

60
50
40
30
20
10
0
2006e 2008e 2010e 2012e 2014e 2016e 2018e 2020e

Gas (European Russia) Gas (Siberia)


Coal (European Russia) Coal (Siberia)

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 66/183
Figure 90: Cost of new entrant by region

European Russia Siberia


(gas-fired) (coal-fired)

100 100 100


80
100 90 90 100 90
80 70 80
90 80 90
80 70 80 60 70
70
70 60 60 70 50 60
60 50 50 60 50
40
50 40 40 50 40

USD/MWh

USD/MWh
30

USD/MWh

USD/MWh
40 30 30 40 30
USD/MWh

USD/MWh
30 20 20 30 20 20
20 10 10 20 10 10
10 0 0 10 0
0
0 0

Cost of capital
Tax of capital
Cost Tax Operating & maintanance
Cost ofTax
capital
Fuel Tax &Operating & mainta
Cost of capital Operating maintanance F
Operating & maintanance
Cost of capital Tax Operating & maintanance
Cost of
Fuel
capital Tax Operating & maintanance Fuel
Fuel
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


60 35

50 30

25
40 20.1
30.3 20 16.9
USD/MWh

30 25.6
USD/MWh

19.7 15 61%
71%
20 110% 10
135% -40% 12.5
81% 9.9
10 14.4 5
10.9 5.9
0 0
Jun 07

Aug 07
Jul 07
Mar 07

Mar 08
Jan 07

Jan 08
Feb 07

Feb 08
Nov 07
Dec 07
May 07

Sep 07
Oct 07
Apr 07

Apr 08
Jun 07

Aug 07
Jul 07
Feb 07

Feb 08
Mar 07

Mar 08
Jan 07

Jan 08
May 07

Nov 07
Dec 07
Sep 07
Oct 07
Apr 07

Apr 08

Actual price Fuel cost of new entrant Average actual price Actual price Fuel cost of new entrant Average actual price

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 67/183
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

60 30

50 25

40 20

USD/MWh
USD/MWh
30 15

20 10

10 5

0 0

Free market Free market


Regulated Regulated
Average electricity price Average electricity price
Fuel cost of new entrant Fuel cost of new entrant

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 68/183
Figure 93: Capacity payment forecast

European Russia Siberia

350 400
350
300
300
250
250
200
200

USD/kW
USD/kW
150 150
100 100
50 50

0 0

Free market Free market


Regulated Regulated
Average capacity payment Average capacity payment
Capacity cost of new entrant Capacity cost of new entrant

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

120 100
90
100
80
80 70
60
USD/MWh

USD/MWh

60 50
40
40
30
20 20
10
0 0

Average effective capacity payment Average effective capacity payment


Average effective electricity price Average effective electricity price
Total cost of new entrant Total cost of new entrant

Source: Glitnir estimates Source: Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 69/183
Russia total

120

100

80

USD/MWh
60

40

20

Average effective capacity payment


Average effective electricity price

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 70/183
Figure 95: Heat business operating margin

2006 2011e

Average 2006 Average 2011e


8.4% 13%
OGK-1 OGK-1
OGK-2 OGK-2
OGK-3 OGK-3
OGK-4 OGK-4
OGK-5 OGK-5
OGK-6 OGK-6
TGK-1 TGK-1
TGK-2 TGK-2
Mosenergo Mosenergo
TGK-4 TGK-4
TGK-5 TGK-5
TGK-6 TGK-6
TGK-7 TGK-7
TGK-8 TGK-8
TGK-9 TGK-9
TGK-10 TGK-10
TGK-11 TGK-11
Kuzbassenergo Kuzbassenergo
TGK-13 TGK-13
TGK-14 TGK-14
Bashkirenergo Bashkirenergo
Irkutskenergo Irkutskenergo
Novosibirskenergo Novosibirskenergo
Far East Gen. Co. Far East Gen. Co.

-30% -10% 10% 30% -30% -10% 10% 30%

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


450
400
350
300
250
200
g/kWh

150
100
50
0
Novosibirskenergo

Bashkirenergo

DGK
Irkutskenergo
OGK-4

OGK-1

OGK-5

OGK-2
OGK-3

OGK-6
TGK-10

TGK-13

TGK-12

TGK-14
TGK-11
TGK-3

TGK-5
TGK-1

TGK-7

TGK-6
TGK-2

TGK-4

TGK-8

TGK-9

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 71/183
Source: Company data, Glitnir estimates

Figure 97: Fuel burn rates in heat production, 2007

200
180
160
140
120

kg/Gcal
100
80
60
40
20
0

Novosibirskenergo

Bashkirenergo
Irkutskenergo

DGK
OGK-5

OGK-2

OGK-6

OGK-4

OGK-1
OGK-3
TGK-10

TGK-13

TGK-12

TGK-14
TGK-11
TGK-5

TGK-7

TGK-1

TGK-8
TGK-2
TGK-6

TGK-4

TGK-9

TGK-3
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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 72/183
Figure 98: Fixed cost of electric capacity, USD/kW, 2006 and 2011e

Average 2006 Average 2011e


OGK-1
OGK-2
OGK-3
OGK-4
OGK-5
OGK-6
TGK-1
TGK-2
Mosenergo
TGK-4
TGK-5
TGK-6
TGK-7
TGK-8
TGK-9
TGK-10
TGK-11
Kuzbassenergo
TGK-13
TGK-14
Bashkirenergo
Irkutskenergo
Novosibirskenergo
Far East Gen. Co.

0 10 20 30 40 50 60 70 80
USD thous./MW
Fixed electricity cost, 2006 Fixed electricity cost, 2011e

Source: Company data, Glitnir estimates

Figure 99: Fixed cost of heat capacity, 2006 and 2011e

Average Average
2006 2011e
OGK-1
OGK-2
OGK-3
OGK-4
OGK-5
OGK-6
TGK-1
TGK-2
Mosenergo
TGK-4
TGK-5
TGK-6
TGK-7
TGK-8
TGK-9
TGK-10
TGK-11
Kuzbassenergo
TGK-13
TGK-14
Bashkirenergo
Irkutskenergo
Novosibirskenergo
Far East Gen. Co.

0 5 10 15 20 25 30 35 40
USD thous./Gcal/h
Fixed heat cost, 2006 Fixed heat cost, 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 73/183
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
Sovereign risk-free rate 5.9% Russia 2028 YTM
Standard equity risk premium 5.0% Glitnir research
Market risk 10.9%

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.‖

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 74/183
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


After-
tax
Sector Liquidity Corp. gov. risk Cost cost
Market risk risk premium (+) / of Effective of Target Required Terminal
Company risk premium premium discount (-) RROE debt tax rate debt D/A WACC 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%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 75/183
USD/kW

0
5
10
15
20
25
30
35
40
OGK-2
Krasnoyarsk GES
TGK-8
Bashkirenergo
TGK-1
TGK-6
OGK-6
TGK-13
TGK-5
OGK-4
Novosibirskenergo
OGK-5
2007e

OGK-1
Irkutskenergo
TGK-7
TGK-4
Mosenergo
Far East GC
TGK-14
TGK-9
OGK-3
TGK-11
TGK-10
HydroOGK
TGK-2

Source: Glitnir estimates


Kuzbassenergo
USD/kW
0
100
150
200
250
300
350

50

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia


Far East GC
OGK-6
Figure 102: EBITDA/kW

OGK-3
TGK-6
OGK-5
OGK-1
TGK-5
TGK-7
Bashkirenergo
TGK-4
OGK-2
TGK-2
2014e

TGK-8
TGK-11
Novosibirskenergo
TGK-9
Mosenergo
OGK-4
TGK-14
TGK-13
TGK-10
Kuzbassenergo
TGK-1
Irkutskenergo
HydroOGK

76/183
Source: Glitnir estimates

Krasnoyarsk GES
Figure 103: Valuation results

Mid- EV/
market Installed Installed Elec- Heat Fuel Fuel Generation
Fair price as capacity, Installed heat tricity sales, consumption, price, load factor,
Mcap, of Jun Upside USD/kW electric capacity sales, 2007, 2007 USD/ Fuel mix, 2007 2007
USD 12m TP, 19, 2008, to TP, Cur- Tar- capacity 2007, 2007, Gcal Electr. Heat, tfe, fuel
Company Type mn FV, USD USD USD % Rating rent get 2007, MW Gcal/h GWh thous. g/kWh kg/Gcal 2007 gas coal 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%

Source: Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 77/183
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 78/183
Sensitivity analysis
Figure 104: Target price sensitivity analysis, generation companies

Gas prices Coal prices Electricity prices


-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%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 79/183
Target price sensitivity analysis, generation companies (continued)

Heat margins Cost of new construction Power consumption growth rate, p.a.
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%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 80/183
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. R 2
= 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


14
y = 0.01006x
MRSK Center
R2 = 0.91
12
RCN estimated by appraiser, USD bn

MRSK South MRSK Siberia


10

MRSK Volga
8 MRSK Center
and Volga
MRSK Urals
6 MRSK North-West

4 MRSK North Caucasus

0
0 200 400 600 800 1 000 1 200 1 400
Size, thous. units

Source: UES, Glitnir calculations

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 81/183
Figure 106: RCN vs. grid length

16
y = 0.0375x
R2 = 0.89
14

RCN estimated by appraiser, USDbn


12 MRSK Siberia MRSK Center

10
MRSK Volga MRSK South
8
MRSK Urals
MRSK Center
MRSK North-West and Volga
6

4
MRSK North Caucasus

0
0 50 100 150 200 250 300 350 400

Length of grid, thous. km

Source: UES, Glitnir calculations

Figure 107: RCN vs. electricity throughput

14
y = 0.145x
R2 = 0.21 MRSK Center
RCN estimated by appraiser, USD bn

12

10 MRSK
MRSK Volga MRSK Siberia
South
8
MRSK Urals
MRSK MRSK Center
MRSK
6 North-West and Volga
North
Caucasus
4

0
0 20 000 40 000 60 000 80 000 100 000
Electricity throughput, GWh

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%.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 82/183
Figure 108: RCN and DRC, Russian vs. foreign distribution grids

PPE PPE
PPE PPE cost, net,
cost, PPE acc. net, Grid USD USD
USD Depr. depr., USD USD length, Transformer MVA/ thous/ thous/
Company Country mn rate mn mn km capacity, MVA km km 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, DRC,
RCN, Assumed DRC, USD USD
USD acc. depr., USD thous./ thous./
mn USD mn mn km 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%
Source: Company data, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 83/183
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

EBITDA
2006/
Total % to be financed from Total
capex, Total capex capex
USD mn Existing Debt Connection 2H07-2010/ 2H07-
2H07-2010 equity fee DRC 1H07 2010
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%

Source: Company data, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 84/183
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

Company 1H07 2010e


MRSK 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

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


100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e
Equity Net debt

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 85/183
Figure 112: Cost of equity calculation, MRSKs

Sector Liquidity Corp. gov. risk


Market risk risk premium (+) /
Company risk premium 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%

Source: Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 86/183
Valuation results
Figure 113: Target price calculation, MRSKs

MRSK MRSK MRSK Moscow Moscow


MRSK MRSK North Center North- MRSK MRSK MRSK Unified City Dist.
Center South Caucasus and Volga West Siberia Urals Volga Dist. Co. 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,
1 243 1 145 194 1 181 583 435 660 777 2 331 1 645 1 636 1 481
2H07-2010, USD mn
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,
0.0519 n/a 11.5 0.0141 0.0111 0.0183 0.0191 0.0073 0.0885 0.0630 1.75 n/a
per common share, USD
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

Source: Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 87/183
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

2011e/ CAGR in
Company 2006 2011e 2006 RUB terms
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%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 88/183
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

Year of RAB introduction DRC estimate


Base Base
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 -50% -25% -10% Base 10% 25% 50% -50% -25% -10% Base 10% 25% 50%
Tariff growth CAGR through year
Company Change in target price of RAB introduction Company Change in target price Tariff growth CAGR, 2007 - 2011
MRSK Center 30% 14% 0% -12% -22% 27.3% 21.2% 17.5% 15.2% 13.6% 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 30% 14% 0% -12% -23% 24.3% 19.3% 16.2% 14.2% 12.7% 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 37% 17% 0% -15% -28% 32.8% 24.7% 20.0% 17.3% 15.3% 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 24% 11% 0% -11% -20% 23.4% 18.7% 15.8% 13.8% 12.4% 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 26% 12% 0% -10% -18% 21.8% 17.3% 14.5% 12.7% 11.5% 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 36% 17% 0% -13% -25% 22.0% 17.2% 14.3% 12.6% 11.4% 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 30% 14% 0% -11% -21% 18.9% 15.2% 12.9% 11.4% 10.3% 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 29% 14% 0% -11% -21% 25.1% 19.5% 16.2% 14.1% 12.6% 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 9% 5% 0% -12% -23% 15.6% 14.2% 12.8% 11.0% 9.7% 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 9% 5% 0% -12% -23% 27.2% 22.5% 19.2% 16.1% 13.8% 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 8% 4% 0% -12% -23% 22.9% 20.1% 17.7% 14.9% 12.9% Lenenergo -30% -15% -6% 0% 6% 15% 30% 14.9% 16.3% 17.2% 17.7% 18.2% 19.0% 20.3%
Tyumenenergo 1% 1% 0% -10% -20% 11.3% 10.7% 10.0% 9.0% 8.3% Tyumenenergo -29% -15% -6% 0% 6% 15% 29% 8.8% 9.4% 9.8% 10.0% 10.3% 10.6% 11.2%
Total 21.8% 17.6% 14.9% 13.0% 11.6% Total 11.3% 13.2% 14.3% 14.9% 15.6% 16.6% 18.2%

Rate of RCN appreciation Total capex, 2H07-2010


Base Base
0% 1% 2% 3% 4% 0% 1% 2% 3% 4% -50% -25% -10% Base 10% 25% 50% -50% -25% -10% Base 10% 25% 50%

Company Change in target price Tariff growth CAGR, 2007 - 2011 Company Change in target price Tariff growth CAGR, 2007 - 2011
MRSK Center -25% -12% 0% 13% 26% 15.8% 16.7% 17.5% 18.4% 19.2% 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 -27% -14% 0% 14% 29% 14.7% 15.5% 16.2% 17.0% 17.7% 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 -24% -12% 0% 12% 25% 18.4% 19.2% 20.0% 20.9% 21.7% 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 -22% -11% 0% 12% 24% 14.4% 15.1% 15.8% 16.5% 17.2% 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 -21% -11% 0% 11% 23% 13.1% 13.8% 14.5% 15.1% 15.8% 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 -25% -13% 0% 13% 27% 12.9% 13.6% 14.3% 14.9% 15.6% 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 -21% -11% 0% 11% 23% 11.9% 12.4% 12.9% 13.4% 13.9% 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 -17% -8% 0% 9% 18% 15.0% 15.6% 16.2% 16.8% 17.5% 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 -17% -9% 0% 9% 18% 11.9% 12.3% 12.8% 13.2% 13.7% 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 -17% -9% 0% 9% 18% 17.7% 18.5% 19.2% 20.0% 20.8% 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 -16% -8% 0% 8% 17% 16.6% 17.2% 17.7% 18.3% 18.8% Lenenergo -17% -9% -3% 0% 3% 9% 17% 13.8% 15.8% 17.0% 17.7% 18.4% 19.5% 21.2%
Tyumenenergo -12% -6% 0% 6% 13% 9.6% 9.8% 10.0% 10.2% 10.5% 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% 14.9% 15.6% 16.2% Total 13.7% 14.3% 14.7% 14.9% 15.2% 15.6% 16.2%

Source: Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 89/183
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 90/183
Figure 116: Peer group, distribution companies

EV /
Through- EV / Grid
put 2006, length, EBITDA
MCap, EV, EV/Sales EV / EBITDA P/E USD/MWh USD th/km margin EBIT margin Net margin
USD USD P/B, Cur- Tar- Cur- Tar-
Company Country BB ticker mn mn 2006 2011e 2006 2011e 2006 2011e 2007e rent get rent 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
Czech
Prazska Energetika PREN 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
Republic
Eletropaulo Metropolitana
Eletricidade de Sao 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%
Paulo SA
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
Luxem-
Cegedel
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

Source: Company data, Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 91/183
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


PPE PPE
PPE Trans- cost, net,
PPE PPE acc. net, Grid former USD USD
cost, Depreci- depr., USD USD length, capacity, MVA/ thous./ thous./
Company Country BS date USD mn ation rate mn mn km MVA km km 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
Trans- RCN, DRC,
Assumed DRC, Grid former USD USD
Appraisal RCN, Depreci- acc. depr., USD length, capacity, MVA/ thous./ thous./
date USD mn ation rate USD mn mn km MVA km km km
FSK Russia Mar 31, 2007 34 674 48% 16 652 18 022 120 513 295 691 2.45 288 150

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 92/183
Figure 118: FSK capex through 2012

Year Total
Source of financing, USD mn 2007 2008e 2009e 2010e 2011e 2012e 2008-2012
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

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

Liquidity Corp. gov. risk


Sector risk risk premium (+) /
Company Market risk premium premium discount (-) RROE
FSK 10.9% 1.5% 0.0% 0.0% 12.4%

Source: Glitnir estimates

Valuation results
Figure 120: FSK target price calculation

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

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 93/183
Figure 121: Valuation without capex or state injection

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

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


Market
FV per price as
share, 12m TP, of Jun 19, Upside MCap, EV,
Company BB ticker Share type Rating USD USD 2008 to TP USD mn 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%

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

20 18.3
CAGR 15% 12
15 10.0
10 CAGR 19%
USD/MWh

8
10 7.7
USD, bn

6
3.4
5 4
2
0 0
2006 2012e 2006 2012e
Effective tariff, USD/MWh
Revenue, USD mn

Source: Company data, Glitnir estimates Source: Company data, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 94/183
Figure 125: FSK, EBIT margin

8 000 65%
CAGR 29% 60%
6 000
55%

USD, mn
4 000 50%
45%
2 000
40%
0 35%
2006 2012e
EBIT, USD mn 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

Base, Base,
2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
Implied tariff growth CAGR through
Company Target price change year of RAB introduction
FSK 20% 9% 0% -8% -14% 18.7% 16.4% 14.9% 13.3% 11.8%

Source: Glitnir estimates

Figure 127: Sensitivity to DRC estimate

-50% -25% -10% Base 10% 25% 50% -50% -25% -10% Base 10% 25% 50%
Company Target price change Tariff growth CAGR, 2007 - 2011
FSK -19% -9% -4% 0% 4% 9% 19% 12.6% 13.8% 14.4% 14.9% 15.3% 15.9% 16.9%

Source: Glitnir estimates

Figure 128: Sensitivity to RCN appreciation rate

Base, Base,
0% 1% 2% 3% 4% 0% 1% 2% 3% 4%
Company Target price change Tariff growth CAGR, 2007 - 2011
FSK -10% -5% 0% 5% 10% 13.7% 14.3% 14.9% 15.4% 16.0%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 95/183
Figure 129: Peer comparison, FSK

EV / Grid EV /
length, Through-
MCap*, EV*, EV / EV / USD put 2006, EBITDA EBIT Net
USD USD Sales EBITDA P/E P/B thous. USD/ margin, margin, margin,
Company Country BB ticker mn mn 2006 2006 2006 2006 /km MWh 2006 2006 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
Italy TRN IM 8 991 13 156 8.5 11.9 18.4 3.2 317 41.6 72% 53% 32%
Nazionale SpA
Cia de Transmissao
Brazil
de Energia Eletrica Paulista
TRPL3 BZ 4 394 4 609 7.6 43.6 81.2 2.5 380 35.5 17% 5% 9%
Latin
Interconexion Electrica SA ISA CB 5 029 5 027 5.6 10.1 78.9 1.7 134 96.0 55% 16% 7%
America
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

Source: Bloomberg, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 96/183
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

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%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 97/183
Figure 131: Sum-of-parts valuation, Far East Energy Company

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%

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 98/183
Figure 132: UES basket indicative valuation

Voting FOR issue no. 1 on EGM agenda or not participating Voting AGAINST issue no. 1 on EGM agenda
("FOR basket") ("AGAINST basket")

Per UES common Per UES preferred Per UES common Per UES preferred

Value at Value at Value at Value at


Number of market Target Number of market Target Number of market Target Number of market Target 12m 12m
underlying prices, value, underlying prices, value, underlying prices, value, underlying prices, value, common preferred
Company Ticker shares USD USD shares USD USD shares USD USD shares USD USD TP 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

Source: Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 99/183
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

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

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 100/183
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

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

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

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

Source: Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 101/183
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

Former YUKOS
power assets
acquired by Rosneft

Generation
merger blocked by YUKOS
Kuban Gen. Co. TGK-8

merger
Tomskenergo TGK-11

Distribution
merger
Kubanenergo MRSK South

merger
Tomsk Dist. Co. MRSK Siberia

Transmission
merger
Kuban Trans. Co.
FSK
Tomsk Trans. Co.

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 102/183
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

Company Date
Tomskenergo/TGK-11 Jul 10, 2008
Tomsk Transmission Company Jun 23, 2008
Tomsk Distribution Company Not available

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.

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 103/183
Appendix 2: Selected financials, distribution companies
Revenues, USD mn EBITDA, USD mn EBIT, USD mn EBITDA margin Net income, USD mn Net margin
Company 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%

Source: Company data, Glitnir estimates

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 104/183
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 105/183
OGK-1
Strengths
Above-average electricity load factor

6-month performance
15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

-35%

OGK-1 RTS Index RTS Electric Utilities Index

Assets

2007
Installed
electric Installed heat Electricity
capacity, capacity, generated, Heat sales,
Plant Region MW Gcal/h GWh 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

New investment projects


New Initial
electric investment
capacity, Fuel outlay, NPV,
Plant Project Date MW type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas Gas UES Strategic


92% 78% 92% shareholder
75%

Fuel
Fuel
oil Coal Other
Coal oil Other
1% 21% minorities
7% 1% minorities 25%
8%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 106/183
OGK-1
Financials
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed 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 statement


Change 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

Financial ratios
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

Operational data
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 107/183
OGK-1
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 0.166 0.177 0.191 0.209 0.231 10.8% 784 835 899 979 1 082
11.8% 0.140 0.148 0.159 0.171 0.187 11.8% 664 703 750 807 879
12.8% 0.118 0.125 0.132 0.142 0.153 12.8% 565 595 630 672 724
13.8% 0.100 0.105 0.111 0.118 0.126 13.8% 483 506 533 564 603
14.8% 0.085 0.089 0.094 0.099 0.105 14.8% 414 432 452 476 505

Valuation

12m target EV, USD mn


Existing assets New
Plant Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 108/183
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
20%

10%

0%

-10%

-20%

-30%

-40%

-50%

OGK-2 RTS Index RTS Electric Utilities Index

Assets
Installed Electricity
electric Installed heat generation Heat sales
capacity capacity 2007, 2007, 2007,
Plant Region 2007, MW Gcal/h GWh 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

New investment projects


Initial
New electric investment
Completion capacity, outlay, NPV,
Plant Project date MW Fuel type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas UES
Gas 66% Gazprom
75% 63.7%
57%
Westmead
Limited
4%

Gazprom
12%

Coal Westmead
Fuel Coal Fuel 35.8% Limited
oil Other
oil 24% 4%
0.5% minorities Other minorities
1% 18% 39%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 109/183
OGK-2
Financials
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed 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 statement


Change 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

Financial ratios
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

Operational data
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,
19 22 29 38 48 58 65 75 81 84 86 88 91 94 97
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 110/183
OGK-2
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 0.215 0.230 0.250 0.274 0.307 10.5% 740 798 870 961 1 080
11.5% 0.180 0.192 0.206 0.224 0.246 11.5% 613 657 709 773 855
12.5% 0.152 0.161 0.172 0.184 0.200 12.5% 510 543 581 629 687
13.5% 0.129 0.136 0.144 0.153 0.165 13.5% 424 449 479 514 556
14.5% 0.109 0.115 0.121 0.128 0.137 14.5% 352 372 394 421 453

Valuation
12m target EV, USD mn
Existing assets New
Plant Electricity Heat Total USD/kW project 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 111/183
OGK-3
Strengths
Coal plants in European Russia

Weaknesses
Below-average electricity load factor
Above-average fuel burn rate

6-month performance
15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

-35%

OGK-3 RTS Index RTS Electric Utilities Index

Assets
Installed Installed
electric heat Electricity
capacity capacity generation Heat sales
2007, 2007, 2007, 2007,
Plant Region MW Gcal/h GWh 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

New investment projects

New Initial
electric investment
Completion capacity, outlay, NPV,
Plant Project name date MW Fuel type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Norilsk Norilsk
Nickel Nickel
Gas Gas
65% 80%
59% 56%

UES
Coal 26%
Coal Fuel
Fuel 41%
38% oil Other Other
oil
3% 3% minorities minorities
9% 20%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 112/183
OGK-3
Financials
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed 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 statement


Change 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

Financial ratios
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

Operational data
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,
26 31 37 42 47 53 65 77 85 88 91 93 95 98 101
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 113/183
OGK-3
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.1% 0.184 0.193 0.205 0.220 0.239 10.1% 594 645 708 789 897
11.1% 0.165 0.172 0.180 0.191 0.204 11.1% 492 529 575 632 705
12.1% 0.150 0.155 0.161 0.169 0.178 12.1% 409 437 471 512 563
13.1% 0.138 0.142 0.146 0.152 0.159 13.1% 341 362 388 418 456
14.1% 0.127 0.130 0.134 0.138 0.143 14.1% 284 301 321 344 371

Valuation
12m target EV, USD mn
Existing assets New
Plant Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 114/183
OGK-4
Strengths
Above-average electricity load factor
Below-average fuel burn rate
Below-average effective fuel price
Foreign strategic investor

6-month performance
20%

10%

0%

-10%

-20%

-30%

-40%

-50%

OGK-4 RTS Index RTS Electric Utilities Index

Assets
Installed Installed
electric heat Electricity
capacity capacity generation Heat sales
2007, 2007, 2007, 2007,
Plant Region MW Gcal/h GWh 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

New investment projects


New Initial
electric investment
Completion capacity, outlay, NPV,
Plant Project date MW Fuel type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas Gas
82.78% 71.78% E.On
E.On
69%
76%

Peat Peat UES Other


0.69% Fuel Coal 23% minorities
Coal 0.23% Fuel 27.80% Other
oil 16.48% oil minorities 24%
0.05% 0.18% 8%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 115/183
OGK-4
Financials
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed 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 statement


Change 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

Financial ratios
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

Operational data
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,
18 21 26 35 47 53 58 68 75 77 79 82 85 88 91
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 116/183
OGK-4
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.198 0.210 0.224 0.244 0.270 9.8% 1 229 1 314 1 421 1 559 1 745
10.8% 0.173 0.181 0.192 0.205 0.223 10.8% 1 049 1 111 1 187 1 284 1 408
11.8% 0.152 0.158 0.166 0.176 0.188 11.8% 902 948 1 004 1 073 1 160
12.8% 0.135 0.140 0.146 0.153 0.162 12.8% 780 815 857 908 970
13.8% 0.121 0.125 0.129 0.134 0.141 13.8% 678 705 737 775 821

Valuation
12m target EV, USD mn
Existing assets New
Plant Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 117/183
OGK-5
Strengths
Coal plant in European Russia
Foreign strategic investor

6-month performance
20%

10%

0%

-10%

-20%

-30%

-40%

-50%

OGK-5 RTS Index RTS Electric Utilities Index

Assets
Installed Installed
electric heat Electricity Heat
capacity capacity generation sales
2007, 2007, 2007, 2007,
Plant Region MW Gcal/h GWh 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

New investment projects


New Initial
electric investment
Completion capacity, Fuel outlay, NPV,
Plant Project date MW type USD mn USD mn
Nevinnomysskaya GRES new 410 MW CCGT 2010 410 gas 442 134
upgrade of six 300 MW units to
Reftinskaya GRES 328MW and four 500MW units to 2013 488 coal 705 129
580MW
Sredneuralskaya GRES new 420 MW CCGT 2009 420 gas 448 147

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Enel
Gas Gas 52.9%
58% 57% Enel
Government
26.4% 55.8%
Government
26.4%

Coal
Coal 42%
41% Fuel Other Gazprom
Fuel Gazprom Other
oil minorities and af f ilates
oil and af f ilates minorities EBRD
1% 14.4% 6.4%
1% 6.3% 6.3% 5.2%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 118/183
OGK-5
Financials
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheets
Fixed 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 statement


Change 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

Financial ratios
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

Operational data
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,
22 28 35 43 52 58 67 79 85 88 90 92 94 96 100
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 119/183
OGK-5
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.1% 0.254 0.274 0.299 0.333 0.380 9.1% 1 005 1 085 1 186 1 321 1 510
10.1% 0.216 0.231 0.248 0.271 0.302 10.1% 853 911 982 1 073 1 195
11.1% 0.186 0.197 0.209 0.225 0.246 11.1% 732 774 825 890 972
12.1% 0.161 0.169 0.179 0.190 0.205 12.1% 632 664 702 749 807
13.1% 0.141 0.147 0.154 0.163 0.173 13.1% 550 575 603 638 679

Valuation
12m target EV, USD mn
Existing assets New
Plant Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 120/183
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
15%

5%

-5%

-15%

-25%

-35%

-45%

OGK-6 RTS Index RTS Electric Utilities Index

Assets
Installed Installed
electric heat Electricity Heat
capacity capacity generation sales
2007, 2007, 2007, 2007,
Plant Region MW Gcal/h GWh 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

New investment projects


New Initial
electric investment
Completion capacity, Fuel outlay, NPV,
Plant Project date MW type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

UES Gazprom
Gas 60%
Gas 93%
50%
39%

Coal Coal
Fuel 47% Fuel 60% Other
Other
oil oil minorities minorities
3% 1% 7% 40%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 121/183
OGK-6
Financials
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed 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 statement


Change 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

Financial ratios
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

Operational data
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,
32 35 40 43 49 57 67 79 88 91 94 96 99 102 105
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 122/183
OGK-6
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 0.129 0.140 0.153 0.170 0.193 10.5% 395 433 480 539 618
11.5% 0.106 0.115 0.124 0.137 0.152 11.5% 316 344 379 421 475
12.5% 0.088 0.094 0.102 0.111 0.122 12.5% 252 274 299 330 369
13.5% 0.073 0.078 0.083 0.090 0.098 13.5% 200 217 236 259 287
14.5% 0.061 0.064 0.069 0.074 0.080 14.5% 157 170 184 202 223

Valuation
12m target EV, USD mn
Existing assets New
Plant Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 123/183
TGK-1
Strengths
Hydroelectric power plants
Below-average fuel burn rate

Weaknesses
Above-average effective fuel price
Gazprom's corporate governance

6-month performance
15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

TGK-1 RTS Index RTS Electric Utilities Index

Assets
Installed Installed
electric heat Electricity
capacity capacity generation Heat sales
2007, 2007, 2007, 2007,
Branch Region MW Gcal/h GWh 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

New investment projects


New Initial
electric New heat investment
Completion capacity, capacity, Fuel outlay, NPV,
Branch Project date MW Gcal/h type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas Gas Gazprom and Fortum


UES af f iliated
89% 90% 26%
56% 46%

Fortum
26%

Norilsk
Norilsk Other Nickel
Other minorities
Fuel oil Coal Fuel oil Coal Nickel 6%
minorities 22%
7% 4% 4% 6% 7%
11%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 124/183
TGK-1
Financials
USD mn 2006 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed 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 statement
Revenues 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

Financial ratios
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

Operational data
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,
17 19 25 41 57 67 71 81 86 89 92 95 98 101 105
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 125/183
TGK-1
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.5% 0.00191 0.00205 0.00223 0.00246 0.00276 10.5% 993 1 081 1 188 1 325 1 504
11.5% 0.00159 0.00170 0.00183 0.00199 0.00220 11.5% 804 869 948 1 045 1 168
12.5% 0.00133 0.00142 0.00151 0.00163 0.00178 12.5% 650 699 758 829 916
13.5% 0.00112 0.00118 0.00126 0.00135 0.00145 13.5% 523 560 605 658 722
14.5% 0.00094 0.00099 0.00105 0.00112 0.00120 14.5% 416 445 480 520 567

Valuation
12m target EV, USD mn
Existing assets New
Branch Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 126/183
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
20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

TGK-2 RTS Index RTS Electric Utilities Index

Assets
Installed electric Installed heat Electricity Heat sales
capacity 2007, capacity 2007, generation 2007, 2007,
Branch Region MW Gcal/h GWh 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

New investment projects


New Initial
electric New heat investment
Completion capacity, capacity, Fuel outlay, NPV,
Branch Project date MW Gcal/h type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas Gas UES Prosperity RWE-Sintez


62% 52% 49% capital consortium
24% 43% Prosperity
capital
18%

Coal Coal Industrial


13% 33% Industrial investments
investments 4%
Municipal
5%
Municipal property
Other
Other State 1%
Peat Fuel oil Peat Fuel oil State property minorities
1%
1% 24% 11% 4% minorities 2% 33%
1%
19%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 127/183
TGK-2
Financials
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%
* Non-recurring items and electricity trading activities excluded

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

Financial ratios
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

Operational data
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,
15 41 46 56 65 70 75 84 88 91 93 96 100 103 106
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 128/183
TGK-2
DCF
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%

12m target price, common 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.4% 0.00166 0.00178 0.00192 0.00211 0.00238 9.4% 835 899 981 1 088 1 234
10.4% 0.00142 0.00150 0.00161 0.00174 0.00191 10.4% 700 746 804 878 974
11.4% 0.00122 0.00128 0.00136 0.00145 0.00157 11.4% 589 624 666 718 784
12.4% 0.00106 0.00110 0.00116 0.00123 0.00131 12.4% 498 524 556 594 641
13.4% 0.00092 0.00096 0.00100 0.00105 0.00111 13.4% 421 442 465 494 528

Valuation
12m target EV, USD mn
Existing assets New
Branch Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 129/183
Mosenergo (TGK-3)
Strengths
Above-average electricity load factor
Below-average fuel burn rate
Favourable heat business regulation
Weaknesses
Gazprom's corporate governance
20%
6-month performance
10%

0%

-10%

-20%

-30%

-40%

Mosenergo RTS Index RTS Electric Utilities Index

Assets
Installed electric Installed heat Electricity Heat sales
capacity 2007, capacity 2007, generation 2007, 2007,
Plant Region MW Gcal/h GWh 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
New investment projects
New electric New heat Initial investment
Completion capacity, capacity, Fuel outlay, NPV,
Plant Project date MW Gcal/h type USD mn 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
- 79
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

, 2007e Fuel mix


Fuel mix, 2011e Ownership structure, 2007e Ownership
Ownership structure
structure, 2008e

2007e 2011e 2007e 2008e


Gas UES Other
98.2% Gas
98.5% 36% minorities
20%
Other
minorities
9% Gazprom
Gazprom
Fuel 53%
Fuel City of 50% City of
oil Moscow
0.4%Coal oil Moscow
0.3% Coal 5% 27%
1.4% 1.2%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 130/183
Mosenergo (TGK-3)
Financials
USD mn 2006 2007 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Balance sheet
Fixed 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 statement


Change 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

Financial ratios
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

Operational data
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,
19 24 32 43 51 57 67 79 84 87 90 93 96 99 102
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 131/183
Mosenergo (TGK-3)
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
10.8% 0.331 0.349 0.370 0.397 0.431 10.8% 1 151 1 212 1 286 1 380 1 501
11.8% 0.290 0.303 0.319 0.338 0.363 11.8% 1 008 1 053 1 108 1 176 1 260
12.8% 0.257 0.266 0.278 0.292 0.310 12.8% 890 925 966 1 015 1 076
13.8% 0.228 0.236 0.245 0.256 0.268 13.8% 791 818 849 886 931
14.8% 0.204 0.210 0.217 0.225 0.235 14.8% 707 728 753 781 814

Valuation
12m target EV, USD mn
Existing assets New
Plant Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 132/183
TGK-4
Weaknesses
Below-average electricity load factor
Above-average fuel burn rate
Above-average effective fuel price

6-month performance, common


15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

TGK-4 common RTS Index


RTS Electric Utilities Index

Assets
Installed electric Installed heat Electricity Heat sales
capacity 2007, capacity 2007, generation 2007, 2007,
Branch Region MW Gcal/h GWh 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
New investment projects
New electric New heat Initial investment
Completion capacity, capacity, Fuel outlay, NPV,
Branch Project* date MW Gcal/h type USD mn 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
Fuel mix Ownership structure

2007e 2011e 2007e 2008e


Gas Archivo
Gas Archivo
98% Ltd.
98% Onexim Ltd.
UES 14%
Holdings 10%
47%
Immenso Ltd. Immenso
Enterprises 52% Enterprises
Ltd. Ltd.
Fuel Fuel 7% 5%
oil oil
1% 1% Other Other
Coal Coal minorities minorities
1% 1% 32% 33%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 133/183
TGK-4
Financials
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%
* Non-recurring items and electricity trading activities excluded

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

Financial ratios
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

Operational data
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
27 32 40 51 61 68 77 90 95 98 101 105 108 112 116
price, USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 134/183
TGK-4
DCF
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%

12m target price, common 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.00175 0.00187 0.00202 0.00222 0.00249 9.8% 951 1 022 1 110 1 225 1 379
10.8% 0.00149 0.00158 0.00169 0.00182 0.00200 10.8% 800 852 915 995 1 099
11.8% 0.00127 0.00134 0.00142 0.00152 0.00164 11.8% 677 716 763 820 892
12.8% 0.00110 0.00115 0.00121 0.00128 0.00137 12.8% 575 605 640 682 733
13.8% 0.00095 0.00099 0.00103 0.00109 0.00115 13.8% 490 513 539 571 609

Valuation
12m target EV, USD mn
Existing assets New
Branch Electricity Heat Total USD/kW project 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 135/183
TGK-5
Strengths
Coal power plants in European Russia
Below-average fuel burn rate

6-month performance
15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

TGK-5 RTS Index RTS Electric Utilities Index

Assets
Installed Installed
electric heat Electricity
capacity capacity generation Heat sales
2007, 2007, 2007, 2007,
Branch Region MW Gcal/h GWh 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

New investment projects


New Initial
electric New heat investment
Completion capacity, capacity, Fuel outlay, NPV,
Branch Project date MW Gcal/h type USD mn 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

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas Gas
89% 69% UES IES
46% Russian
65% Federation
25%

IES
20%
Gazprom
5%
Coal
Peat
Peat Fuel oil 23% Other Other
3% Fuel oil Coal
7% 1% minorities minorities
1% 7%
15% 24%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 136/183
TGK-5
Financials
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%
* Non-recurring items and electricity trading activities excluded

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

Financial ratios
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

Operational data
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,
25 26 34 41 53 58 67 78 86 89 92 95 98 101 104
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 137/183
TGK-5
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.00194 0.00204 0.00218 0.00236 0.00259 9.8% 768 821 888 974 1 090
10.8% 0.00170 0.00178 0.00188 0.00200 0.00216 10.8% 655 694 742 802 880
11.8% 0.00152 0.00157 0.00165 0.00173 0.00184 11.8% 563 592 627 670 724
12.8% 0.00136 0.00140 0.00146 0.00152 0.00160 12.8% 487 509 535 567 605
13.8% 0.00123 0.00126 0.00130 0.00135 0.00141 13.8% 423 440 460 483 512

Valuation
12m target EV, USD mn
Existing assets New
Branch Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 138/183
TGK-6
Weaknesses
Below-average electricity load factor
Above-average effective fuel price

6-month performance
15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

TGK-6 RTS Index RTS Electric Utilities Index

Assets
Installed Electricity
electric Installed heat generation Heat sales
capacity, capacity, 2007, 2007,
Branch Region MW Gcal/h GWh 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

New investment projects


New Initial
electric New heat investment
Completion capacity, capacity, Fuel outlay, NPV,
Branch Project date MW Gcal/h type USD mn USD mn
Ivanovo reconstruction 2007 19 0 gas 20 18
3 new 325 MW CCGT power plant and
Nizhny Novgorod 2010 985 1 129 gas 1 171 - 60
reconstruction of old capacity
Dzerzhinsk reconstruction 2010 135 358 gas 148 31

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas Gas Archivo


UES Archivo Ltd.
95% 95% 50% Ltd. 19%
19%

Other
minorities
IES 17%
19%
IES and
Fuel Fuel Other
affiliated
oil Coal oil Coal minorities
64%
2% 3% 2% 3% 12%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 139/183
TGK-6
Financials
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%
* Non-recurring items and electricity trading activities excluded

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

Financial ratios
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

Operational data
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,
25 31 38 45 53 66 79 89 96 96 99 102 105 109 113
USD/MWh
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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 140/183
TGK-6
DCF
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

12m target price 12m target EV/capacity


Terminal growth Terminal growth
WACC 0.0% 1.0% 2.0% 3.0% 4.0% WACC 0.0% 1.0% 2.0% 3.0% 4.0%
9.8% 0.00124 0.00134 0.00147 0.00163 0.00185 9.8% 585 643 715 809 936
10.8% 0.00105 0.00112 0.00121 0.00133 0.00147 10.8% 473 516 568 633 718
11.8% 0.00090 0.00095 0.00102 0.00110 0.00120 11.8% 384 415 454 501 559
12.8% 0.00077 0.00081 0.00086 0.00092 0.00099 12.8% 311 335 364 398 440
13.8% 0.00067 0.00070 0.00074 0.00078 0.00084 13.8% 251 270 291 317 348

Valuation
12m target EV, USD mn
Existing assets New
Branch Electricity Heat Total USD/kW projects 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

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 141/183
TGK-7
Weaknesses
Below-average electricity load factor
Above-average effective fuel price

6-month performance
15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

TGK-7 RTS Index RTS Electric Utilities Index

Assets
Installed Installed
electric heat Electricity Heat
capacity capacity generation sales
2007, 2007, 2007, 2007,
Branch Region MW Gcal/h GWh 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

New investment projects

New Initial
electric New heat investment
Completion capacity, capacity, Fuel outlay, NPV,
Branch Project date MW Gcal/h type USD mn USD mn
new 200 MW CCGT capacity and
Samara 2011 445 453 gas 486 - 20
reconstruction of old capacity

Fuel mix Ownership structure

2007e 2011e 2007e 2008e

Gas Gas
99.7% 99.2% UES IES
54% Estone 56%
Holdings
Ltd. Prosperity
8% Capital
Emeraldi 16%
Enterprises
Ltd.
8%
Rubinium
Enterprises
Ltd.
Fuel oil Fuel oil Other Prosperity 8% Other
0.3% 0.8% minorities Capital minorities
3% 19% 28%

CJSC Glitnir Securities l Paveletskaya Pl. 2, bld. 3 l Moscow 115054 l Russia 142/183
TGK-7
Financials
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