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Specialised Asset Management specialised research and investment group Russian Power: The Greatest Sector Reform on Earth www.sprin-g.com November 2010 specialised research and investment group Specialised Research and Investment Group (SPRING) Manage Investments in Russian Utilities: - HH Generation - #1 among EM funds (12 Months Return)* #2 among EM funds (Monthly return)** David Herne - Portfolio Manager Previous positions: Member, Board of Directors - Unified Energy Systems, Federal Grid Company, RusHydro, TGK-1, TGK-2, TGK-4, OGK-3, OGK-5, System Operator, Aeroflot, etc. (2000-2008) Chairman, Committee for Strategy and Reform - Unified Energy Systems (2001-2008) Boston Consulting Group, Credit Suisse First Boston, Brunswick. * Top 10 (by 12 Months Return) Emerging Markets (E. Europe/CIS) funds in the world by BarclayHedge as of 30 September 2010 ** Top 10 (by Monthly Return) Emerging Markets (E. Europe/CIS) funds in the world by BarclayHedge as of 31 August 2010 2 specialised research and investment group Russian power sector reform: Privatization Pre-Reform Post-Reform Government Government 52% 1 RusHydro 1 FSK RAO ES RAO UES 58% 79% hydro generation HV distribution 53% Far East Holding control control Independent energos 53% 1 MRSK Holding 14 TGKs 0% (Bashkir, Novosibirsk, ~72 energos 0% generation (CHP) generation Irkutsk, Tat) 35 federal plants transmission thermal 11 MRSK distribution 51% hydro LV distribution 0% ~72 SupplyCos supply 6 OGKs other 0% generation 45% InterRAO 0% ~100 RepairCos Source: UES, Companies Data, SPRING research 3 specialised research and investment group Russian power sector reform: Price liberalization Scheme of liberalization of the markets Wholesale electricity prices, RUB/MWh 100% 1 000 90% 80% 800 70% 60% 600 50% 40% 400 30% 20% 200 10% 0% 0 Europe&Ural Siberia free share regulated shares E&U year average Siberia year average Free market and growth of gas tariff lead to increase in electricity price and growing margins of generators Source: ATS, Companies Data, SPRING research 4 specialised research and investment group Who is spending money? Investors spent more then USD40bn during the sector privatization Foreign Russian America Europe Private Government $0 $25bn $18bn Asia $14bn $0 Competitive Monopolistic sectors sectors + hydro generation MCap$19bn* MCap$13bn** Source: Bloomberg, Companies data, SPRING research * MCap of major’s stakes in OGKs and TGKS **MCap of government stakes in RusHydro and FSK, which were paid by cash 5 specialised research and investment group Russian utilities today – Key players Player Where from Asset (s) Investment Gazprom (state) Russia TGK-1,3; OGK-2,6 USD9.3bn E.On Germany OGK-4 USD5.8bn NorNickel (Potanin) Russia OGK-3 USD5.4bn KES (Vekselberg) Russia TGK-5,6,7,9 USD4.6bn Enel Italy OGK-5 USD3.9bn Fortum Finland TGK-10, TGK-1 USD3.9bn Lukoil (Alekperov) Russia TGK-8 USD3.2bn SUEK (Melnichenko) Russia TGK-12,13 USD0.6bn Onexim (Prohorov) Russia TGK-4 USD1.2bn Sintez (Lebedev) Russia TGK-2 USD0.8bn RZhD(state) + ESN (Berezkin) Russia TGK-14 USD0.3bn InterRAO (state) Russia TGK-11 n/a Source: Companies Data, SPRING research 6 specialised research and investment group What do investors expect? Capacity market – RAB regulation – profit for generators profit for grids EBITDA earned yearly for EBITDA of the sector 1 kW of installed capacity will increase 3.5 times in 5 years $/kW $ bln 350 10,0 300 341 8,0 250 9,6 200 6,0 150 183 4,0 100 50 2,0 2,7 0 20 0,0 old capacity new gas new coal capacity capacity EBITDA 2009 EBITDA 2014 Each kW of new capacity installed EBITDA margin grows will generate at least 9 times more EBITDA from 15% to 35% than existing capacity !!! in 2010-2014 (not taking into account electricity market earnings) 7 specialised research and investment group Main trends – Acquisitions Consolidation Reorganisation IPO Inter RAO OGK-2, OGK-6; RAO ES Far East Holding Eurosibenergo ~ 20 companies – TGK-1, TGK-3 Transition to a Hong Kong Stock non-cash single share during Exchange; acquisitions; To be merged into very the next 2 years NOW mid 2011 large GenCo before IPO Novosibirskenergo RusHydro TGK-5, TGK-6, SUEK TGK-7, TGK-9 Distribution and supply Strategy to businesses spin-off from Hong Kong Stock To be consolidated expand abroad; generation Exchange; 5 years with heat businesses 6 months before IPO Energostream Bashkirenergo To increase its stakes Distribution and supply in ~17 SupplyCos businesses spin-off from up to 100% generation Source: Companies Data, SPRING research 8 specialised research and investment group Strategic investors are still underwater % increase Asset Investor Price paid Current Value necessary* TGK-1 Gazprom (state) USD2.8bn USD2.1bn 34% TGK-2 Sintez (Lebedev) USD0.8bn USD0.2bn 371% Mosenergo Gazprom (state) USD5.0bn USD2.2bn 128% Quadra Onexim (Prohorov) USD1.2bn USD0.5bn 129% TGK-5 KES (Vekselberg) USD0.5bn USD0.3bn 55% TGK-6 KES (Vekselberg) USD1.1bn USD0.4bn 183% Volga TGK KES (Vekselberg) USD1.6bn USD0.9bn 85% TGK-8 Lukoil (Alekperov) USD3.2bn USD1.2bn 167% TGK-9 KES (Vekselberg) USD1.3bn USD0.9bn 45% Fortum Fortum USD3.6bn USD1.2bn 213% TGK-11 InterRAO (state) na USD0.1bn na Kuzbassenergo SUEK (Melnichenko) USD0.1bn USD0.05bn 136% Yenisei TGK SUEK (Melnichenko) USD0.5bn USD0.3bn 46% TGK-14 RZhD (state)+ESN (Berezkin) USD0.3bn USD0.2bn 97% OGK-2 Gazprom (state) USD0.7bn USD0.2bn 206% OGK-3 NorNickel (Potanin) USD5.4bn USD2.1bn 153% OGK-4 E.On USD5.8bn USD4.4bn 31% OGK-5 Enel USD3.9bn USD1.7bn 125% OGK-6 Gazprom (state) USD0.8bn USD0.2bn 259% Source: Companies Data, SPRING estimations * % increase necessary from current price to purchase price 9 specialised research and investment group Russian utilities – an undervalued asset class Gencos valuations Discos valuations 12,00 12,0 NTPC Datang Interconexion Electrica 10,00 10,0 Endesa-Chile TrustPower Terna SpA Tohoku Electric Kyushu Electric 8,00 OGK-1 Power Entergy Corp Power 8,0 Vector LTD CPFL Energia Iberdrola TGK-6 Transmissao Red Electrica NRG Energy 6,00 Edison CEZ 6,0 Paulista OGK-2 OGK-4 MRSK North- AES Equatorial COELCE-PRF OGK-6 Drax West MOESK Eletropaul-PRF EV/EBITDA 2012 EV/EBITDA Edenor 4,00 2012 EV/EBITDA 4,0 International Light SA TGK-4 Kuzbassenergo Power Plc MRSK South MRSK HoldingMRSK Center Kubanenergo 2,00 TGK-13 Lenenergo MRSK Siberia 2,0 MRSK TGK-10 MRSK Urals Centr&Privolzh 0,00 0,0 0 1 000 2 000 3 000 0,0 1,0 2,0 3,0 4,0 EV/IC P/BV Russian utilities International utilities Source: Bloomberg, Companies Data, SPRING research 10 specialised research and investment group SPRING – Specialised in Russian power utilities Investments in traded securities performed well to date 7 500 HH Generation 6 500 Open-ended, investments in traded securities of 5 500 utilities and related businesses in Russia and other countries of the CIS 4 500 3 500 YTD 53.96% 2 500 1 500 Since inception (August 2005) 565.68% 500 Annualized since inception 44.32% HH Generation (net of fees) RTSI RTS Utilities Index Date: 29 October 2010 Source: SPRING estimation 11 specialised research and investment group Contact details: Name: Yana Starovoytova Tel: +7 495 783 6780 Email: [email protected] Website: www.sprin-g.com 12.
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