Company Presentation
July 2018 Hizmete Özel Disclaimer
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2 Hizmete Özel Executive Summary
3 Hizmete Özel Successful track-record of expansion and improvement of legacy regional companies
Turkey’s No.1 Electricity Distribution and Retail Company
Generation and Wholesale Spin-off from Distribution and Retail 2018 Acquisition of 2017 Ayedaş and 2016 IPO & listing at Istanbul Toroslar Regions Stock Exchange – included to BIST 30 & FTSE All-World Index Acquisition of Başkent Region 2013 Start of Current Establishment of (3rd) Regulatory Enerjisa by E.ON Becomes Period 2009 50% Partner 2006 Unbundling 1996 Process Initiated Start of 1st Regulatory Period
4 Hizmete Özel Enerjisa at a glance
Overview
No.1 Electricity Distribution and Retail Turkey’s leading electricity distribution and retail company with consolidated revenues of Player in Turkey over TL12bn for the year ended 31 December 2017
Successful partnership between E.ON and 1 1 1 TL5.3bn 10.9m c. 220,000 km Sabancı, through a 50/50 joint venture since 2017 RAB 2017 Connection 2017 20131 Points Network Length
Fundamental growth from incumbent regions
(Başkent, Ayedaş and Toroslar) Distribution
1 1 35.2 TWh 9.2m Successfully completed operational and financial 2017 Sales 2017 Customers improvement post privatizations Volume
Total RAB of TL5.3bn as of 2017 Retail
Large retail customer base of over 9 million (representing 22% market share) with high proportion of regulated sales
5 1 Post IPO E.ON and Sabancı own 40% each. Hizmete Özel Presence in highly attractive regions in Turkey
Presence in Turkey’s Top 10 Provinces by Population
2 Ayedaş Istanbul Rank Region Population (Asian Side) Başkent İstanbul European Side 9.7m Total: 15.0m 3 Ankara 2 İstanbul Asian Side 5.3m (Capital) 3 Ankara 5.4m Adana 4 İzmir 4.3m Toroslar Gaziantep 7 5 Bursa 2.9m 9 6 Antalya 2.4m
7 Adana 2.2m Operations in some of the 8 Konya 2.2m most influential and More than a quarter of 9 Gaziantep 2.0m industrialised regions of population covered Turkey 10 Şanlıurfa 2.0m 11 Kocaeli 1.9m Key Statistics on Regions (2017)
Net Population Area Distribution Volume1 20.9m 109,663 km2 41.8 TWh Ayedaş 5.3m 1,926 km2 11.6 TWh Enerjisa Enerjisa Enerjisa 14% 26% 24% 2 Başkent 7.3m 61,141 km 15.0 TWh
Toroslar 8.3m 46,596 km2 15.2 TWh Other Other Other Players Players Players 76% 74% 86%
Source: Company, TUIK. 1 Based on EMRA disclosure. 6 Hizmete Özel Turkey’s no.1 electricity distribution and retail company
Supportive and Transparent Leader in an Attractive Market No.1 Regulatory Framework TL2.6bn Operational Earnings3 10.9m Distribution 9.2m Retail (2017) Connections Customers Regulated Retail 26%1 22%2 9%
Distribution 91%
Premium Sponsors and Strong Historical Growth and Superior Governance Untapped Potential
Regulated Asset Base > 2x RAB Free Float (TLbn) 2016
20%
+55% 5,3 3,9 40% 40% 2,7 1,4
2014 2015 2016 2017 2020E
1 Market share by number of connections as of 2017. 2 Market share by number of Retail customers as of 2017. 7 3 EBITDA + Capex Reimbursements. Hizmete Özel Significant operational earnings and cash growth
Consolidated Operational Earnings Consolidated Underlying Net Income (TLm) (TLm)
+49% 2.565 522 377 1.938 70 1.100 779
-277 2014 2015 2016 2017 2014 2015 2016 2017
Consolidated Free Cash Flow before Interest Net Debt/Operational Earnings and Tax (TLm) 7,0x
5,5x 444 176 2 Global Peers1
3,4x -379 2,9x
2014 2015 2016 2017
2014 2015 2016 2017 Operating Cash Flow (before interest & tax) Capex 8 Hizmete Özel 1 Source: S&P and company research. Mid-term targets
Operational Earnings Underlying Net Income (TLm) (TLm)
+32% +20% +38% 2,565 CAGR 2016-20 Significantly 1,938 522 >20% CAGR 2016-20 377
2016 2017 2020 2016 2017 2020
Dividend policy 60-70% payout of Underlying Leverage <3.5x Net Debt/Operational Net Income earnings
Dividend per 0.30TL share1 3.5x 3.4x 2.9x 70% 68%
60%
2017 2020 2016 2017 2020
1 Dividend per 100 shares; total number of outstanding shares is 118,106,896,712. 9 Hizmete Özel Electricity distribution leadership provides No.1 economies of scale
2017 Number of Distribution Connections by Competitors Share of National (millions) Regulatory Asset Base1 (2017) 10,9 = 26% Market Share
8,0 24% 29% 10.2 = 24% Market Share 5,0
3,1 3,0 2,2 2,0 1,8 1,7 1,7 1,0 0,7 0,7 0,7 Other
players
CK
Aksa
Içtaş
Zorlu
Akcez
Limak
Kcetas Akedas
Bereket Share of 2016–2020
Türkerler Calik-Kiler DicleEdaş National Capex Allowance
of Total ~TL18bn Alarko-Cengiz (October 2015, real)
Enerjisa Distributes Electricity to 1 Out of Every 4 Persons in Turkey 23%
Enerjisa Reads c. 120 Million Meters Every Year
Centralised Management Enables Sustainable Top Performance Other players Source: Company and EMRA. 1 National Regulatory Asset Base according to initial Capex allowance, Enerjisa RAB accounts for actual Capex.
10 Hizmete Özel No.1 electricity retailer with nationwide reach No.1
2017 Sales Volume by Competitors Market Share by Customers (TWh) (2017) 35 = 18% Market Share 31 29 30 2 23 22% 9.2m
13 11
9 8 8 c.200 c.200 Players
1 Other
CK players
Aksa
İçtaş
Zorlu
Limak
Bereket
Akenerji Non-
Other Market Share of Residential Incumbents Incumbents and SME Volume (2017)
Enerjisa Operates Nearly 200 Customer Service Points 22 TWh 18%
Call Centres Handle 1.3 Million Calls a Year
Retailer with Nationwide Reach and Brand Awareness Other Source: Company and EMRA. players 1 Including Cengiz Toptan. 2 Includes inactive customers.
11 Hizmete Özel RAB-based regulation similar to Western Europe with stronger fundamentals
Western Europe vs. Turkey
RAB Growth Low High
Connections Growth Low High Key Features of Distribution Demand Growth Low High Infrastructure Level of Interruptions Low High
Dispersion in Performance Low High by Concessionaires
Regulatory Period Length 4-8 years 5 years
RAB-Based P P
Regulatory: in EBITDA Capex Reimbursement Regulation In EBITDA IFRS: in Cash Flow Accounting Approach Statement
Capex Reimbursement 30-45 years 10 years Period
Outperformance Incentives P P
Source: Regulatory Bodies, Moody’s’ “Regulated Electric and Gas Networks – EMEA” reports dated November 2016 and June 2017.
12 Hizmete Özel Distribution regulation incentivises investment and outperformance
2nd Reg. Period 3rd Reg. Period Distribution Operational Earnings Breakdown1 2011 – 2015 2016 – 2020 (2017)
2018-2020 -> 13.61% Other 2016-2017 -> 11.91% 5% 9,97% Efficiency & Regulated WACC Quality (real Oct 2015, pre-tax) +194bps 26% Financial Income and 69% Capex Reimbursement 4.3
Enerjisa 2.8 TL2.3 bn Capex Allowance (TLbn, real Oct 2015) +53% Regulated WACC (real) 13,61% 11,91% 9,97% 4.8 9,35% Enerjisa 4.0 Opex Allowance1 (TLbn, real Oct 2015) +21%
2006-2010 2011-2015 2016-2017 2018-2020 Variable with Theft and Fixed by st nd Actual 1 reg. 2 reg. Loss Allowance Regulator rd Historical Rates period period 3 reg. period
Source: Company, Bloomberg and EMRA. 1 For the explanation please see “Operational Earnings bridge “in the Appendix. 13 Hizmete Özel Majority of retail customers still regulated – liberalisation as potential upside for profitability
By Consumption Limits in Illustrative Profitability Structure Eligibility Limit Development* (MWh p.a.) 100.0 Market Openness 2.38% by Volume 2.38% ~ 94%
30,0 + Potential for Higher Margins 25.0 Market Openness by No. of Customers ~ 47% - Potential for Reduced Sourcing Cost
Regulated Liberalised Sales Price Sales Price 5,0 4,5 4,0 3,6 2,4 2,0 Discount Gross Margin
2010 2011 2012 2013 2014 2015 2016 2017 2018 Retail Service Revenue Sourcing Cost In December 2017, the regulator has lowered the eligibility threshold from 2.4MWh to 2.0MWh, effective starting from 2018
Source: Company, EMRA. 14 Hizmete Özel High quality partners and experienced management team
Current Ownership Structure
World class utility – operating in Turkey’s leading conglomerate Free Float networks, customer solutions, company and renewables >75% international institutions at IPO Strong retail experience/ RAB of ~€19bn brand awareness
>22m retail customers across Listed holding with listed Europe subsidiaries including Akbank, Avivasa, Brisa and Carrefoursa >400k customers purchasing 20% value added units Track record of working with international partners (e.g. Aviva, Operates 754,000 km of 40% 40% Ageas, Bridgestone, Heidelberg and network grid length Carrefour)
Experienced Management Team
Independent Board Members
Transparent and Arm’s Length Related Party Transactions
Source: E.ON & Sabancı websites. Note: Operational and financial data as of 2016.
15 Hizmete Özel Turkish electricity sector investment needs to continue to grow significantly
• Population growth of 1.4% p.a. since 2000, expected 0.6% Strong macro with p.a. until 2042 • Young population with median age of 31 years favourable dynamics • Economic growth driven by increasing population and prosperity, with GDP expected to grow 4.7% p.a. until 2042
• Electricity demand growth ~5% p.a. since 2000 and projected 5% CAGR electricity to continue going forward in line with government guidance demand since 2000 • Electricity consumption per capita of 3.2 MWh in 2016 is significantly behind European countries
Quality improvements • Frequency and duration of outages as well as level of theft and loss rates vs. other EU countries shows need for significant required additional investments into network quality improvements
• Exceptional wind and solar generation capacity increase from virtually nothing in 2000 to 6.5 GW in 2017 has driven network Impact from requirements renewables / • Renewables and decentralised energy will play a significant role decentralised energy for security of supply purposes in the future (12.3 GW wind and solar installed capacity expected in 2020)
Source: EIU, World Bank, TEİAŞ, EMRA.
16 Hizmete Özel Turkey’s macro growth story remains strong, supported by positive demographic dynamics
One of the Fastest Growing European Countries One of the Largest and Still Growing (real GDP CAGR in %) Population in Europe
(2016 population in millions, CAGR 2016-2022E in %)
- -
4.6% 3.3% 4.1% 2.8% 1.6% 2.3% 1.6% 2.2% 1.6% 1.7% 1.0% 0.1% 1.1% 0.6% 0.4% (0.1%) 0.0% 0.0% (0.5%) 0.5% 0.0% (0.3%)
CAGR (2016 2022E)
CAGR (2016 2022E)
82,6 79,5
5,7%
65,1
64,7
–
59,4
3,7%
3,6%
46,4
38,4
2,7%
(2001 (2001
1,7%
1,3%
2016)
19,8
(in m) (in
1,1% 1,1%
17,0
1,1%
10,6
10,3
Population Population
0,1%
CAGR
(0,1%)
UK
UK
Italy
Italy
Spain
Spain
Poland
France
Turkey
Poland
France
Turkey
Portugal
Romania
Portugal
Germany
Romania
Germany
Czech Rep. Czech
Czech Rep. Czech
Netherlands Netherlands Favorable Demographics with Increasing A Young Population Urbanisation (Percent of 0-14 Age in Total 2016 Population, Median Age in 2016) (% of Total Population) 91,0%
31 41 40 42 41 42 40 43 44 46 46
Age Median Median 82,8% 80,5% 79,8% 79,8% 25% 18% 18% 73,9% 17% 15% 15% 15% 15% 14% 14% 13%
71.0% 14 Age
-
% of % of 0 2016in population
Turkey Turkey Netherlands UK OECD France Spain UK
2010 2016 Italy
Spain
Poland
France
Turkey
Portugal
Romania Germany
Source: EIU, World Bank. Rep. Czech Netherlands
17 Hizmete Özel Electricity consumption growing steadily, with room for further increase
Electricity per Capita Consumption Significantly Below European Countries
50 Netherlands
6 6 UK Germany 40
201 France
) 30 Italy
USDk Spain
( 20 Turkey Portugal Czech Republic 10 Poland
GDP per capita per GDP Romania
- 2.000 3.000 4.000 5.000 6.000 7.000 8.000 Electricity consumption per capita 2016 (kWh) Electricity Consumption Growth Expected to Outpace European Countries (TWh 2016, CAGR 2016-2021 in %)
0.7% 0.7% 0.9% 1.1% 1.7% 5.1% 0.9% 1.4% 2.5% 1.2% 2.8% 581 461 338 307 257 251 153 116
69 49 54
UK
Italy
Spain
Poland
France
Turkey
Portugal
Romania
Germany
Czech Rep. Czech Netherlands
Source: EIU.
18 Hizmete Özel Network investments to bridge the efficiency/ quality gap with other European markets
Duration of outages and theft & loss rates show need for significant further investments into network quality improvements Turkish SAIDI SAIDI Benchmarking vs. European Counterparts (minutes per year) (minutes per year, 2014)1
1.764 1.567
694
320 277 153 99 92 67 67 25
2015 2016 Romania Poland Czech Rep. Italy Portugal UK France Spain Germany Turkey Electricity Transmission and Distribution Significant Transmission and Distribution Losses Evolution Losses in Turkey vs. European Counterparts (% of output) (% of output, 2015)
14,3% 15,4% 14,3% 14,0% 13,4% 14,0%
10,3% 8,8% 7,9% 7,0% 6,7% 6,4%
4,7% 2
2012 2013 2014 2015 2016
UK
Italy
Spain
France
Turkey
Europe
Germany Czech Rep. Czech Source: Company, EMRA, Eurostat. 1 Sourced from: 6th CEER benchmarking report on the quality of electricity and gas supply. 2 Turkey 2015 data sourced from EMRA.
19 Hizmete Özel Attractive home regions enhance growth potential
Enerjisa Geographic Footprint Başkent
Başkent • First Enerjisa region acquired in 2009 Ayedaş • Largest electricity distribution region in Istanbul Turkey by grid size and geographic area (Asian Side) • Key urban centers: Ankara (Capital) • Network length: 110 thousand km Ankara (Capital) • License Expiry Date: Sep 2036 • Population: 7.3 million
Gaziantep Ayedaş Adana • Acquired in a privatisation tender in 2013 Mersin • Fastest growing Enerjisa regions by Toroslar electricity consumption • Exposure to the Asian side of İstanbul Consumption Population Household (Turkey’s largest city) 1 2 Growth Growth Size • Network length: 24 thousand km • License Expiry Date: Dec 2042 Başkent 4.0% 1.0% 3.0 • Population: 5.3 million
4 Toroslar Ayedaş 4.7% 1.5% 3.5
• Acquired in a privatisation tender in 2013 Toroslar 3.9% 0.8% 3.8 • 3 large metropolitan areas: Mersin, Adana and Gaziantep Turkey Turkey Western Europe 3 • Network length: 86 thousand km 3.6% 0.6% 2.0 - 2.5 • License Expiry Date: Dec 2042 Source: Company, EMRA, Turkstat and Eurostat. • Population: 8.3 million (most populous of 1 Ayedaş and Toroslar annual growth rate 2016–2042, Başkent annual growth rate 2016-2036; Source: Mercados. Enerjisa’s regions) 2 Ayedaş and Toroslar annual growth rate 2016–2042, Başkent annual growth rate 2016-2036; Source: Population growth study by Prof. Dr. Ahmet Sinan Türkyılmaz. 3. Based on average household sizes in Germany (2.0), UK (2.3), France (2.2) and Spain (2.5). 4. Ayedaş considers Istanbul household size (including European side) as per Turkstat. 20 Hizmete Özel Clear priorities to harvest growth potential
Leverage Customer Base into New Services and Customer Solutions
Benefit from Retail Liberalisation
Drive Operational Excellence, Digitalise all Processes
Ensure Competitive Financing Cost and Leverage
Capitalise on Distribution Investment Opportunities
21 Hizmete Özel Enerjisa is a forward thinking utility
Future Focus Areas / R&D
Network Operations B2B & B2C Growth Areas Growth Areas Network Monitoring Energy Drones efficiency
Smart Cross-sells appliances
Smart cities Digital customer experience Electric Bus E-battery Lines Platform / Connected network home activities
Distributed Back-office and Distributed generation Internetother shared generationservices of things Solar PV
Actionable medium term opportunities including rooftop solar, smart meters and battery storage
22 Hizmete Özel Key Investment Highlights
Significant growth realized & expected
Highly regulated and guaranteed income
Reliable framework, positive regulatory trend
Solid balance sheet, declining leverage
Attractive dividend pay-out
23 Hizmete Özel Key Financials
24 Hizmete Özel Background and definition of key financial KPIs
In Turkey, Distribution companies operate under a transfer of operating rights (TOR) agreement, which means no legal ownership of assets; legal and asset ownership remains with TEDAŞ (i.e. the state)
As a consequence, accounting for all Turkish distribution companies falls under IFRIC 12 “service concession arrangements: government or other body grants contracts for supply of public services”
Therefore, networks are accounted as financial asset instead of fixed assets in IFRS which need to be recognized at fair value under IFRIC 12
This has two important implications for the presentation of top financial KPIs: 1. IFRS P&L does not show any asset depreciation and accordingly no income from amortisation allowance (reimbursement of capital) Enerjisa uses EBITDA + Capex reimbursement as its main operational financial KPI to capture the full regulatory, cash-effective RAB return and to increase comparability with international peers who generally do not have to apply IFRIC12 2. Changes in long-term assumptions (e.g. Regulatory parameters) lead to changes in the fair value of the networks-related financial asset. These changes are IFRS P&L-effective, can be material because they relate to the remaining concession period and are fully non cash-effective. As a result they are treated as exceptional items and adjusted from top financial KPIs in order to avoid time series distortions
As a result, Enerjisa defines the top financial, P&L-related KPIs as follows:
EBITDA + Capex reimbursements Reported Net Income - Exceptional items - Exceptional items = Operational Earnings = Underlying Net Income
25 Hizmete Özel Operational earnings and cash development in 2014 – 2017
Consolidated Operational Earnings Key Drivers (TLm) Distribution
Higher financial income driven by higher Capex related RAB and higher WACC in 3rd regulatory period +49% 2.565 Higher outperformance on Capex, Opex and T&L driven by 1.938 efficiency gains as well as more favorable regulatory parameters starting in 2016 (theft accrual & collection) 1.100 2.344 Retail 779 1.650 807 Focus on profitable volumes and flexible optimization of 635 customer segments depending on market conditions 145 280 290 247 2014 2015 2016 2017
Consolidated Free Cash Flow before Interest Key Drivers and Tax Distribution (TLm) 2 444 Generally increasing, even though significant discretionary 121 176 Capex weigh on FCF 420 323 299 Retail 48 -59 Generally positive and closely linked with EBITDA due to -432 -423 inavailability of Capex Significant working capital-related shift between 2014 and -379 2015 due to change in sourcing driven by increased liberalised sales 2014 2015 2016 2017
Distribution Retail Other
Source: Company 26 Hizmete Özel Significant deleverage helps to capitalise on investment opportunities
Net Debt Development (TLbn) Avg. nominal effective cost of financing 9.8% 11.6% 13.3% Net debt increase largely driven by Distribution 7,3 Capex 6,1 6,5 5,5
3,2 Privatisation Administration debt fully repaid by 5,1 6,6 7,5 end of 2016 2,4 1,2 (0,1) (0,2) (0,1) (0,2) Cost of debt has increased with market interest 2014 2015 2016 2017 Privatisation Administration Debt Debt Cash rates mainly driven by rising inflation Net Debt/Operational Earnings
7,0x
Significant deleveraging despite increasing 4,2x absolute net debt Global Peers1
3,4x 2,9x Leverage target: Below 3.5x Net Debt / Operational Earnings2
2014 2015 2016 2017
Source: Company. 1 Source: S&P and company research. 2 See disclaimer regarding forward-looking statements on “Disclaimer”.
27 Hizmete Özel Reduced leverage supported by improving financing mix
3% 5% 6% Increasing Tenor 9% 10% Rating 30% Increasing alignment with capex 45% Highest rating among Turkish electricity companies reimbursement period within 28% constraints of Turkish financing environment 37% Key positives in its rating report are: regulated nature 27% of Enerjisa, favorable market reforms, predictable operating cash flows and experienced shareholders of Average remaining tenor 2-3 2014 2017 years Enerjisa <1 year 1–2 year 2–3 year 3–4 year >4 year National Rating Turkish Electricity Companies 2 Diversifying Debt Instruments1 Rating Agency 7% 18% Enerjisa AA Biggest corporate real sector issuer in 2017, including biggest 93% Başkent AA and longest bond issuances 82% * Bank loans are based on “name lending”, with minimal covenants Limak Yatırım AA- 2014 2017
Banks Loans Bonds Aksa Enerji A+
Alignment with Revenue Streams IC IÇTAŞ Enerji A
No material FX exposure other than TEDAŞ payable of ~60- Çalık Enerji A- 70m€ payable before hedges Odaş Elektrik BBB- Bonds are CPI-linked and therefore match inflation exposure of business Zorlu Enerji BBB-
Source: Company. 1 Gross debt excluding ~60-70m€ TEDAŞ payable 2 Long-term national rating. 28 Hizmete Özel Bottom-line development in 2014 - 2017
Consolidated Underlying Net Income1 Key Drivers (TLm)
Substantial increase compared to EBITDA growth due to parallel deleveraging 522 377 Increase in financial expenses (net) due to Capex-related higher loan volume as well as higher interest rate
70 Effective tax expense rate of ~30% driven by non-tax deductible financial expenses at holding level
-277 2014 2015 2016 2017
Consolidated Free Cash Flow after Interest and Key Drivers Tax (TLm) 2014 burdened by high PPI-linked privatization agency interest payments, which positively contributed in 2015 and 2016 (at end of 2016, those have been fully repaid)
-303 Positive operational development from 2015 to 2016 -446 partially offset by higher interest payments as a result of higher net debt -775 2017 burdened by discretionary front-loaded CAPEX profile -1,023 in the years 2016 and 2017 resulting in higher interest payments without a corresponding increase in OCF 2014 2015 2016 2017
1 Excludes fair value change of financial assets (see “TOR concessions”).
29 Hizmete Özel Distribution Business
30 Hizmete Özel Enerjisa distribution operations at a glance
No. 1 Distribution Company in Turkey1 Distribution Operational Earnings (TLbn)
TL 5.3bn2 1 c.220,000 km 1 10.9m 1 2017 RAB Network Length 2017 Connection EBITDA excluding exceptional items Points
Capex Reimbursements
Access to a c.110,000 km2 1 c. 8,500 Population of Coverage area employees4 2,3 over 20m CAGR 2014-2017: 0,6 +55%
Turkey Market Share 1,6 3rd Regulatory period Capex allowance3 2017 RAB2 0,4
0,8 1,8 23% 29% 0,6 0,2 1,2 0,2 0,6 0,4 Other Other Players Players
Source: Company, EMRA. 2014 2015 2016 2017 1 As of 2017. In terms of RAB; number of connection points, total network length and coverage area. 2 National Regulatory Asset Base according to initial Capex allowance, Enerjisa RAB accounts for actual Capex. 3 Capex allowance for the 3rd regulatory 2016-2020 period. 4 As of 2017.
31 Hizmete Özel Başkent experience: driving operational excellence
Başkent was acquired during the 1st round of privatisations Human resources, technological infrastructure, in January 2009. Many challenges were experienced, from IT systems and processes were integrated to which valuable lessons were extracted for the takeover of P P newly acquired regions successfully Ayedaş and Toroslar regions
Transition “One Distribution” Excellence in Distribution Up to Q4 2014 Q4 2014 to Q4 2015 From 2016 onwards
Definition of processes & Cultural integration Strong IT infrastructure, interaction implementing SAP ISU, WFM and SAP Business excellence PS systems Establishment of organisational Warehouse and fleet management structure Sharing & transferring best optimisation practices & implementation Clear definition of roles & Research & Development activities responsibilities (R&D) Safety Improvement Plan Setting of strong IT Material Quality control infrastructure Geographical Information System (GIS) Automated Meter Reading (AMR) Efficient Structural Organisation (Central Function) Financial management (FCF, CPI Linked Bonds) Process Efficiency in Field & Customer Source: Company. Operations 32 Digitalization Hizmete Özel Historical track record and expected continued growth
Number of Connection Points (# Million) ● Enerjisa is the market leader in c.3% CAGR Turkey by number of connection 2016-2020E points and network length
– Başkent and Toroslar are the 10,5 10,9 9,9 10,2 largest and 2nd largest power 3,8 distribution companies in Turkey 3,4 3,5 3,7 by network length respectively 3,8 4,0 4,1 4,2 ● Demand growth results from 2,6 2,7 2,8 2,8 favourable Turkish demographics 2014 2015 2016 2017 2020E 1 (i.e. young and growing population in large metropolitan areas), favourable Distributed Energy (Net) macroeconomic parameters (GDP per (TWh) Turkey’s 5% capita, increasing disposable Demand CAGR incomes) and urbanization 2016-2020E 41,8 – Enerjisa’s concessions are in 38,4 39,7 36,4 privileged locations given 15,2 12,9 13,8 14,3 exposure to large Turkish urban centres: Istanbul (Asian side), 13,2 13,9 14,3 15,0 Ankara, Adana, Mersin and Gaziantep 10,3 10,8 11,1 11,5
2014 2015 2016 2017 2020E
Ayedaş Başkent Toroslar
Source: EMRA. 1 As per 5 year master plan application to EMRA.
33 Hizmete Özel Scope of the distribution business
Associated Regulatory Business Activity Regulatory Item Remuneration
Investments Investments Financial Income Planning Execution Capex Allowance Capex Reimbursement 5-year master plans Capex plan execution Yearly investment Construction works plans Quarterly revisions Supply Chain Management Capex Unit Prices Capex Outperformance
Investments Procurement Warehouse, stock and fleet management
Technical Customer Operations Opex Opex Outperformance allowance New connections Meter operations Meter reading Theft & Loss Connection / disconnection T&L T&L Outperformance Allowance
Network Operations
SCADA system Lighting Quality Quality enhancements Customer satisfaction Quality Bonus Operations parameters
Other Other Revenues Theft accrual Rental and advertisement Theft accruals
Source: Company. 34 Hizmete Özel TOR concessions
Acquisition of license to operate as transfer of operating rights (TOR) agreement Legal No transfer of legal ownership of assets; legal and asset ownership remains with TEDAŞ
Accounting for all Turkish distribution companies falls under IFRIC 12 “service concession arrangements: government or other body grants contracts for supply of public services”
Networks are accounted as financial asset instead of fixed assets in IFRS which need to be recognized at fair value under IFRIC 12; subsequently changes in fair value are recognized through the P&L and are driven by changes in long-term assumptions impacting financial income
Therefore, IFRS P&L does not show any asset depreciation and accordingly no income from Accounting amortisation allowance (reimbursement of capital) Enerjisa uses EBITDA and Capex reimbursement as its main KPI to capture the full regulatory RAB return and to increase comparability with international peers
In contrast, local GAAP accounts for a fixed asset and therefore P&L shows both a depreciation expense as well as reimbursement of capital expenditure as income which is naturally captured in local GAAP EBITDA
Local GAAP depreciation expense is calculated until end of concession, while Capex reimbursement period is 10 years. Thus, there is a tax correction in place.
Başkent: 01.09.2036 TOR Period Toroslar & Ayedaş: 31.12.2042
Assets are handed back to TEDAŞ in exchange of reimbursement of unamortised RAB Expiration A new re-tender of the asset may follow “Liberalised” retail license is not in the scope of TOR
35 Hizmete Özel Well-established incentive-based regulatory framework
First Regulatory Period Second Regulatory Period Third Regulatory Period (2006–2011) (2011–2015) (2016–2020)
Approach Uniform regulation for all Distribution System Operators in Turkey Stable regulatory Method RAB-based framework with incentives given to outperformance environment Incentives with long- Regulated Revenue cap standing track • WACC return: RAB x WACC • Capex outperformance record Revenue • Opex outperformance components • Capex reimbursement • Theft & Loss ratio improvement and • Opex allowance incentives • Service quality • Tax difference adjustment • Other revenue (Advertisement, Similar building • No volume and inflation risk rent, lighting margin) blocks to various Western Capex reimbursement 5 years 10 years European countries WACC (real, pre-tax) 9.35% 9.97% 11.91% - 13.61%
• “Transition” period • WACC revised up • WACC revised up (2016-2017 designed to provide smooth 11.91%, 2018-2020 13.61%) shift to a cost-based tariff • Unbundling between Continuous structure post-2010 • T&L methodology revised distribution and retail incentives for operations Evolution • RAB-based tariff calculation efficiency, methodology introduced • Significant increases in quality and with RAB set to 0 in 2006 Opex and Capex allowances outperformance • Private operator model across regulatory • Enhancement of Quality (TOR) established for periods and Efficiency Incentives privatisations
Source: Company, EMRA.
36 Hizmete Özel Illustrative Operational Earnings breakdown
Other e.g. theft accruals and quality bonus
T&L Target rates set by regulator for each region separately outperformance Opex Outperformance on allowed controllable expenses Incentive for Outperformance
& & Other outperformance Distribution-specific cost inflation linked to CPI
Capex Capex unit prices updated by the regulator to reflect Outperformance outperformance prevailing prices
Capex Capex reimbursement period: 10 years reimbursement Reimbursement amounts indexed by CPI
RAB Development IFRS WACC return largely driven by regulated WACC (pre-tax Incentive for real: 2016-2017 11.91%, 2018-2020 13.61%) and inflation Investment New investments included in RAB as soon as approved by EMRA Financial
Income RAB set to zero in 2006 Guaranteed by Regulator Guaranteed by
Illustrative Operational Earnings Breakdown
37 Hizmete Özel Earnings and cash generation in IFRS
+/- Capex Reimburse- ments +/•- Adjustment for fair value change of Other Financial Assets Actual allowed - Adjustment for Capex net of Theft accruals & Statutory Financial Capex quality bonus outperformance Income not yet Including VAT cash-effective Theft & Loss (18%) payments - Capex Capex outperformance net of VAT outperformance incentive Opex + Net VAT (18%) outperformance collection/payment
Capex outperformance
Financial income Free Cash Flow (before Interest & Tax)
Stated IFRS Operational Cash EBITDA Earnings Inflows
38 Hizmete Özel Earnings and cash generation in IFRS (cont’d)
2017 Operational Targets2 vs. Drivers Earnings1 Actual 2017 2016 base
• Capex (initial allowed & actual) Financial Income More than double RAB • RAB development 57% & Capex 69% 2016 by 20203 • Regulated WACC overspending Reimbursements • Inflation
• Capex (actual) 9% Capex Maintain 6% • Capex unit prices outperformance Outperformance • Procurement performance
Opex • Opex allowance 5% Continue to 2% Outperformance • Actual Opex outperformance outperform • Operational efficiency
• T&L target rates 1.8pts Continue to Theft & Loss • T&L performance 6% average outperform Outperformance • Consumption growth • Procurement prices outperformance
Theft Accruals & • Theft accrual collection Growing 12% TL 277m Quality Bonus • Quality bonus contribution
• Tax correction Other 5% • Other income (e.g. rent & advertisement)
1 EBITDA + Capex reimbursements excluding exceptional items 2 See disclaimer regarding forward-looking statements on “Disclaimer”. 3 Key assumptions include (i) EMRA’s approval for the reimbursement of Capex overspending (over the initial Capex allowance) per annum and (ii) Enerjisa’s estimates for inflation. See “Financial Income: regulatory RAB development” and “Financial income: RAB development” for the development of RAB until end of 2020.
39 Hizmete Özel Financial Income Ability of increasing Capex allowances & Capex contribute to further RAB growth Reimbursements
Initial vs. Actual Allowed Capex Process to increase initial Capex (October 2015 prices, TLbn) +0.6 allowance: (77%) +0.5 +0.7 (57%) Additional allowance is permitted by (122%) EMRA regulations if investments are 1.5 needed in order to meet service +0.1 1.4 requirements as per legislation (18%) 1.3 Similar procedure as initial 0.9 0.9 5-year plan approval process 0.7 0.6 0.6 After acquisition of Toroslar in 2013, need for additional allowance was approved – additional investments were 2014 2015 2016 2017 mainly realised in 2015 Initial allowed Capex Actual allowed Capex Starting with 3rd regulatory period, application for additional investments Initial vs. Actual Allowed Capex has to be made when actual spending +0.7 (TLbn) +0.6 reaches 80% of cumulative initial (77%) (57%) +0.7 allowance for 2016–2020 (122%) 2017 shows overspending vs. full year 1.6 1.6 +0.1 allowance (18%) 1.3 If rate of overspending continues, this 1.0 0.9 80% threshold will be reached in 2018 0.6 0.5 0.6 Capex allowance post-2020:
Fundamentals and need for investment remain intact post-2020 driven by network upgrades, smart grid and 2014 2015 2016 2017 expansion Initial allowed Capex Actual allowed Capex
Source: EMRA, Company.
40 Hizmete Özel For illustrative purposes and not to scale. Financial Income Regulatory RAB development & Capex Reimbursements
Regulatory RAB Development Recognition of (October 2015 prices, TLbn) Overspent Capex1
RAB Initial allowed Capex 0.9 0.8 0.9 0.7 4.0 0.6 3.9 Additional Capex allowance 0.9 3.7 Capex reimbursement 0.5 0.9 3.4 0.4 3.1 0.9 2.6 0.7 0.2
0.1 0.6 0.2 1.5 0.6 1.1
RAB RAB RAB RAB RAB RAB RAB RAB Opening 2013 2014 2015 2016 2017 2018 2019 2020 RAB 2021 2nd Regulatory period 3rd Regulatory period
Regulatory RAB development depends on announced initial Capex allowance and Capex reimbursement and is therefore fixed until end of the 3rd regulatory period – indexed to October 2015 prices (CPI index 267.2)
Any deviation in actual Capex vs. initial Capex allowance will be adjusted in the opening balance of 2021 (start of 4th regulatory period). This is also when any additional Capex starts to be reimbursed
To compensate for this timing difference, the regulator grants a lump sum payment at the beginning of the next regulatory period including the foregone financial income inflated to the start of the next regulatory period Source: EMRA, Company. Note: See disclaimer regarding forward-looking statements on “Disclaimer”. 1 Assumes reimbursement of Capex overspending will be approved by EMRA.
41 Hizmete Özel For illustrative purposes and not to scale. Financial Income Financial income: RAB development & Capex Reimbursements
RAB Development Overspending (Nominal, TLbn) & inflation on Capex Reimbursements Capex 2.0 2018–2020 2018–2020 (real) Initial RAB allowed Capex Inflation on Inflation effect on opening balance 2.6 Capex 2018–2020 Actual allowed Capex Reimbursements (Real) Capex reimbursement
5.3 1.6 0.6 >2x 0.4 RAB 3.9 2016 1.6 0.4 2.7 0.1 1.3 0.2 1.4 0.2
RAB RAB RAB RAB RAB 2014 2015 2016 2017 20201 2nd Regulatory period 3rd Regulatory period
RAB depends on actual allowed Capex and requires an inflation adjustment for the opening balance each year Capex reimbursement is again based on initial allowed Capex and is only adjusted for the overspending in the next regulatory period (same as in statutory financials)
Source: EMRA, Company. Note: See disclaimer regarding forward-looking statements on “Disclaimer”. 1 Key assumptions include (i) EMRA’s approval for the reimbursement of Capex overspending (over the initial Capex allowance) per annum and (ii) Enerjisa’s estimates for inflation.
42 Hizmete Özel Financial Income Financial income & Capex Reimbursements
Simplified & illustrative calculation logic of IFRS Financial IFRS Financial Income Income (Nominal, TLm)
1.014 Average Regulated Inflation rate 610 RAB (nominal) X WACC (real) + ≈ 205 305
2014 2015 2016 2017
Illustration of Difference in Cash-effective Financial Income in IFRS vs. Statutory
Revaluation component Cash-effective within the 10 years Capex reimbursement period on RAB basis
Financial Income Cash-effective at beginning of next regulatory period on Overspending
Directly cash-effective
Statutory Financial Average Income Regulated Cumulative Regulatory RAB X WACC (real) X Inflation Index (real)
IFRS Financial Income
Source: EMRA, Company.
The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our 43 reported results may deviate significantly as such line item would contain other Hizmete Özel components. Economies of scale enable efficiencies Capex in Capex… Outperformance
Capex Outperformance (TLbn) EMRA announced new, more favorable Capex unit prices for the 3rd regulatory period starting in 2016
Subsequently, those new unit prices will form the basis for outperformance until 2020 -10% -9% Outperformance is included in EBITDA and reduces Capex
1.599 -2% 1.573 1.434 1.431 Overspending Capex Capex 1.2691.246 Inflation outper- outper- X formance ≈ formance Capex -7% (%) (abs) allowance of 619 577 ~TL864m p.a. (real) until 2020 Actual allowed Capex (nominal)
2014 2015 2016 2017 Actual Allowed CAPEX Actual CAPEX spent In spite of increased and accelerated Capex, majority of investments continue to be spent for mandatory network expansion rather than quality improvements
As a consequence network quality trails network growth and leaves substantial investment needs in the years to come
The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our reported results may deviate significantly as such line item would contain other components. 44 Hizmete Özel …and Opex Opex Outperformance
Opex Outperformance (TLbn) -5% -16% 1.1 -12% -10% 1.0 Inflation 0.9 Opex outper- Opex outper- 0.8 0.7 0.7 formance 0.7 Opex allowance X formance ≈ 0.6 of ~TL880m p.a. (%) (abs) (real) until 2020
Opex allowance (nominal) 2014 2015 2016 2017
Opex allowance (controllable) Actual controllable Opex
Opex Breakdown by Type (ex-Depreciation) (2017, %) Majority of Opex is related to Personnel expenditure: Other payroll, employee benefit expenses and social security 11% premiums
Utilities & Rent Material expenses mainly for conducting maintenance 12% operations and equipment for health & safety Personnel TL1.1bn 50% Subcontracting / Outsourcing 12%
Material Source: Company. 15% The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our 45 reported results may deviate significantly as such line item would contain other Hizmete Özel components. Theft & Loss outperformance Theft & Loss Outperformance
T&L target rates have Target T&L rate Theft & Loss outperformance increased for all regions (% of Energy Sold) Actual T&L rate +1.9 +0.8 -1.5 -2.0 as of the 3rd regulatory % Spread % (Actual – Target) 13,6% period starting 2016 13,2% -0.2 -0.9 -1.0 -1.7 +0.6 +0.4 -0.8 -1.5 12,5% In the 3rd regulatory, T&L 12,2% 12,1%12,1% 11,7% target rates are a result of 7,9% 7,9% 8,0% 7,7% 7,8% 7,2% 7,6% 7,6% 11,4% 7,0% 7,0% 6,6% 6,6%7,0% 6,8% 1 6,0% 6,1% 1.2 % 10.7%1 past 3 year average actual rates
EMRA has taken into 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 consideration a 8% Başkent Ayedaş Toroslar overall reference for Gross distributed energy setting target T&L rates (TWh) CAGR 4.9% CAGR 3.8% CAGR 3.5% 17,2 Regional profiles vary due 16,0 16,3 15,3 15,7 to differences in 15,0 12,3 14,9 population density, 14,3 11,9 11,6 X 11,1 network length and industrial vs. agricultural activity 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 Başkent Ayedaş Toroslar Distributed energy growth in line with average Energy sourcing costs Theft & Loss outperformance consumption growth (TL/MWh) (TLm) 135 199 193 84 187 T&L outperformance 26 (TLm) is the product of 170 X ≈ T&L outperformance (%), distributed energy and -60 energy sourcing costs 2014 2015 2016 2017 2014 2015 2016 2017 over all regions Source: EMRA, Company. 1 Initial T&L target rate before EMRA revision for Toroslar.
The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our 46 reported results may deviate significantly as such line item would contain other Hizmete Özel components. Theft accrual collection Theft Accruals & Quality Bonus
Regulation in the 3rd tariff period explicitly incentivizes distribution companies to detect and invoice theft energy usage as well as to seek legal proceedings
20% (40% effective starting from 2018) of every theft usage invoice is granted to the distribution company regardless of collection
75% of every collection after legal proceeding can be kept by distribution companies
Detected & Distributed Energy Avg. price of Theft accrual invoiced (GWh) X X energy (TL/kWh) ≈ (TLm) theft rate (%)
2017: 45,449 GWh 2017: 2% 2017: 0.50-0.60
Theft accrual 40% granted by Guaranteed income (TLm) X regulator ≈ (TLm)
2017: TL206m
Percentage of 75% collection Theft accrual Additional collection legal proceedings kept after legal (TLm) X X ≈ (TLm) executed proceeding
2017: 18% 2017: TL71m
Source: Company. Company performance The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our 47 reported results may deviate significantly as such line item would contain other Regulatory parameters Hizmete Özel components. Tax correction Other
Capex-related tax correction result from difference between statutory depreciation period (based on remaining concession time) and Capex reimbursement (based on 10 year amortisation period)
Difference expected to significantly grow over the next years, reversing towards the end of concession
Simplified Tax Correction Mechanism Capex reimbursement (nominal)
Tax correction rate until 2017: 20% / (1-20%) = 25%
TL592m Tax correction rate starting 2018: 22% / (1-22%) = 28%
Average difference 2014–2017 ~TL186m TL269m Statutory depreciation (related to Capex)
Tax Rate 25% Additions are a function of initial allowed Capex (nominal) divided by average remaining time until concession end (Başkent: ~TL47m p.a. 2036, Ayedaş & Toroslar: 2042) 2014–2017
2014 2015 2016 2017 2020
Source: Company.
The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our 48 reported results may deviate significantly as such line item would contain other Hizmete Özel components. Rapid growth in earnings driven by constructive regulation and increasing RAB
Comments Distribution Operational Earnings1 (TLbn) 55% Operational Earnings CAGR between 2014-2017 Financial income has increased by 70% between 2014–2017 supported by the increase in WACC rate and RAB growth 2,3 +55% 0,6 Capex reimbursements have increased with a CAGR of 41% 1,6 supported by past investments 0,4 Significant improvement of Efficiency & Quality by 108% as 0,8 1,7 Başkent experience is leveraged in other regions 0,6 0,2 0,2 1,2 2017 earnings continued to be driven by significant RAB 0,4 0,6 growth 2014 2015 2016 2017 EBITDA Capex reimbursements
Distribution Operational Earnings In TLm 2014 2015 2016 2017 (2017A)
T&L Financial Income 205 305 610 1.014 Other Capex reimbursements 210 200 443 592 Tax Correction 2% 6% 4% Efficiency & Quality 67 137 449 605 Theft Accrual & Collection Financial Capex outperformance 42 23 165 142 12% Income 43% Opex outperformance 78 70 146 51 Opex Outperformance 2% T&L outperformance -60 26 84 135 6% Capex Outperformance Theft accrual & collection 7 17 54 277
Tax correction 32 39 44 86 25% Capex Reimbursement Other 121 126 104 47
Operational Earnings 635 807 1.650 2.344
49 1 EBITDA + Capex Reimbursements excluding exceptional items. Hizmete Özel Improving cash flow
Free Cash Flow Before Interest and Tax Comments (TLm)
121 Operating cash flow grows significantly
IFRS financial income is partially not yet cash-effective due to overspending and -59 inflation revaluation recognition, which are compensated at a later point in time
Capex outperformance is not a -432 -423 contribution to operating cash flow, but 2014 2015 2016 2017 reclassified as a reduction of Capex Capex frontloading creates higher Capex which decreases FCF while significantly In TLm 2014 2015 2016 2017 growing EBITDA
Operational Earnings 635 807 1.650 2.344
Financial income not yet cash effective -71 -125 -265 -577
Capex outperformance -42 -23 -165 -142 Other (non-cash, NWC, VAT) -476 -35 -146 21 Operating Cash Flow before interest and 47 624 1.633 1.646 tax Actual allowed Capex (nominal) -619 -1.269 -1.599 -1.573 Actual allowed Capex (incl. Capex -577 -1.246 -1.434 -1.431 outperf.) Unpaid Capex and VAT 98 198 -78 -274
Cash-effective Capex -479 -1.048 -1.512 -1.705
Free Cash Flow before interest and tax -432 -423 121 -59
50 Hizmete Özel Retail Business
51 Hizmete Özel Enerjisa retail operations at a glance
No.1 Retail Company in Turkey1 Operational Earnings4 (TLm) 35.2 TWh 1 9.2m 1 2017 Sales 2017 Volume Customers2
290 280
c. 1,100 247 employees3
Turkey Market Share 145 Sales Volume (2017) # of Customers (2017)
35.2 18% 9.2m TWh18% 22%2
Source: Company, EMRA. 2014 2015 2016 2017 1 As of 2017. In terms of number of customers. 2 Includes inactive customers. 3 Full-time employees as of 2017. 4 EBITDA includes TradeCo related EBITDA adjustments in the amount of TL16M, TL-60m and TL-16m in 2014,2015 and 2016. Starting from 2017, there is no TradeCo related EBITDA adjustments. 52 Hizmete Özel Evolution of Enerjisa’s retail platform
2013 2014 2015 2016 2017
Take-over & Transformation from Prevailing as a Flexibility in Adaptation Reorganization Utility to Retail Retail Company to Market Conditions
Ayedaş and Toroslar take-over D2D / Telesales / Dealer System unbundling Collection performance increased SAP Full CRM roll-out Legal and financial unbundling channels launched from 98% in 2014 to >99.5% Commodity risk management Centralization/ standardization Rebranding –new Enerjisa brand 100k liberalized contracts signed D2D: 200k sales of critical processes launched nation-wide in a month Telesales: 118k renewals Renovation of all CCOs1 First cross-sector marketing Digitalized archiving Dealer: 8.8m collections campaigns with Telecoms and Setting up of sales and 90k mobile app / 400k online Call Center: 1.3m calls answered Insurance marketing departments portal users Customer service quality Customer Experience Fixed and variable products for improvements (sample): Closing of D2D channel due to mass segment Committee CCO avg. Waiting Time: slowdown in sales (flexible 1 hr2 > 12 minutes Customer immersion sessions response to market conditions) Customer-centric process design Call Center Reach Rate: incl. customer journeys SAS platform for analytics – 10% 2 > 90% Brand awareness: value based segmentation 47%3 > 78% NPS reporting Invoice Errors:188k3 > 2016–2020 tariff negotiations 49k Trustworthy brand: SAP ISU roll-out 3 Customer satisfaction: 61 > 73 48%3 > 62% Single ISU & CRM systems in Mobile app launch incumbent regions «Save Your Energy» campaign
Behavioral, demographic, geographic segmentation models
D2D route optimization backed by analytics
1- Customer Care Office 2- Before take-over 3- As of 2015
53 Hizmete Özel Liberalisation has led to various customer and retailer types
Customer Types Retailer Types
Ineligible customers regulated in nature
Exclusive supply by the incumbent retailer at Total of 21 incumbent retailers regulated tariffs Division of 21 electricity distribution regions also Largely composed of residential customers represents the separation for “incumbent” retailer
Ineligible operations Regulated
Constitutes c.10% of volume and c.75% of Exclusive rights of electricity sale to regulated customers in 2017 in Turkey customers in their regions at regulated tariffs
Eligible customers who opt to remain regulated Further flexibility of sales to liberalised customers in other regions at free market prices Exclusive supply by the incumbent retailer at regulated tariffs Dominant players in the sector with strong reach to
Incumbent Incumbent Retailers the end customers Largely composed of industrials, commercials
Regulated and high consumption residentials Supplied c. 80% of total sales volume in Turkey in 2017
Eligible customers who opt to be liberalised
Eligible Flexibility to choose retailer
Currently c.200 other non-incumbent retailers Free market prices Sales to liberalised customers throughout Turkey at Consist of industrials and commercial customers free market prices Liberalised as well as high consumption residentials
Largely serves industrials and commercials currently Other Other Retailers
Source: Company, EMRA. 54 Hizmete Özel Electricity retail market is still dominated by incumbents
Incumbent Retailers Overlap with Retail Companies Distribution Regions (2016) Incumbent # of Subscribers Sales Volume Company Region (m) (TWh)
Toroslar 7 EnerjiSA Başkent KIRLARELI 9 9,0 32,9 Ayedaş 14 13 Bogazici 17 1 17 14 BARTIN SINOP Cengiz-Kolin Akdeniz 10 EDIRNE KASTAMONU ARTVIN 7,8 28,9 ZONGULDAK 4 ARDAHAN Camlibel 6 ISTANBUL RIZE KARABÜK SAMSUN TRABZON TEKIRDAĞ KOCAELI DÜZCE ORDU AMASYA Coruh 4 SAKARYA BOLU ÇANKIRI 21 GIRESUN KARS Aksa BAYBURT 3 IĜDIR 2,2 16,7 YALOVA ÇORUM TOKAT GÛMUŞH- Firat 5 CANAKKALE 15 9 12 BURSA BILECIK ANE ERZURUM AĜRI BALIKESIR KIRIKKALE 6 Gediz 11 ESKİŞEHIR YOZGAT SIVAS ERZINCAN Bereket Enerji Menderes 19 4,8 13,6 ANKARA KIRSEHIR BINGÕL KÜTAHYA TUNCELI 16 MUŞ 5 11 MANISA ELAZIĞ UŞAK AFYON NEVSEHIR KAYSERI BITLIS 2 IC-Ictas Trakya VAN 13 1,0 13,2 MALATYA IZMIR 8 AKSARAY 18 MARAŞ ISPARTA BATMAN DENIZLI NIGDE 1 AYDIN DIYARBAKIR SIIRT 19 KONYA ADIYAMAN HAKKARI Limak BURDUR 20 Uludag 12 3,0 11,1 MUGLA ADANA KARAMAN GAZIANTEP ŞIRNAK OSMANiYE MARDIN ANTALYA KILIS URFA MERSIN 10 7 AKCEZ Sakarya 15 1,7 8,9
ISKENDERUN Retailers Alarko-Cengiz Meram 8 2,0 7,2
Zorlu Enerji Osmangazi 16 1,7 7,1 Dominant presence of local ownership with the
Incumbent 1 exception of two groups, one being Enerjisa Iskaya-Dogu Dicle 1,7 5,6
Calik Yesilirmak 21 1,9 4,2
Top 5 companies supply 57% of the total market in Kipas Holding Goksu 20 0,6 2,3 terms of sales volume
Kayseri Municipality + 18 0,7 1,6 Private Players Kayseri
Kiler-Calik Aras 3 0,9 1,2
2 0,6 1,1 Turkerler Van Golu Source: Company, EMRA. Non-incumbent 30,7 1 Including Cengiz Toptan. • c.200 players n.a. players 55 Hizmete Özel Regulated customers represent 69% of total sales volumes in 2017
Sales Volume by Region Number of Customers by Type1 (TWh) (m) 98% 96% 93% 88%
8.9 9.0 9.2 35.2 8.8 0,1 0,50,4 0,6 1,1 0,4 0,4 1,4
8,2 8,1 8,0 6,7
2014 2015 2016 2017
Ineligible Regulated Eligible Regulated Liberalised % % Regulated
34.0 Volume Breakdown by Customer Type (TWh) Reaction to 78% 69% Removal of 63% unfavorable 69% unprofitable liberal market 39.6 corporates conditions 35.2 37.2 32.9
8,3 12,2 12,0 10,9 15,1 29,0 9,4 16,0 1.2 12,3 11,5 8,3 2014 2015 2016 2017
Enerjisa’s Incumbent Regions Other Regions Regulated Ineligible Regulated Eligible Regulated Liberalised % % Regulated (eligible + ineligible) Source: Company. 1. Includes inactive customers. 56 Hizmete Özel Well-defined strategy by customer segment
Residential & SME (<400 MWh p.a.) Corporates
Largely regulated customers (either ineligible or All eligible eligible regulated) Material volume still remain under regulated tariffs Efficiency, innovation and direct customer access Focus on profitable customers only allow for strong retention of customer base Key Features Liberalised customers provide volume, yet price Scope to realise transition volumes from eligible sensitive with low margins regulated to liberalised, at higher margins Scope to acquire liberalised customers in other regions
99.9% 0.10%
# of Customers 9.2 (% of Total Other regions 0.3k Enerjisa) 9.6k Incumbent 9.2k regions
62.3% 37.6% Volumes 21.96 0.1 13.2 (% of Total Other regions Incumbent TWh 21.95 Other regions 1.1 TWh 12.1 Enerjisa) regions Incumbent regions
Liberalised Volume Liberalised %25.0 Breakdown by %34.6 21.9 13.2 Customer Type TWh TWh (Liberalised vs. Regulated) Regulated Regulated %65.4 %75.0
Source: Company. Note: All data as of 2017 1. Includes inactive customers. 57 Hizmete Özel Customer-tailored products with aligned hedging in sourcing
Product Product Description Sourcing Strategy
Res. & Corporates SME Regulated sales with regulated margin Regulated sourcing from TETAŞ and
Regulated Pass through of electricity cost by regulation EPİAŞ Regulated
Res. & Corporates Automatic inflation increase SME Contractual flexibility for above-inflation increase with a 30- day notice Dynamic sourcing from EPİAŞ and Floating wholesale Dominant share in residential & SME volume (63% in 2016)
Flagship profitability product in a market with minimal churn
Res. & Corporates Fixed price for contract duration SME Dominant share in corporates volume (72% in 2016) Fixed Flagship corporate product in a market where price increases are shunned by customers Back-to-back bilateral agreements with private wholesale at a fixed and
Corporates Discount to national tariff tariff indexed prices Liberalised Mainly offered to lower-consumption corporates with lower Tariff Index tailor-made requirements
14% of overall liberalised corporate sales
Corporates Customer price is determined by the actual EPİAŞ exchange price DAP1 Index Cost pass-through sourcing from Preferred by sophisticated and high consuming customers EPİAŞ (e.g. cement producers) DAP1 Usually preferred seasonally, especially in off-peak months
Source: Company. 1 Refers to Day Ahead Price (EPİAŞ, Spot market).
58 Hizmete Özel Three electricity sources driven by customer type
Electricity Sourcing Channels
1 2 3 TETAŞ EPİAŞ 56% 29% Private Wholesale 15% (State-owned electricity wholesale company ) (Spot market)
Regulated price fixed quarterly Markets include day-ahead and intra- Bilateral agreements with Enerjisa day balancing TradeCo1 All regulated volumes need be sourced from TETAŞ (unless TETAŞ is not able Buy or sell electricity through Contracts with other wholesalers to satisfy demand) derivatives in BIST possible in the future Historically, TETAŞ has not been able Contract terms are mostly ≤1 year to provide 100% of the volumes
Sourcing of Liberalised vs. Regulated Sales Regulated Liberalised Proportion of TETAŞ in the Electricity Sourcing Electricity Purchase by Source (2017, TWh) Decreasing dominance of TETAŞ as the eligibility limit decreases
Removal of Customers switch to unprofitable liberalised regulated due to pricing corporates conditions 35.2 35.2
67,7% 56,0% Regulated TETAŞ 47,1% 19,7 42,8% 24,3
Liberalised 5,6 EPİAŞ 5,3 Enerjisa TradeCo1 10,9 4,6 EPİAŞ Sourcing 2014 2015 2016 2017 SalesSales (GWh) 1
Source: Company. TETAŞ EPİAŞ (free) Enerjisa TradeCo EPİAŞ (regulated) 1 Enerjisa TradeCo is an entity owned by Enerjisa Üretim Santralleri A.Ş. (generation company) and not part of IPO perimeter. 59 Hizmete Özel Strong credit management with improving collection rates
Initiatives on Collections Supported by Favorable Regulation Improving Collection Rates2
Regulation Customer Credit Incentives on high collection Scoring 99,5% Deterrent factors including 99,1% – Immediate disconnect of 98,9% regulated customers
98,0% – Regulated monthly interest Payment of 1.4% on late payment Automated Behavior Dunning Analysis – Deposits / Letter of Guarantees received 2014 2015 2016 2017
Collection Channels1
105 Authorised 4,244 PTT Website and Payment 16 Banks Branches Mobile App Points
Source: Company. 1 Collection channels as of 30.09.2017. 2 Enerjisa monitors its collection capacity as the rate of collection over sales of electricity for the relevant period. Due to operational requirements, Enerjisa defines an unpaid invoice “mature” after six month period following the invoicing. Enerjisa measures its collection rate on the basis of its capacity to collect mature invoices within 12 months of their maturity. Reference to “collection rate” are to the collected portion of the mature invoices to the total mature invoice amounts. 60 Hizmete Özel Operational improvements arising from successful restructuring
Significant Improvement in Customer Selected Operational Metrics Interface in our Retail Shops
Before1 Now2 Before Now Customer Care Offices (CCO) 168 69
Free Market Contracts3
50 k 1.1m (CCO)
Waiting time in CCO 16 1 hr
min Offices Customer Care Customer
Reach rate to Call Center 10% 98%
Wrong # of Invoice 238k 29k
Daily Contract Sales/Agent3
1 6.3 Payment Payment Points
Source: Company. 1 As at end of Q3 2013. 2 As at end of Q3 2017. 3 Also includes the impact of increasing market opennes as a result of the decrease of eligibility threshold from 5.0MWh p.a. to 2.4 MWh p.a. in respective periods.
61 Hizmete Özel Strong end-customer reach via multiple channels
Channel Management Organized Around the Overview End-Customer SME and residential customers Corporate Retail can sign up and get information Channel 200 customers service points Retail
Channel Corporate D2D Assign sales representatives for D2D Channel CCO Outsourced D2D corporate customers (Door to Win new customers Door) Use of outsourced personnel Residential D2D Own & SME Acquire customers through Dealer outbound calls and mobile Call Center applications Customer 1.3m outbound calls and 335k inbound calls a year Website Telesales
Send e-mails and SMS for customer services/ marketing Digital Call Center Digital Mobile/ Apps A favourable environment for Channel Call Center digital switching
Key Dedicated account managers for Corporates Account each corporate client Manager Customized services Key Account Sales Physical Office Representative Manager
Source: Company.
62 Hizmete Özel Enerjisa’s large scale and incumbent position helps achieve competitive advantages
Incumbent Advantage Leveraged by Strong CRM Capabilities
Customer Service
Single CRM Automated Call Handling Field Force Route Optimisation
Customer Analytics
Value Based Segmentation Behavioural Segmentation Demographic and Geographic Extensive database of Segmentation 9.0m retail customers Reporting Infrastructure
Automated Sales Reporting Profitability Reporting Automated Dashboards
Source: Company.
63 Hizmete Özel Enerjisa benefits from strong brand recognition
Most Well-known Brand2
Highest Brand Awareness Most Customer-Oriented Most Prestigious and Trustworthy
Social Impact Award Innovation & Marketing Awards
Won 2 Crystal Apple awards for:
First digital commercial to encourage energy saving
“Save Your Energy” campaign short movie
Won 2 “Smarties” awards from the Mobile Marketing Association in the “Social Impact Turkey” and “Social Worlds’ first digital commercial to Impact EMEA” categories with “Save Your Energy” encourage energy saving from Mixx campaign Awards Europe 2017
Source: Company. 1 Market Deep Dive Market Research dated August 2014. 2 According to image and perception study conducted by Future Bright Research Agency in January 2017.
64 Hizmete Özel Resilient customer base in a liberalising environment
72% 74% 65% 66% 69% 54%
Improving Customer Satisfaction1
2014 2017 2014 2017 2014 2017 AyedaşAyedas BaBaskentşkent Toroslar
3,0% 2,9%
Low Churn Rate2 1,2% (Eligible Residential and 0,9% SME Segments)
2014 2015 2016 2017
High cost of acquiring customers by non-incumbents
Source: Company. 1 Customer satisfaction surveys conducted by IPSOS in 2014 and Future Bright in 2016. 2 Number of churned customers to the yearly average of eligible residential and SME customers (including regulated customers that did not switch to free market portfolio). The yearly average is calculated as the relevant number as of January 1 plus the relevant number as of December 31 which is then divided by two.
65 Hizmete Özel Regulated electricity tariff components
National Monthly Residential End-User Energy Bill (based on illustrative volume assumptions of 200 kWh, representing eligibility limit) 2018 Q1 2018 Q2
Unit Price Total Unit Price Total (TL/kWh) (TL) (TL/kWh) (TL)
Retail Energy Sales Including energy procurement costs, gross profit margin and retail 0.231 46.19 0.245 48.93 Tariff service revenues
Including costs of operating and maintaining of facilities, investment Distribution Tariff cap for distribution investments, reimbursement of Capex, cost of supplying energy for T&L and general lighting, transmission costs, fixed meter reading fees differentiated according to voltage level 0.130 26.09 0.127 25.32 Reactive Energy Fee: For consumers subject to Reactive Energy Reactive Energy Fee, Application (excl. household, illumination subscriptions and mono Capacity and phase premises) Overload Charges Overload Charges: For Two Phase Industrial Consumers (Connected to high voltage level)
Energy Fund and TRT Energy Fund Surcharge (1% of retail energy) Surcharge, Electricity TRT Surcharge (2% of retail energy) 3.69 3.91 Consumption Tax Electricity consumption tax (1% for Industry, 5% for the Rest)
Total 75.97 78.16
18% on 18% on 13.67 14.07 VAT sub-total sub-total
89.64 92.23
Source: Eurostat, Regulatory review of Turkish electricity market.
66 Hizmete Özel Electricity costs represent a relatively small share of disposable income
Disposable Income Growth Share of Electricity Costs over Disposable (rebased to 100) Income CAGR 2012-2016 5,6% 5,1% 160 4,8% 11.7% 4,3% 4,2% 4,0% 150 3,7% 3,6%
2,7% 2,6% 140
130
5.2%
120
UK Italy
110 Spain
Poland
France
Turkey
Belgium
Portugal
Germany Czech Rep. Czech 1,2 100 Electricity Costs (€/MWh, 2016) 2012 2013 2014 2015 2016 3 230 228 142 298 135 275 171 234 121 183
Disposable Income Retail Energy Bill
Source: Turkstat, Eurostat electricity retail prices second half of year. 1 Retail prices after taxes, levies etc. 2 Annual consumption: 2 500 kWh < consumption < 5 000 kWh. 3 Based on 413 TL / MWh for the second half of year for Turkey and exchange rate TL/ € of 3.43, source: Eurostat.
67 Hizmete Özel Components of regulated and liberalised end- user prices
Regulated + Liberalised Potential Regulated Gross Margin1 for Higher Margins Set at 2.38% on reference procurement price (including FiT Discount cost effective starting from 2018) for the 2016-2020 period Higher Gross Margin
Retail Service Revenue Invoicing and collecting for regulated sales Electricity - Electricity Tariffs set for every three Procurement Potential for month period Cost Procurement Reduced = Cost Sourcing Free sourcing at free market TETAŞ Cost = prices + EPİAŞ EPİAŞ + Private Electricity Procurement Cost Wholesale TETAŞ as primary source EPİAŞ as secondary source
Taxes and Other Taxes and Other
Transmission Fee Transmission Fee
Pass through for the retailer Theft & Loss Theft & Loss Pass through for the retailer
Distribution Distribution System Usage Fee System Usage Fee
Regulated Liberalised End-user price End-user price
1 As stated in the regulation. Regulator gross margin and sales services combined compensate for the operational expenses.
68 Hizmete Özel Price equalisation mechanism
• EMRA determines the revenue and price caps for distribution and retail companies in each region • Price equalisation mechanism was introduced to balance the inequalities and differences between the 21 distribution regions - Mechanism was determined for inequalities in regional characteristics like distribution of customer segments, theft & loss occurrences and performances - Mechanism was implemented as a result of application of a single tariff throughout Turkey • Price equalisation mechanism makes sure that the distribution companies and the incumbent retail companies obtain their regulated returns, although they charge the same end tariff. • EMRA sets the regulated margin and revenue requirements for regulated sales based on demand and consumption forecasts. However, the actual demand of customers shows some variance from forecasts which leads to imbalances in our electricity purchases. • EMRA compensates for such variances via the price equalisation mechanism two quarters after the occurrence of such variances and guarantees that the incumbent retail company generates a gross margin of 2.38%, independent of its sourcing costs for its regulated customers. • Reconciliation of over or under collections is made by EMRA through TETAŞ on a monthly basis.
(EMRA)
Other Market Costs 2,38% Gross Margin Day Ahead Market
Procurement TETAŞ Cost
Energy cost Revenue Cap Region A Revenue Region B Revenue 69 Hizmete Özel Turkish electricity pricing dynamics impacted by renewable feed-in-tariffs in 2017
Electricity Prices Comments (TL/MWh)
FiT ($73/MWh2) applicable to renewables 300
Renewable players can opt yearly to sell power at FiT or at spot market 250 Average difference for 4Q2017: 17 TL/MWh With depreciation of TL, renewable companies have been consistently 200 Average difference opting for FiT for 2014-2016: 58 TL/MWh
Renewable capacity increased from 4.1 150 GW in 2014 to 8 GW in 2017
Additional costs from FiT have put an 100 increasing pressure on the total cost of sourcing from EPİAŞ (spot market) in 2017
50 Regulated national tariff has remained largely stable since 2014
0 Liberalised margins contracted in 2017, as national tariff, which acts as a natural cap to liberalised market EPİAŞ (Spot Market) FIT Regulated Electricity Price price, has not yet increased to reflect increasing sourcing costs
Source: TEDAŞ, EPİAŞ 70 Hizmete Özel Earnings and cash generation
Liberalised Volume x Margin OPEX
+/- +/- Regulated Volume x 2.38% of regulated Other: +/•- Changes in procurement -• Doubtful Provision Working Capital price Expenses +/•- Price Equalisation + +• Bonus Collection +• Late Payment Retail Service Income Revenue including Doubtful Component
Gross EBITDA Free Cash Flow Profit (before Interest & Tax)
Source: Company.
71 Hizmete Özel Regulated Regulated gross profit Gross Profit
Regulated Retail Regulated Regulated Volume procurement Service Margin Gross Profit (TWh) X price (including X + Revenue = FiT cost*) (2.38%) (TLm) (TL/MWh) (TLm)
Effective total regulated margin * Regulated margin of 2.38% will be applied to a higher procurement cost basis (pure sourcing costs + Feed-in-Tariff cost), which increases the regulated gross profit margin (2018 onwards)
Effective Total Regulated Margin Regulated Gross Profit Regulated Volume (TL/MWh and %1) (TLm) (TWh)
5.3% 6.8% 6.4% 335 4.9% 312 312 299 29,0 80 27,3 15,0 73 24,3 13,8 155 20,9 184 11,4 / = 10,3 239 255 157 115
2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017
Regulated Margin Retail Service Revenue
Source: Company. 1 % margin calculated vs. average residential household tariff.
The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our 72 reported results may deviate significantly as such line item would contain other Hizmete Özel components. Liberalised Optimization of liberalized segments Gross depending on market conditions Profit
Residential & SME Segment
Volume Gross Margin Gross Profit (TWh) (TL/MWh and %) (TLm)
17.5% 15.3% 4.1% 154 7,6 37,1 122 31,9 4,8 66 3,3 X = 8,7
2015 2016 2017 2015 2016 2017 2015 2016 2017
Corporate Segment Volume Gross Margin Gross Profit (TWh) (TL/MWh and %) (TLm) -2.7% -0.7% 1.5%
8,9 3,0 10 7,2 X = 3,3 -9 -1,3
2015 2016 2017 -5,6 -50 2015 2016 2017 Source: Company. 2015 2016 2017 The calculations and models in this slide are simplified illustrative representations of the relevant figures. The corresponding line items in Enerjisa financial statements or our 73 reported results may deviate significantly as such line item would contain other Hizmete Özel components. Opex and others
Opex1 Bad debt related income and expense (TLm) (TLm) 246 119 224 231
174 64 82 Bonus collection Late payment income
Doubtful prov. Expense 2014 2015 2016 2017
Key Drivers Breakdown of 2017 Opex -3 Personnel 2014 2015 2016 2017 Inflation 17% Marketing and Sales Efficiency gains Consulting & Outsourcing 9% 42% Segment mix Payment Channel and Comments 5% Collection Expenses Business expansion Stamp Taxes 10% Includes Rent and Utility 7% 10% Comments Other – Doubtful provision expense and late payment income
Focus on operational excellence after acquisition of – Bonus collections (collection of previously written-off regions until 2015 receivables; partially related to state-owned times) with significant contributions in 2015-2017 that are expected Increase in Opex after 2015 due to higher spending on to decline in the mid-term marketing and sales efforts in the liberalised segment as well as general business expansion and inflation
Source: Company. 1 Adjusted for TradeCo related Opex (TL7m, TL12m, TL8m in 2014, 2015 and 2016 respectively) excluding depreciation as well as doubtful provision expense in the year 2015. 74 Hizmete Özel Retail growth and profitability
Retail Operational Earnings1 (TLm) 2014 2015 2016 2017 Breakdown (TLm) Regulated gross profit 299 312 312 335 290 280 247 Liberalised gross profit 23 72 145 76
OPEX -174 -224 -231 -246
145 Bad debt related income -3 119 64 82 and expense
Operational Earnings 145 280 290 247
∆ in NWC -51 186 68 82
Operating Cash Flow 94 466 358 329 before Interest and Tax
Capex -46 -46 -35 -30
Free Cash Flow before 48 420 323 299 Interest and Tax 2014 2015 2016 2017
Bad debt related income/expense Cash flow driven by operational earnings Liberalised Gross Profit Cash flow conversion is on average above 100% (of Operational Earnings) Regulated Gross Profit Opex Capex limited to IT-related expenditures
Source: Company. 1 Operational Earnings refers to EBITDA plus TradeCo related EBITDA adjustments in the amount of TL16m, TL-60m and TL-16m in 2014, 2015 and 2016. Starting from 2017, there is no TradeCo related EBITDA adjustments. 75 Hizmete Özel Investor Relations contacts
Ilkay Demirdağ Head of Investor Relations
T +90 (0) 212 385 8907 [email protected]
Sibel Turhan Investor Relations
T +90 (0) 212 385 8984 [email protected]
76 Hizmete Özel Appendix
77 Hizmete Özel Key Financials
78 Hizmete Özel Summary Financial Statements Consolidated Income Statement
FY FY FY FY 1Q 1Q (TLm) 2014 2015 2016 2017 2017 2018 Sales Revenue 8,064 9,154 9,103 12,345 2,726 4,070 Cost of Sales -6,754 -7,108 -6,501 -8,412 -1,971 -3,045 Gross Profit 1,311 2,045 2,602 3,932 755 1,025 OPEX -967 -1,080 -1,228 -1,519 -340 -415 Other Income/(Expense) -36 73 -102 -173 -58 -14 Operating profit before finance income/(expense) 308 1,038 1,272 2,241 357 596 Financial Income/(Expense) -571 -575 -758 -957 -240 -264 Profit before tax -264 463 514 1,284 117 332 Taxation -13 -127 -137 -296 -39 -89 Net Income -277 336 377 988 78 243
FY FY FY FY 1Q 1Q (TLm) 2014 2015 2016 2017 2017 2018 Operating profit before finance income/(expense) 308 1,038 1,272 2,241 357 596 Adjustment of depreciation and amortization 209 219 218 235 56 61 TradeCo-related pro-forma EBITDA adjustments 16 -60 -16 0 0 0 Adjustments related to fair value difference arising from deposits 43 36 40 79 30 26 Interest income related to revenue cap regulation -5 -2 -19 0 0 -8 EBITDA 569 1,232 1,495 2,555 443 676 CAPEX Reimbursements 210 200 443 592 144 191 EBITDA+CAPEX Reimbursements 779 1,432 1,938 3,147 587 867 Fair value changes of financial assets 0 -332 0 -467 0 0 Non-recurring income related to fiscal year 0 0 0 -115 -70 0 Operational earnings 779 1,100 1,938 2,565 517 867
Net Income -277 336 377 988 78 243 Fair value changes of financial assets 0 -266 0 -374 0 0 Non-recurring income related to fiscal year 0 0 0 -92 -56 0 Underlying Net Income -277 70 377 522 22 243
79 Hizmete Özel Summary Financial Statements Consolidated Balance Sheet
YE YE YE YE 1Q (TLm) 2014 2015 2016 2017 2018
Cash and Cash Equivalents 113 152 75 173 79 Financial Assets 313 456 654 692 767 Trade Receivables 1,471 1,545 1,721 2,382 2,852 Other Current Assets 345 379 490 855 923 Current Assets 2,242 2,532 2,940 4,102 4,621
Financial Assets 1,469 2,565 3,640 5,747 5,758 Tangible and Intangible Assets 8,281 8,103 7,949 7,841 7,790 Other Non-Current Assets 771 820 603 896 799 Non-Current Assets 10,521 11,489 12,192 14,484 14,347
TOTAL ASSETS 12,763 14,021 15,133 18,586 18,968
Short-Term Financial Liabilities 805 1,916 3,098 1,939 1,766 Other Financial Liabilities 17 21 25 30 35 Trade Payables 816 827 1,118 1,512 951 Payables to PA 1,238 1,188 0 0 0 Other Current Liabilities 417 629 710 1,374 1,416 Current Liabilities 3,294 4,581 4,951 4,855 4,168
Long-Term Financial Liabilities 2,098 2,878 3,200 5,269 6,269 Other Financial Liabilities 240 232 245 280 284 Payables to PA 1,176 0 0 0 0 Other Non-current Liabilities 1,915 1,964 1,989 2,302 2,474 Long-Term Liabilities 5,429 5,074 5,434 7,851 9,027
Total Share Capital 4,390 4,390 3,965 4,017 3,966 Other Equity Items 58 47 136 184 220 Retained Earnings -407 -71 646 1,679 1,587 Equity 4,040 4,366 4,747 5,880 5,773
TOTAL LIABILITIES AND EQUITY 12,763 14,021 15,133 18,586 18,968
80 Note: Consolidated numbers include the Business Units Distribution and Retail as well as the legal holding entity. Hizmete Özel Summary Financial Statements Consolidated Cash Flow Statement
FY FY FY FY 1Q 1Q (TLm) 2014 2015 2016 2017 2017 2018 Profit for the period -277 336 377 988 78 243 Adjustments to reconcile net profit for the period 777 830 801 960 287 233 Changes in operating assets and liabilities -665 -463 -7 -979 -231 -886 Other inflows (incl. Capex reimbursements) 311 391 833 954 232 313 Cash Flows from Operating Activities (before interest and tax) 146 1,095 2,004 1,923 366 -97 Tax payments -48 -73 -145 -65 -22 -7 Cash Flows from Operating Activities (before interest, after tax) 98 1,021 1,859 1,858 344 -104 CAPEX -525 -1,093 -1,560 -1,747 -398 -501 Payment to Privatization Administration -1,176 -1,225 -1,188 0 0 0 Interest received 59 31 40 65 7 32 Cash Flows from Investing Activities -1,643 -2,286 -2,709 -1,682 -391 -469 Cash in-flows and out-flows from borrowings 1,072 1,710 1,414 873 938 790 Capital increase 900 0 0 0 0 0 Interest paid -655 -406 -642 -951 -242 -311 Cash Flows from Financing Activities 1,317 1,305 772 -78 696 479 Increase in cash and cash equivalents -228 39 -78 98 649 -94 Cash and cash equivalents at the beginning of the period 341 113 152 75 75 173 Cash and cash equivalents at the end of the period 113 152 75 173 724 79
FY FY FY FY 1Q 1Q (TLm) 2014 2015 2016 2017 2017 2018 Cash Flows from Operating Activities (before interest and tax) 146 1,095 2,004 1,923 366 -97 CAPEX -525 -1,093 -1,560 -1,747 -398 -501 Free cash flow (before interest and tax) -379 2 444 176 -32 -598 Tax payments -48 -73 -145 -65 -22 -7 Interest received 59 31 40 65 7 32 Interest paid -655 -406 -642 -951 -242 -311 Free cash flow (after interest and tax) -1,023 -445 -303 -775 -289 -884
81 Hizmete Özel Electricity Market Regulation in Turkey
82 Hizmete Özel Turkish electricity market structure is in line with proven models seen in other European markets
Turkish Electricity Market Framework Replicates the Tested Electricity Market Structures
Physical flow of electricity
Generation Transmission Distribution: 21 Regions
Generation Activities Wholesale Activities Supplier Activities
Suppliers Customers State-owned Organised Bilateral • IPPs/ • Non-eligible Spot (Forward / Producers Customer Market OTC) (from • Incumbent incumbent Retailers retailers BOO – BOT – TOR • Non- only) Incumbent • Eligible Retailers customers Wholesale Market (free to choose their (TETAŞ / Private) IPP supplier)
Enerjisa is the Leading Player in the Turkish Electricity Distribution and Retail Sector Note: EÜAŞ: State-owned generation company; EPIAS: Market operation company; TEİAŞ: State-owned transmission company; BIST: Istanbul stock exchange: TETAŞ: State-owned wholesale Company; BOO: Build, Operate, Own, BOT: Build, Operate, Transfer, TOR: Transfer of Operating Rights, IPP: Independent Power Producers.
83 Hizmete Özel Distribution revenue build-up
EMRA Determines Revenue Caps for Distribution Companies, which are Taken as a Basis for the Determination of the Distribution Tariff
Return on RAB Return on RAB: Average RAB x WACC Capex Allowance Capex Reimbursement Reimbursement of Capex
The cost of operating and maintaining the distribution network Fixed costs Transmission costs (pass through to TEDAŞ) Fixed meter reading fees Opex Allowance Variable costs Meter replacement costs Uncontrollable cots Other costs (e.g., distribution fee, capacity fee, overcapacity fee, available capacity fee, and customer care services costs)
Distribution companies are entitled to buy the energy required for Lighting Revenues general illumination Advertising and rent Cost of energy for target theft and loss and general lighting Other Revenues Theft & Loss Margin Advertising, rent and lighting Additional Revenues Maintenance income, punishment warrant and compensation income, advertisement and renting, etc.
Tax Adjustment Component Revenue and Investment Difference Adjustment
R&D Difference Adjustment
84 Hizmete Özel Distribution revenue build-up Total Capex allowance
Capex Reimbursement Return on RAB1 11.91% – 13.61% Tax adj. from Depreciation
● Reimbursement duration is 10 ● RAB1 was set to “0 TL” by the regulator in 2006 ● Compensation item for the years vs. 5 years in the ● Allowed capex is included in the RAB as soon as they are additional tax burden arising previous regulatory period realized from the difference between the depreciation periods in Tax ● Additional capex included in RAB after EMRA approval Law and Electricity Market ● Yearly indexation of RAB by Consumer Price Index (CPI) Regulation ● Increase in RAB due to greater Capex allowance results in greater RAB leading to additional income
Total Capex Allowance
● Capex is reimbursed within 10 years as fixed by EMRA ● 5 categories in Capex eligible for the Capex allowance system ● Calculated by Regulatory Period based on average RAB and regulatory real WACC of 11,91% before-tax, real for the period 2016-2020 194 bp increase in WACC rate compared to 2011-2015, meaning greater financial income from RAB ● Current framework allows outperformance for certain components determined on the basis of centralized unit prices through better procurement and supply chain management
Capex Outperformance
● By the end of a tariff year, if the distribution company realises its mandated investments at a cost less than the allowed Capex value, then it will still have collected the revenues through its tariffs that were calculated on the basis of initially allowed Capex
Note: 1 RAB derived from average of RAB at the start and at the end of the tariff year plus new investments minus depreciation escalated by Energy Price Index (EPE) equal to CPI. 85 Hizmete Özel Distribution revenue build-up Opex allowance
Non-controllable Costs R&D Opex Fixed Opex Variable Opex Transmission (pass thr.) 1% of fixed / variable Other incl. Opex
● Component not ● Component affected ● Transmission ● R & D Expenses ● 75% advertisement affected by factors by demand level, # expenses reimbursed through income kept by like demand, # of of customers, ● Utilisation of forestry Revenue Ceiling companies (25% customers, network network length areas deducted from length revenue ceiling) ● Taxes except for VAT, corporate tax, ● Theft accrual (c. 7% and licensing and of EBITDA) transmission fees
Total Opex Allowance
● 2016-2020 based on actualisations of years 2013-2014 ● Key growth drivers of Opex allowance: number of customers, distributed energy volume, number of transformers, line length ● Opex allowance is set on the basis of region requirements ● Increase in Opex allowance in the Regulatory Period of 2016-2020 which provides potential for income from Opex efficiency ● Current framework allows outperformance through employee efficiency, better workforce management and IT systems
Opex Outperformance
● The over and under-realisation of Opex is not taken into account in the revenue and tariff calculations ● By the end of a tariff year if a distribution company realises its mandated Opex at a cost less than the allowed Opex value calculated by EMRA, then the distribution company will keep the difference between what is allowed and what is spent
86 Hizmete Özel Distribution revenue build-up Other revenues
● Maintenance income ● Punishment warrant and compensation income Additional revenues ● Advertisement and renting ● Provisions no longer required ● AMR incomes, theft usage accrual
● Distribution companies are entitled to buy the energy required for general illumination ● As per the current regulation, distribution companies must supply electricity from TETAŞ and to sell energy to Lightning revenues municipalities and provincial administrations within the scope of general illumination responsibilities ● If a new omnibus bill is enacted, distribution companies will no longer be required to supply electricity within the scope of general illumination activities, following October 1, 2018, and will replace TETAŞ with TEDAŞ
● All eligible and ineligible customers, pay the theft and lost tariff as distribution companies are obligated to buy energy to compensate for energy theft and loss based on the theft and loss target ● The theft and loss tariff is determined at the national level and the revenue imbalances between the distribution regions are corrected via the price equalisation mechanism meaning the cost burden calculated Theft & Loss according to the theft and loss target, does not fall on the consumers in a specific region alone, but distributed margin across all consumers in the country ● If actual performance of distribution companies is below the target it is bonus, if it is above, it is a penalty ● T&L target is determined using 3 different clusters: <8%, 8 Other revenues ● Other revenue items are fully included in the calculation of the revenue cap 87 Hizmete Özel 3rd regulatory period Regulatory period 5 Years between 2016 and 2020 Base years 2013-2014 50% Fixed and 50% Variable allocation, growth (# of customers, distributed energy volume, # of transformers & line Opex allowance length) & efficiency Adjustment for variable and uncontrollable expenses 2013-2014 are base years X-efficiency DEA (line length, # of customers, # of transformers, distributed energy volume, environmental variables) 5 year convergence duration 5 categories in Capex Capex allowance Unit price application. Capex outperformance in scope WACC 2016 – 2017 11.91%, 2018 – 2020 13.61% (Before Tax, Mid-Year) WACC is applicable to all distribution companies Reimbursement duration 10 Year reimbursement, which is shorter than most international examples Reports and analysis submitted to EMRA every year until end of June Demand forecast Includes: # of customers, distributed energy volume, peak energy volume TEİAŞ merges its own demand forecast with distribution companies and submits final forecast report to EMRA Dynamic T&L target determination methodology 3 different clusters (<8%, 8 EMI EMI = Consumer Price Index Maintenance income, punishment warrant and compensation income, rentals and advertisements, consultancy, Other revenues provisions no longer required, AMR incomes, electricity theft accrual Introduction of new quality incentives: The new regulation (announced in December 2017) allows for an additional upto 5% (of the revenue requirement) revenue, if all quality parameters are satisfied (previously, it was 1% of the yearly revenue requirement). The impact to Enerjisa is not yet clear as the specific implementation of this new regulation is not yet defined (e.g. which quality parameters and what are the targets) 88 Hizmete Özel Glossary Glossary of terms Elektrik Üretim Anonim Şirketi AMR Automated Meter Reading EÜAŞ R&D Research and Development (Electricity Generation Co) BIST Borsa Istanbul FCF Free Cash Flow RAB Regulated Asset Base BOO Build, Operate, Own FiT Feed-in Tariffs RES Renewables BOT Build, Operate, Transfer FPO Financial Promotion SAIDI System Average Interruption Duration Indices CAGR Compound Annual Growth Rate FX Foreign Exchange SAIFI System Average Interruption Frequency Indices Supervisory Control and Data Acquisition Capex Capital Expenditure GAAP Generally Accepted Accounting Principles SCADA System CCO Customer Care Offices GDP Gross Domestic Product SME Small Medium Sized Entities CMB Capital Markets Board GIS Geographical Information System T & L Theft and Loss Türkiye Elektrik Üretim İletim A.Ş. Cont'd Continued GSM Global System for Mobile Communications TEAŞ (Turkey Electricity Generation Co.) Türkiye Elektrik Dağıtım A.Ş. CPI Consumer Price Index GW Gigawatt TEDAŞ (Turkey Electricity Distribution Co.) Türkiye Elektrik İletim A.Ş. CRM Customer Relations Management HSE Health and Safety Executive TEİAŞ (Turkey Electricity Transmission Co.) International Financial Reporting Türkiye Elektrik Ticaret ve Taahhüt A.Ş. D2D Door to Door IFRIC TETAŞ Interpretations Committee (Turkey Electricity Trading and Contracting Co.) DSO Distribution System Operator IFRS International Financial Reporting Standards TFRS Turkish Financial Reporting Standards EBIT Earnings Before Interest and Tax IPP Independent Power Producers TLbn Turkish Lira billion Earnings Before Interest, Tax, Depreciation and EBITDA IR Investor Relations TLm Turkish Lira million Amortisation EC European Commission IT Information Technology TOR Transfer of Operating Rights EEA European Economic Area KPI Key Performance Indicators TradeCo Trading Company EEDAŞ Enerjisa Elektrik Dağıtım A.Ş. LTM Last Twelve Months TSO Transmission System Operator EFET European Federation of Energy Traders m Millions TWh Terawatt Hour EIA Energy Information Administration MWh Megawatt Hour WACC Weighted Average Cost of Capital EML Electricity Market Law NWC Net Working Capital EMRA Electricity Market Regulatory Authority OHSAS Occupational Health and Safety Assessment Enerji Piyasaları İşletme A.Ş. EPİAŞ Opex Operating Expenditure (Energy Exchange Istanbul) EU European Union OTC Over the Counter 89 Hizmete Özel