MRSK Initiation RAB Roll-Out Offe

MRSK Initiation RAB Roll-out Offers RABid Value

Sum

mar

y

The roll-out of RAB-based tariffs across the country is the single most important value-driver in Russia’s power distribution space. By the beginning of 2011, the new scheme will be fully implemented. The new regime will secure stable and transparent returns on distribution assets, facilitating the financing of the sector’s formidable CAPEX needs. Our preferred play on the theme is MRSK Holding, which not only offers one of the biggest upsides in valuation terms but is also the most liquid stock. Our other top picks – out of 13 names covered in this report – include MOESK, MRSK Center, MRSK Center-Volga and MRSK Urals based on valuation, geography and transparency.

Inve

stm

ent C

ase

RAB story likely to play out over the next six months: The share of MRSK Holding’s regional branches operating under an RAB tariff regime is expected to rise from 29% to 100% by the beginning of 2011. This roll-out will be the major catalyst for MRSKs over the coming months and is not fully reflected in current prices. Compelling EV/RAB multiples: Current EV/RAB multiples are mainly in the range of 0.4-0.5x, suggesting significant upside to our DCF-based EV/RAB metrics of up to 0.8x for some stocks. Current valuations seem out of sync with RAB-implied capital returns. RAB regime necessary to secure financing for modernization:Russia’s distribution networks require massive investments into renovation and modernization to enhance the reliability of electricity supply and remove bottlenecks. This will only materialize if regulated tariffs allow companies to generate sufficiently high returns on invested capital. MRSK Holding is our preferred stock in the sector: 70%+ upside combined with high liquidity suggest that MRSK Holding is the best way to play the theme, in our view. MOESK, MRSK Center, MRSK Center-Volga, MRSK Urals our top picks: These MRSK names provide the highest upside supported by a combination of the lowest inherent regulatory risk, good geography and high transparency.

Valu

atio

n &

Ris

ks

Valuation: We value the underlying MRSKs using DCF based on the expected parameters of RAB-based tariffs. We value MRSK Holding using an equally weighted blend of DCF and sum-of-the-parts approaches and apply a 25% holding discount to the latter. Risks: The sector’s performance will be subject to regulatory risk, particularly the risk of lower iRABs than those expected by MRSK Holding. A key indication to investors will come on July 1, when 19 more regions are expected to adopt RAB-based tariffs. The CAPEX programs of MRSKs have yet to be finalized, posing another risk to our valuation. Finally, the low liquidity of many MRSK names is another risk facing these stocks.

Target prices and recommendations Company 12M TP Upside Rating MRSK Holding $0.184 71% O/W MRSK Center $0.069 115% O/W MRSK C&V $0.015 135% O/W MOESK $0.075 72% O/W MRSK Urals $0.020 152% O/W MRSK N.C. $11.2 161% O/W MRSK South $0.0080 55% O/W Tomsk DisCo $0.024 48% O/W MRSK Volga $0.0050 43% O/W MRSK Siberia $0.013 30% E/W Lenenergo $0.91 25% E/W Kubanenergo $6.1 4% E/W MRSK N.West $0.0043 -40% U/W Source: Bloomberg, Alfa Research

Current EV/RAB multiples, MRSKs

0.16

x

0.29

x

0.32

x0.

38x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x0.

47x

0.51

x 0.81

x

0.00x

0.20x

0.40x

0.60x

0.80x

1.00xM

RS

K N

.C.

MR

SK

Ura

ls

Tom

sk D

isC

o

MR

SK

C&

V

Lene

nerg

o

Kub

anen

ergo

MR

SK

Sib

.

MR

SK

Cen

ter

MR

SK

Vol

ga

MR

SK

Sou

th

MO

ES

K

MR

SK

N.W

.

Source: Company data, Bloomberg, Alfa Research

Share price performance

-30% 70% 170% 270% 370%

MRSK HoldingMRSK Center

MRSK Cente&VolgaMRSK Volga

MRSK NorthwestMRSK Siberia

MRSK NCMRSK Urals

MRSK SouthMOESK

LenenergoKubanenergo

Tomsk DisCo

1 M Change YTD Change

Source: Bloomberg

RESEARCH DEPARTMENT [email protected]

The contents of this document have been prepared by Alexander Kornilov of OJSC Alfa Bank ("Alfa Bank") as Investment Research within the meaning of Article 24 of Commission Directive 2006/73/EC implementing the Markets in Financial Instruments Directive (2004/39/EC). Please refer to the further important information in relation to this Document located on the last page. www.alfa-bank.com

Alexander Kornilov, Ph.D. Senior Analyst, Moscow

(+7 495) 788-0334 Fedor Kornachev

Analyst, Moscow (+7 495) 795-3735

Elina Kulieva, Ph.D. Analyst, Moscow

(+7 495) 789-8509

Russian Equity ResearchUtilities

June 30, 2010

Equity Market


2

TABLE OF CONTENTS:

Investment Summary ......................................................................................................4 Our Top Picks.................................................................................................................6 MRSKs on multiples .......................................................................................................8 Key events to watch......................................................................................................10 Risks.............................................................................................................................10

Valuation ........................................................................................................................12 DCF-derived fair EV/RAB varies among the companies...............................................12 WACC: The main factor affecting EV/RAB; major discrepancy among MRSKs ...........13 Initial RAB: The main valuation factor is still uncertain .................................................14 MRSK Holding valuation...............................................................................................16 EV/RAB waterfall analysis ............................................................................................17

Limited Impact on End-User Tariffs .............................................................................21 How much regulatory risk? ...........................................................................................21

Distribution Segment at a Glance ................................................................................23 The second-largest segment of the Russian electricity sector......................................23 The economics of the DisCo business..........................................................................27

The place of DisCos in the sector’s value chain.................................................................................... 27 Electricity loss reimbursement ............................................................................................................... 28 The technology of electricity distribution................................................................................................ 29

RAB-based tariff setting: How does it work?.................................................................31 RAB framework to replace inefficient and archaic “cost plus” tariff setting approach ........................... 31 RAB introduction timeframe................................................................................................................... 34 The principles of RAB-based tariff setting ............................................................................................. 36

Company Profiles ..........................................................................................................41 MRSK Holding ..............................................................................................................41

MRSK Holding DCF valuation ............................................................................................................... 44 MRSK Holding condensed financials .................................................................................................... 45

MOESK (Moscow United DisCo) ..................................................................................46 MOESK DCF valuation .......................................................................................................................... 49 MOESK condensed financials ............................................................................................................... 50

Lenenergo ....................................................................................................................51 Lenenergo DCF valuation...................................................................................................................... 54 Lenenergo condensed financials........................................................................................................... 55

MRSK Center ...............................................................................................................56 MRSK Center DCF valuation................................................................................................................. 59 MRSK Center condensed financials...................................................................................................... 60

MRSK Center-Volga .....................................................................................................61 MRSK Center-Volga DCF valuation ...................................................................................................... 64 MRSK Center-Volga condensed financials ........................................................................................... 65

MRSK Northwest ..........................................................................................................66 MRSK Northwest DCF valuation ........................................................................................................... 69 MRSK Northwest condensed financials ................................................................................................ 70

MRSK Urals..................................................................................................................71 MRSK Urals DCF valuation ................................................................................................................... 74 MRSK Urals condensed financials ........................................................................................................ 75

Equity Market


3

MRSK Siberia ...............................................................................................................76 MRSK Siberia DCF valuation ................................................................................................................ 79 MRSK Siberia condensed financials ..................................................................................................... 80

MRSK Volga .................................................................................................................81 MRSK Volga DCF valuation .................................................................................................................. 84 MRSK Volga condensed financials ....................................................................................................... 85

MRSK South.................................................................................................................86 MRSK South DCF valuation .................................................................................................................. 89 MRSK South condensed financials ....................................................................................................... 90

MRSK North Caucasus.................................................................................................91 MRSK North Caucasus DCF valuation.................................................................................................. 94 MRSK North Caucasus condensed financials....................................................................................... 95

Tomsk DisCo ................................................................................................................96 Tomsk DisCo valuation.......................................................................................................................... 99 Tomsk DisCo condensed financials .................................................................................................... 100

Kubanenergo ..............................................................................................................101 Kubanenergo DCF valuation ............................................................................................................... 104 Kubanenergo condensed financials .................................................................................................... 105

Tyumenenergo (not listed)..........................................................................................106 Tyumenenergo DCF valuation............................................................................................................. 109 Tyumenenergo condensed financials.................................................................................................. 110

Equity Market


4

Investment Summary Russia’s power distribution sector will be mainly driven by regulatory change in the near- to medium term. Based on our estimates, current stock prices fail to reflect the capital returns implied by the roll-out of RAB-based tariff regimes, which is anticipated in the next months. Considering the valuation upside together with factors like transparency, geography and stock liquidity, MRSK Holding, offering upside of more than 90%, is the best way to get exposure to the theme. However, a number of regional players, in which MRSK Holding has mostly majority stakes of 50% to 60%, offer attractive opportunities in valuation terms, with upsides of between 43% and 161% for our O/W-rated stocks, combined with acceptable liquidity. These names include MOESK, MRSK Center, MRSK Center-Volga and MRSK Urals.

In total, in this report we initiate coverage of 13 stocks from the sector, including MRSK Holding and all its listed subs: MOESK, Lenenergo, Kubanenergo, Tomsk DisCo, MRSK Holding, MRSK Center, MRSK Center-Volga, MRSK Northwest, MRSK Volga, MRSK North Caucasus, MRSK South, MRSK Urals and MRSK Siberia.

Having eight O/W ratings out of 13 MRSK names indicates our generally positive stance on the country’s power, mainly based on the following considerations:

• The introduction of RAB-based tariffs is the major value-driver and catalyst for the MRSK story. RAB-based tariffs have been introduced at only 29% of MRSK Holding’s regional branches. Since this story has not been played out yet and the regulatory decisions remain to be seen, we believe many MRSK names offer very attractive upside combined with a clear-cut catalyst.

• The RAB regime finally provides a transparent framework, allowing companies to earn sufficient returns on invested capital to generate and attract the necessary funds for the sector’s formidable CAPEX needs. Power distribution is the poorest part in the Russian power sector, which we believe to be one of the most attractive industries of the Russian economy. With the introduction of RAB-based tariffs, one of the key ingredients for financing the segment’s CAPEX needs is being established.

• Stable business with limited risk once RAB-based regulation is introduced. RAB-based regulation assumes tariffs will be set for a five-year period, after which they will be revised. This stable and predictable business means there is limited risk for investors. Once the active phase of the CAPEX cycle is over, MRSKs may become an attractive dividend play. All the abovementioned factors make MRSKs a very attractive investment vehicle for risk-averse investors.

Six reasons to be bullish on distribution

Equity Market


5

Figure 1: Current EV/RAB multiple Figure 2: Average daily turnover

0.16x

0.29x 0.32x0.38x 0.39x 0.39x 0.40x

0.44x 0.45x 0.47x0.51x

0.81x

0.00x

0.10x

0.20x

0.30x

0.40x

0.50x

0.60x

0.70x

0.80x

0.90x

MR

SK N

.C.

MR

SK U

rals

Tom

sk D

isC

o

Kuba

nene

rgo

MR

SK C

&V

MR

SK S

iber

ia

Lene

nerg

o

MR

SK V

olga

MR

SK C

ente

r

MR

SK S

outh

MO

ESK

MR

SK N

.Wes

t

564538

341 327278

197148 136 115

94

20 100

100

200

300

400

500

600

MO

ESK

MR

SK N

.C.

MR

SK C

ente

r

Kuba

nene

rgo

MR

SK S

outh

MR

SK C

&V

MR

SK V

olga

MR

SK U

rals

MR

SK S

iber

ia

MR

SK N

.Wes

t

Lene

nerg

o

Tom

sk D

isC

o

Source: Bloomberg, Company data, Alfa Research Source: Bloomberg

• Pure domestic play with no currency exposure. Because their businesses are purely domestic, MRSKs’ cash flows do not have any exposure to currency risk. This makes the stocks especially attractive given the ongoing turmoil in the Euro zone.

• EV/iRAB multiples of mainly 0.4-0.5x look very compelling. MRSKs are mainly trading within a range of 0.4-0.5x EV/RAB (see Figure 1 above). This looks extremely cheap given that our fair EV/RAB for some names reaches almost 0.8x.

• Possible privatization. MRSKs may be privatized, though this is unlikely before the full introduction of RAB-based tariffs, i.e. before 2011. Regardless, privatization may be a long-term trigger for MRSK stocks.

Our ratings and 12M TPs for the 13 MRSK names we cover are summarized in the table below. MRSK Holding, MRSK Center, MRSK Center-Volga, MOESK and MRSK Urals offer the highest upside and stronger catalysts than their peers.

Figure 3: MRSK valuation summary

Company RTS ticker

Fair EV/RAB WACC % of RAB

approved% of

branches under RAB

Fair EVFair

Equity value

Fair valuep.s. 12M TP Current

share price Upside Rating

MRSK Holding, com MRKH N/A 12.9% 19% 29% N/A 6,999 $0.163 $0.184 $0.107 71% O/W

MRSK Holding, pref MRKHP $0.149 $0.168 $0.078 115% O/WMOESK MSRS 0.67x 13.4% 0% 0% 4,623 3,201 $0.066 $0.075 $0.043 72% O/WMRSK Center MRKC 0.76x 12.7% 54% 45% 3,010 2,581 $0.061 $0.069 $0.032 115% O/WMRSK Center and Volga MRKP 0.67x 14.1% 45% 56% 1,839 1,501 $0.013 $0.015 $0.006 135% O/W

MRSK Volga MRKV 0.52x 17.8% 24% 14% 936 751 $0.0042 $0.0050 $0.0035 43% O/WMRSK Northwest MRKZ 0.48x 17.8% 18% 14% 489 349 $0.0036 $0.0043 $0.0071 -40% U/WMRSK Siberia MRKS 0.43x 16.4% 25% 13% 1,234 1,018 $0.011 $0.013 $0.010 30% E/WMRSK North Caucasus MRKK 0.31x 21.8% 0% 0% 304 271 $9.2 $11.2 $4.3 161% O/W

MRSK Urals MRKU 0.54x 17.1% 35% 50% 1,628 1,458 $0.017 $0.020 $0.008 152% O/WMRSK South MRKY 0.53x 17.1% 34% 50% 736 341 $0.0069 $0.0080 $0.0052 55% O/WLenenergo, com LSNG 0.42x 15.5% 0% 0% 1,252 798 $0.79 $0.91 $0.73 25% E/WLenenergo, pref LSNGP $0.72 $0.83 $0.80 4% E/WKubanenergo KUBE 0.33x 19.2% 0% 0% 347 393 $5.1 $6.1 $5.8 4% E/WTomsk DisCo, com TORS 0.42x 18.3% 100% 100% 79 87 $0.020 $0.024 $0.016 48% O/WTomsk DisCo, pref TORSP $0.018 $0.022 $0.011 101% O/WSource: Bloomberg, Alfa Research

MRSK Holding, MRSK Center, MRSK Center-Volga, MOESK and MRSK Urals our top picks

Equity Market


6

Figure 4: % of iRAB approved by regulators Figure 5: % of branches with RAB tariffs

100%

54%45%

35% 34%25% 24%

18%

0% 0% 0% 0%0%

20%

40%

60%

80%

100%

120%

Tom

sk D

isC

o

MR

SK C

ente

r

MR

SK C

&V

MR

SK U

rals

MR

SK S

outh

MR

SK S

iber

ia

MR

SK V

olga

MR

SK N

.Wes

t

MO

ESK

MR

SK N

.C.

Lene

nerg

o

Kuba

nene

rgo

100%

56%50% 50%

45%

14% 14% 13%

0% 0% 0% 0%0%

20%

40%

60%

80%

100%

120%

Tom

sk D

isC

o

MR

SK C

&V

MR

SK U

rals

MR

SK S

outh

MR

SK C

ente

r

MR

SK V

olga

MR

SK N

.Wes

t

MR

SK S

iber

ia

MO

ESK

MR

SK N

.C.

Lene

nerg

o

Kuba

nene

rgo

Source: Alfa Research Source: Alfa Research

Our Top Picks Through its holding structure, which controls all MRSKs, MRSK Holding provides exposure to the entire distribution segment. Moreover, MRSK Holding is the segment’s most liquid stock, with a daily turnover on MICEX of $3.3 mln compared with $560,000 for the most liquid underlying MRSK. We therefore recommend that investors looking for liquidity go O/W MRSK Holding.

Because MRSK is structured as a holding, it is useful to compare its MCap with the SoP valuation implied by the MCaps of its underlying assets (the value of Tyumenenergo, which is not listed, is also taken into consideration):

Figure 6: MRKH MCap vs. marked-to-market SoP Figure 7: MRKH discount to SoP value

0

50,000

100,000

150,000

200,000

250,000

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

SoP MRKH valueMRKH Mcap

RUB mln

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10

Source: Bloomberg, Company data, Alfa Research Source: Bloomberg, Company data, Alfa Research

As can be seen from the above charts, MRSK Holding’s discount to its SoP value has narrowed to virtually zero, though there was a period when it was obviously mispriced, trading at a premium over the value of its underlying assets.

In our SoP valuation of MRSK Holding, we nonetheless apply a 25% discount, which we believe is appropriate in valuing a holding company vs. its underlying assets. Compared with the market-based discount, our valuation of the stock looks conservative.

MRSK Holding ($0.184; O/W, +71%): the most liquid distribution play

Equity Market


7

MRSK Center is our favorite among the holding’s underlying assets for the following reasons:

• The company has the highest percentage of its iRAB already approved by the regulator (see figures 4 and 5 above) as well as one of the highest shares of branches that have already introduced RAB-based tariffs. The company is scheduled to adopt RAB-based tariffs at all its remaining branches as of July 1. If this happens, MRSK Center will be the first multi-regional MRSK to be 100% regulated under the RAB framework, thus reaping the benefits earlier than its peers;

• Because of the previous point, MRSK Center has the lowest regulatory risk among MRSKs, particularly with regard to lower-than-expected iRAB;

• MRSK Center has the highest transparency and best disclosure among MRSKs;

• The stock is the third-most-liquid after MOESK and MRSK North Caucasus;

• Because it operates in regions not deemed strategic by the Russian government, we believe MRSK Center has a good chance of being privatized once the privatization process is launched.

MRSK Center-Volga is very similar to MRSK Center and enjoys practically the same advantages:

• It has one of the highest percentages of iRAB approved by regulators (45%) and the highest share of branches under RAB (56%);

• MRSK Center-Volga also has much lower regulatory risk (e.g. lower-than-expected iRAB) than peers;

• The company also has a good level of transparency with an adequate IR department;

• MRSK Center-Volga is relatively liquid, though not as liquid as MRSK Center or MOESK;

• Like MRSK Center, the geography of the company’s business makes it a likely candidate for privatization.

We like MOESK primarily for the location of its business:

• Operating in the city of Moscow and the surrounding Moscow region, MOESK has good prospects for its business going forward given the massive increase in capacity that will be connected to its networks once developers carry out planned projects in the region. In other words, we believe MOESK provides the best exposure to an increasing customer base;

• Favorable geography also means there is little risk of a deterioration in payment discipline;

• MOESK is the most liquid underlying MRSK, with an average daily turnover of more than $0.5 mln.

MRSK Urals boasts the following advantages:

• Half its branches have already adopted RAB, including Kurganenergo, in which the company holds a 49% stake;

• The company operates in the highly-industrialized Urals region, and manufacturing growth will ensure a sustainable increase in its

MRSK Center ($0.069; O/W; +115%): lowest regulatory risk, highest transparency

MRSK Center-Volga ($0.015; O/W; +135%): more liquid than peers, low regulatory risk, good transparency

MOESK ($0.075; O/W; +72%): a bet on geography

MRSK Urals ($0.02; O/W; +152%): exposure to highly industrialized regions

Equity Market


8

customer base (the company operates in the Sverdlovsk, Perm, Chelyabinsk and Kurgan regions);

• MRSK Urals is one of the cheapest MRSKs, trading at only 0.29x EV/RAB.

MRSK North Caucasus presents an interesting case. Though our iRAB estimate for the company is half that guided by MRSK Holding, and we applied the highest WACC of any MRSK to reflect the high level of risk inherent in the stock, the company looks extremely cheap, offering huge (161%) upside to our target price.

Nonetheless, despite its upside, we do not include the stock in our top picks list because of valuation risk. In particular, the company faces the worst payment discipline, a problem inherent to the Caucasus. Moreover, none of its branches has yet adopted RAB-based tariffs, increasing the risk that unfavorable initial RAB parameters will be set. Finally, the company operates in a region that investors tend to avoid because they consider it politically unstable and dangerous.

Nonetheless, we assign an O/W rating to the stock because our valuation incorporates many of these risks. We recommend the stock to investors with a high appetite for risk, an idea supported by the stock’s high liquidity.

MRSKs on multiples Russian MRSKs are trading at decent discounts to global electricity distribution peers on 2011E EV/S, EV/EBITDA and P/E. Since they will not fully adopt RAB-based tariffs until the beginning of 2011, we believe it makes little sense to at multiples for previous years (e.g. 2010).

MRSK North Caucasus ($11.2; O/W; +161%): huge upside, but very risky play

Equity Market


9

Figure 8: Russian MRSKs on multiples vs. global peers Company Country Mcap EV/Sales EV/EBITDA P/E EBITDA margin $ mln 09 10E 11E 09 10E 11E 09 10E 11E 09 10E 11ERussian companies MRSK Holding Russia 4,570 0.6 0.6 0.5 3.0 3.7 2.6 9.9 79.7 9.1 22% 16% 19%MRSK Center Russia 1,353 1.2 1.0 0.8 5.0 3.2 2.1 13.4 5.3 2.7 25% 31% 38%MRSK Center-Volga Russia 730 0.9 0.7 0.6 5.4 5.9 2.8 28.5 neg 4.8 16% 13% 21%MRSK Volga Russia 618 0.9 0.8 0.6 4.9 5.6 3.2 14.1 26.9 6.2 18% 14% 20%MRSK Northwest Russia 681 1.0 0.9 0.7 7.7 15.4 4.9 n/m n/m 12.2 13% 6% 14%MRSK Siberia Russia 911 1.0 0.8 0.7 9.4 10.0 4.6 neg neg n/m 11% 8% 15%MRSK North Caucasus Russia 126 0.5 0.4 0.4 5.4 6.4 3.1 neg neg neg 9% 6% 11%MRSK Urals Russia 679 0.6 0.5 0.4 3.0 2.3 2.1 4.8 3.9 2.8 20% 22% 21%MRSK South Russia 259 1.1 0.9 0.7 5.1 5.2 2.9 neg 7.1 2.4 21% 18% 26%MOESK Russia 2,110 1.4 1.4 1.4 3.4 4.4 5.0 5.9 18.0 15.0 42% 32% 27%Lenenergo Russia 747 1.6 1.4 1.4 4.3 4.4 6.1 8.1 20.6 neg 37% 32% 23%Kubanenergo Russia 104 0.7 0.6 0.5 4.3 3.8 3.9 1.8 neg 4.0 16% 15% 13%Tomsk DisCo Russia 67 0.5 0.5 0.4 2.7 6.2 4.2 5.5 n/m 16.7 18% 8% 10%Russian MRSKs average 0.9 0.8 0.7 4.9 5.9 3.7 10.2 23.1 7.6 11% 9% 10% Emerging Markets Eletropaulo Brazil 3,300 0.9 0.8 0.8 4.5 4.0 4.3 6.5 7.2 8.6 20% 20% 18%Cia General De Electr. Chile 2,387 1.4 1.6 1.5 8.9 8.4 7.9 9.3 15.9 13.8 16% 19% 19%Aksu Enerji ve Ticaret Turkey 23 11.6 10.4 13.2 14.3 12.7 17.8 6.8 7.6 11.0 81% 82% 74%Zhytomyroblenergo Ukraine n/a n/a 0.5 0.4 n/a 5.8 5.0 n/a n/a n/a n/a 8% 8%Kirovogradoblenergo Ukraine n/a n/a 1.0 0.8 n/a 24.3 17.8 n/a n/a n/a n/a 4% 5%Zakarpattiaoblenergo Ukraine n/a n/a 0.6 0.5 n/a 11.1 8.7 n/a n/a n/a n/a 5% 6%Zaporizhzhiaoblenergo Ukraine n/a n/a 0.3 0.2 n/a 12.1 8.8 n/a n/a n/a n/a 2% 3% Average EM 4.6 2.2 2.5 9.2 11.2 10.1 7.5 10.2 11.1 39% 16% 15%RU DisCos premium/discount to GEM -80% -63% -72% -47% -48% -64% 36% 125% -32% -72% -44% -33%Source: Bloomberg, Alfa Research

Figure 9: EV/RAB multiples of Russian MRSKs vs. global companies Company Country Mcap EV/RAB $ mlnRussian companies MRSK Holding Russia 4,570 0.41MRSK Center Russia 1,353 0.45MRSK Center-Volga Russia 730 0.39MRSK Volga Russia 618 0.44MRSK Northwest Russia 681 0.81MRSK Siberia Russia 911 0.39MRSK North Caucasus Russia 126 0.16MRSK Urals Russia 679 0.29MRSK South Russia 259 0.47MOESK Russia 2,110 0.51Lenenergo Russia 747 0.40Kubanenergo Russia 104 0.38Tomsk DisCo Russia 67 0.32Russian MRSKs average 0.42Emerging Markets Transelectica SA Romania 325 0.78Average EM 0.78MRSKs Premium/discount to EM peers -46%Developed Markets National Grid UK 25,535 1.41Terna Spa Italy 7,223 1.27SP Ausnet Australia 1,752 1.01Elia Belgium 1,878 1.16Average DM 1.21MRSKs Premium/discount to DM peers -65%Source: Bloomberg, Company data, Alfa Research

Equity Market


10

MRSKs trade at discounts to foreign RAB-based regulated companies (we used only high-voltage transmission companies where the RAB value was available).

Key events to watch We highlight the following events that will affect MRSKs’ share price performance and should therefore be closely watched by investors:

1. July 1, 2010: Adoption of RAB-based distribution tariffs in many regions in Russia. Although it is arguable whether the government will be able to set these tariffs as prescribed by the Schedule (see Figure 58 with the RAB transition schedule on pg. 34 of the report), the date will be very important for MRSK stocks because it will show whether or not the government is actually going to cut iRAB vs. the numbers expected by the companies themselves. Disappointing final iRAB figures are the biggest concern expressed by investors, especially given the possible tariff cuts for the Federal Grid Company proposed by the Ministry of Economic Development.

2. 2H10: Approval of methodology for regulation of quality of electricity distribution. The quality of power supply is a very important issue and must ultimately be addressed by the RAB-based tariff regulatory framework. Quality-control rules and criteria are being developed, and we expect them to be finalized by the end of this year. The main component of these rules for MRSKs would be additional penalties and fines that could be imposed if a company fails to satisfy the prescribed level of electric supply quality.

3. January 1, 2011: Complete adoption of RAB-based distribution tariffs by all Russian regions: According to the abovementioned schedule, Russia must entirely adopt RAB-based distribution tariffs as of the beginning of next year. It goes without saying that this is a very important date for MRSK stocks.

Risks Because the majority of MRSK Holding’s regional branches have yet to adopt RAB-based tariffs, we consider the determining of the initial parameters of RAB as the major risk facing MRSK shares. The key unknown is the level of iRAB for those regions where the new tariffs have not been introduced yet, while recent comments from the Ministry of Economic Development about possible cuts to FGC’s RAB-based tariff growth rates in 2011-12 increased investor concern over the government willingness to reduce iRAB for MRSKs to smooth out the sharp increases in distribution tariffs unavoidable upon transition to an RAB-based framework.

Because this is a major risk, we recommend investors go O/W those names with the highest percentage of iRAB already approved (or alternatively, the highest share of branches that already operate under the RAB framework). This is part of the reason why MRSK Center and MRSK Center-Volga are among our top picks.

Since CAPEX is another important component of RAB-based tariffs, the precise CAPEX plans are not yet known for many regional branches of MRSKs where RAB-based tariffs have not yet been introduced. It is no surprise that MRSK Holding has not provided a consolidated investment program, since it has not been finalized.

We therefore believe that higher-than-expected CAPEX poses a serious downside risk to our valuation owing to the discrepancy between our WACC estimates and the regulatory rate-of-return of 12% applied to the new RAB of

Key events to watch

Regulatory risks: lower-than-expected iRAB

CAPEX program has not been finalized

Equity Market


11

DisCos. In other words, until WACC converges with the rate of return, the investment activity of MRSKs will be value-destructive.

Poor liquidity is another risk facing MRSK names. Except for MRSK Holding, MRSKs are relatively illiquid, reducing their appeal for international investors.

Most MRSK names are illiquid

Equity Market


12

Valuation DCF-derived fair EV/RAB varies among the companies We used DCF to value each MRSK. We then valued MRSK Holding based on a 50:50 blend of DCF and sum-of-the-parts using the fair values we calculated for all its underlying assets, including Tyumenenergo, which is not listed.

Below, we summarize the key assumptions and components of the methodology used in our models to value MRSKs:

• We use a bottom-up approach in our MRSK model: we model each regional branch individually because tariffs are determined separately for each region, and then we combine them together in our full MRSK model;

• We assume RAB-based tariffs will be introduced in accordance with the schedule approved by the government (see Figure 56 in the “Distribution Segment at a Glance” section of this report) except for those regions that have said they will delay introduction;

• By default, we use the RAB numbers provided by MRSK Holding except in the case of MRSK North Caucasus (see discussion below);

• We assume the first regulatory period for all branches which have not yet adopted RAB-based tariffs will be for five years;

• Repurchase costs for lost electricity are linked to our recently updated electricity price outlook (see our report “GenCos: Upgrading on Strong Catalysts, Improved Price Outlook” of June 22);

• We link our electricity transmission charge to the tariff growth for FGC in 2010-12 approved by the regulator, while our forecast thereafter is based on our FGC model;

• The regulatory X-factor is assumed to be 1% p.a., while to be on the safe side, we conservatively assume a 0% actual efficiency gain from MRSKs’ OPEX;

• Our WACC takes into consideration six company-specific factors discussed below;

• We assume a 0% perpetual growth rate;

• In calculating our terminal-year cash flow, we use RAB depreciation in place of financial-accounting-based D&A charge;

• We apply smoothing if the expected tariff increase in a given year exceeds 35%. Based on the tariff growth rates of those MRSK branches where RAB-based tariffs have already been introduced, we do not believe regulators are likely to allow MRSK tariffs to rise by over 35-40%. The smoothing mechanism is an important part of RAB-based tariff regulation (for more information, see the “Distribution Segment at a Glance” section of this report);

• Ignoring connection-fee revenues. Since the role of the connection fee mechanism will fade away upon the introduction of RAB-based tariffs, we assume connection fee revenues will be zero starting in 2010;

We use DCF to value MRSKs

Key assumptions

Equity Market


13

• Other regional networks removed from throughput and financials. Many MRSKs have other regional distribution networks in their covered regions whose operations are usually reflected in both electricity throughput and P&L numbers. These regional companies (also known as “TSOs” in accordance with their Russian acronym) are usually affiliated with local authorities and have nothing to do with MRSKs in ownership terms. Since it is hard to predict the future impact of these other regional distribution networks on MRSKs’ business, we adjust the MRSK numbers to completely remove the effect of these companies.

The table below summarizes our valuation of all underlying DisCos of MRSK Holding:

Figure 10: Valuation summary MOESK MRSK

CenterMRSK

C&VMRSK Volga

MRSK N.Westt

MRSK Siberia

MRSK N. Caucas.

MRSK Urals

MRSK South

Len-energo

Kuban-energo

Tomsk DisCo

Tyumen-energo

Mcap, $ mln 2,110 1,353 730 618 681 911 126 679 259 747 104 67 N/ARTS ticker MSRS MRKC MRKP MRKV MRKZ MRKS MRKK MRKU MRKY LSNG KUBE TORS N/AFair EV, $ mln 4,623 3,010 1,839 936 489 1,234 304 1,628 736 1,252 347 79 1,485Fair equity value, $ mln 3,201 2,581 1,501 751 349 1,018 271 1,458 341 798 393 87 1,233

iRAB, $ mln 6,930 3,950 2,757 1,809 1,013 2,903 987 3,030 1,383 2,976 1,056 185 3,957Implied fair EV/iRAB 0.67x 0.76x 0.67x 0.52x 0.48x 0.43x 0.31x 0.54x 0.53x 0.42x 0.33x 0.42x 0.38x

WACC 13.4% 12.7% 14.1% 17.8% 17.8% 16.4% 21.8% 17.1% 17.1% 15.5% 19.2% 18.3% 21.1%Fair price per share, $ $0.066 $0.061 $0.013 $0.0042 $0.0036 $0.011 $9.2 $0.017 $0.0069 $0.79 $5.1 $0.020 N/A

12M TP, $ $0.075 $0.069 $0.015 $0.0050 $0.0043 $0.013 $11.2 $0.020 $0.0080 $0.91 $6.1 $0.024 N/ACurrent share price, $ $0.043 $0.032 $0.006 $0.0035 $0.0071 $0.010 $4.3 $0.008 $0.0052 $0.73 $5.8 $0.016 N/A

Upside, % 72% 115% 135% 43% -40% 30% 161% 152% 55% 25% 4% 48% N/ARating O/W O/W O/W O/W U/W E/W O/W O/W O/W E/W E/W O/W N/A Current EV/RAB 0.51x 0.45x 0.39x 0.44x 0.81x 0.39x 0.16x 0.29x 0.47x 0.40x 0.38x 0.32x N/A

Source: Bloomberg, Company data, Alfa Research

Our DCF-derived EV/RAB multiple varies within a range of 0.3-0.8x, predominantly reflecting the high discrepancy in WACC among MRSKs (see the discussion on WACC below). There are also other factors in our models that affect our fair EV/RAB multiples (see the charts below with our reconciliation of EV/RAB for all MRSKs).

WACC: The main factor affecting EV/RAB; major discrepancy among MRSKs Our build-up WACC estimates incorporate six different company-specific factors, including whether it publishes IFRS accounts, the level of transparency and disclosure, the presence of a large institutional investor among the shareholders (e.g. Prosperity Capital Management and MRSK Center), payment discipline in the regions covered by the MRSK (e.g. MRSK North Caucasus receives the highest premium for this kind of risk) and regulatory risk, defined as the level of exposure to possible reductions in iRAB (those MRSKs with a high share of branches already under RAB-based tariffs have lower risk, and vice versa). The sixth risk is liquidity, based on the daily turnover of the stock.

The table below summarizes our WACC estimates for all covered MRSKs (we assumed a 30:70 D/E gearing ratio, which is in line with what the FTS used to set the rate-of-return for RAB-based tariffs):

Valuation summary

We incorporate six company-specific factors into our build-up WACC calculation

Equity Market


14

Figure 11: WACC build-up calculation MOESK MRSK

CenterMRSK

C&VMRSK Volga

MRSK N.West

MRSK Siberia

MRSK N. Caucas.

MRSK Urals

MRSK South

Len-energo

Kuban-energo

Tomsk DisCo

Tyumen-energo

WACC 13.4% 12.7% 14.1% 17.8% 17.8% 16.4% 21.8% 17.1% 17.1% 15.5% 19.2% 18.3% 21.1% Cost of debt Risk-free rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%Corporate debt spread 3.0% 3.0% 3.0% 4.0% 4.0% 4.0% 6.0% 4.0% 4.0% 3.0% 4.0% 6.0% 3.0%Debt rate implied 9.0% 9.0% 9.0% 10.0% 10.0% 10.0% 12.0% 10.0% 10.0% 9.0% 10.0% 12.0% 9.0%Statutory tax rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%After-tax cost of debt 7.2% 7.2% 7.2% 8.0% 8.0% 8.0% 9.6% 8.0% 8.0% 7.2% 8.0% 9.6% 7.2% Cost of equity Risk-free rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%Base equity risk premium 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Company-specific adjustments: 3.0% 2.0% 4.0% 9.0% 9.0% 7.0% 14.0% 8.0% 8.0% 6.0% 11.0% 9.0% 14.0%

- IFRS financials 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 0.0% 2.0% 0.0% 2.0% 2.0% 2.0% - Transparency and disclosure 0.0% 0.0% 0.0% 1.0% 1.0% 0.0% 2.0% 0.0% 1.0% 1.0% 2.0% 1.0% 2.0%

- Presence of large institutional investor 0.0% 0.0% 0.0% 2.0% 2.0% 1.0% 2.0% 2.0% 1.0% 0.0% 1.0% 1.0% 2.0%

- Payment discipline in the region 0.0% 1.0% 1.0% 1.0% 1.0% 1.0% 3.0% 1.0% 1.0% 0.0% 1.0% 1.0% 0.0%

- Regulatory risk 2.0% 0.0% 1.0% 2.0% 2.0% 2.0% 4.0% 2.0% 1.0% 2.0% 3.0% 0.0% 3.0% - Liquidity 1.0% 1.0% 2.0% 3.0% 3.0% 3.0% 1.0% 3.0% 2.0% 3.0% 2.0% 4.0% 5.0%Adjusted equity risk premium 10.0% 9.0% 11.0% 16.0% 16.0% 14.0% 21.0% 15.0% 15.0% 13.0% 18.0% 16.0% 21.0%

Cost of equity 16.0% 15.0% 17.0% 22.0% 22.0% 20.0% 27.0% 21.0% 21.0% 19.0% 24.0% 22.0% 27.0% Share of equity: E/(D+E) 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%Share of debt: D/(D+E) 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%Source: Alfa Research

The charts below show that those MRSKs with the lowest WACC have the highest DCF-based EV/RAB multiples.

Figure 12: MRSKs ranked by fair EV/RAB Figure 13: MRSKs ranked by WACC

0.76

x0.

71x

0.67

x

0.64

x0.

62x

0.60

x

0.54

x

0.43

x0.

42x

0.42

x

0.38

x0.

33x

0.31

x

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

MR

SK C

ente

r

MO

ESK

MR

SK C

&VM

RSK

Ura

ls

MR

SK N

.Wes

t

MR

SK V

olga

MR

SK S

outh

MR

SK S

iber

ia

Tom

sk D

isC

o

Lene

nerg

oTy

umen

ener

go

Kuba

nene

rgo

MR

SK N

.C.

12.7

%

13.4

%14

.1%

15.5

%

16.4

%

17.1

%17

.1%

17.8

%

17.8

%

18.3

%19

.2%

21.1

%

21.8

%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%

MR

SK C

ente

r

MO

ESK

MR

SK C

&V

Lene

nerg

oM

RSK

Sib

eria

MR

SK U

rals

MR

SK S

outh

MR

SK V

olga

MR

SK N

.Wes

tTo

msk

Dis

Co

Kuba

nene

rgo

Tyum

enen

ergo

MR

SK N

.C.


Initial RAB: The main valuation factor is still uncertain The key factor determining MRSKs’ valuation is the initial regulatory asset base (iRAB). This parameter, however, remains uncertain for 71% of the regions covered by MRSK Holding. Moreover, Elvira Nabiullina, Russia’s Economic Development Minister, recently announced plans to cut next year’s tariff increase for the Federal Grid Company, spurring fears of possible cuts in the initial RAB estimates for many of the regions where RAB-based

We base our valuation on MRSK Holding’s guided iRAB numbers, but they may change

Equity Market


15

distribution tariffs are being introduced. We have written before that this is more likely intended to smooth the increase in FGC’s tariffs and lengthen its regulatory period to five years from the current three; nonetheless, many investors are very concerned that the initial parameters of RAB-based tariffs could deteriorate under pressure from the Economic Development Ministry, which tends to prioritize fighting inflation.

We share these concerns and believe that July 1, 2010, when many MRSK Holding branches must adopt RAB-based tariffs, will be a very important date for investors, since it will show whether or not the approved iRAB numbers differ substantially from those guided by MRSK Holding.

We base our valuation of MRSKs on the numbers provided by MRSK Holding except in the case of MRSK North Caucasus, which seemed exaggerated relative to the net PP&E value of the company. The iRAB numbers we use in our models are provided below:

Figure 14: iRAB numbers assumed in our valuation MRSK Full RAB value iRAB value iRAB value % of iRAB approved to date RUB mln RUB mln $ mln MRSK Center 414,395 118,012 3,934 54%MRSK Northwest 80,607 29,688 990 18%MRSK Siberia 253,452 81,624 2,721 25%MRSK Urals 139,276 74,769 2,492 35%MRSK South 112,473 37,297 1,243 34%MRSK Center and Volga 217,940 79,443 2,648 45%MRSK Volga 158,608 53,981 1,799 24%MRSK North Caucasus 45,570 29,343 978 0%MOESK 603,987 207,079 6,903 0%Lenenergo 180,000 92,256 3,075 0%Tyumenenergo 230,918 119,191 3,973 0%Kubanenergo 96,805 24,622 821 0%Tomsk DisCo 17,080 5,421 181 100%Source: Company data, Alfa Research

The reason why we adjusted MRSK North Caucasus’s iRAB is highlighted in the charts below. The iRAB/Net PP&E ratio based on MRSK Holding’s guided figure looks abnormally high, and the assumed depreciation of MRSK North Caucasus’s assets is strangely low. We therefore adjusted this number, applying the average iRAB/Net PP&E ratio of 1.8x to find the iRAB for the company. The adjusted number is shown in the table above.

Figure 15: iRAB/Net PP&E ratio (MRSK Holding data) Figure 16: iRAB depreciation (MRSK Holding data)

2.4x

1.0x

2.5x 2.7x

2.4x

1.8x

1.3x

4.3x

1.6x 1.7x

1.6x

1.3x 2.

1x

0.0x1.0x2.0x3.0x4.0x5.0x

MR

SK C

ente

r

MR

SK N

.Wes

t

MR

SK S

iber

ia

MR

SK U

rals

MR

SK S

outh

MR

SK C

ente

r

MR

SK V

olga

MR

SK N

.C.

MO

ESK

Lene

nerg

o

Tyum

enen

ergo

Kuba

nene

rgo

Tom

sk D

isC

o

abnormally high ratio!

72%

63%

68%

46% 67

%

64%

66%

36%

66%

49%

52%

75%

68%

0%20%40%60%80%

100%

MR

SK C

ente

r

MR

SK N

.Wes

t

MR

SK S

iber

ia

MR

SK U

rals

MR

SK S

outh

MR

SK C

ente

r

MR

SK V

olga

MR

SK N

.C.

MO

ESK

Lene

nerg

o

Tyum

enen

ergo

Kuba

nene

rgo

Tom

sk D

isC

o

Source: Company data, Alfa Research Source: Company data, Alfa Research

MRSK Northwest’s iRAB figure looks abnormally low at 1.0x Net PP&E vs. the MRSK Holding average of 1.8x. Although we acknowledge that there is

We cut MRSK Holding’s iRAB estimate for MRSK North Caucasus

MRSK Northwest’s iRAB looks extremely low

Equity Market


16

significant upside risk to this iRAB number, we nonetheless use it in our valuation in the absence of any other estimates for the company’s iRAB: MRSK Northwest has the poorest corporate governance and lowest transparency among MRSKs and refused to give their own guidance for their initial regulatory asset base. Only one branch out of six, Novgorodenergo, has adopted RAB-based tariffs.

Regardless, we note that there is significant upside to our current valuation of the stock should the actual iRAB numbers exceed those guided by MRSK Holding.

MRSK Holding valuation We value MRSK Holding using the equally-weighted blended results of the holding’s consolidated DCF and SoP valuation using our fair value for all its components. The details of our DCF valuation of MRSK Holding are provided in the “Company Pages” section of this report. The blended valuation is summarized in the table below:

Figure 17: Blended target price calculation, MRSK Holding DCF SoPWeight 50% 50%Fair EV 17,169Net debt 4,029Minority interest 4,954Fair equity value 8,186 5,813Number of shares, mln - com 41,042 41,042 - pref 2,075 2,075Assumed pref/com discount 0.9158x 0.9158xFair value p.s. $0.191 $0.135Blended fair value p.s., com $0.163Blended fair value p.s., pref $0.149WACC 12.9%Blended 12M TP, com $0.184Blended 12M TP, pref $0.168Current share price, com $0.107Current share price, pref $0.078Upside, com 71%Upside, pref 115%Rating, com O/WRating, pref O/WSource: Company data, Bloomberg, Alfa Research

We apply a 25% discount to our SoP valuation, the discount at which holding companies usually trade to the aggregate value of their underlying assets.

Our SoP valuation is summarized below:

We apply equally-weighted results of DCF and SoP valuation

We apply a 25% holding discount to our SoP valuation

Equity Market


17

Figure 18: MRSK Holding SoP valuation, $ mln DCF-based Equity Value Holding stake Equity value attr. to HoldingMOESK 3,201 51% 1,629 MRSK Center 2,581 50% 1,297 MRSK Center and Volga 1,501 50% 756 MRSK Volga 751 68% 508 MRSK Northwest 349 55% 194 MRSK Siberia 1,018 53% 538 MRSK North Caucasus 271 58% 158 MRSK Urals 1,418 52% 731 MRSK South 341 52% 176 Lenenergo 798 46% 365 Kubanenergo 393 25% 100Tomsk DisCo 87 52% 45 Tyumenenergo 1,233 100% 1,233 Total equity value 7,730 Less: 25% holding discount 1,932 Discounted equity value 5,797 Number of shares, mln - com 41,042 - pref 2,075 Assumed pref/com discount 0.9158x Fair value p.s., com $0.135 Source: Company data, Alfa Research

Figure 19: Five largest contributors to MRSK Holding’s value, $ mln

1629

1297

1233

731

756

2083

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

MOESK MRSK Center TyumenenergoMRSK Urals MRSK Center and Volga Other

Source: Alfa Research

EV/RAB waterfall analysis The waterfall charts below reconcile our EV for the MRSKs with their theoretical value assuming an EV/RAB multiple of 1.0x. We separate the impact of the following factors affecting our DCF-based EV/RAB multiple:

• WACC discrepancy: WACC differs from the regulatory rate-of-return;

• OPEX discrepancy: We assume a 0% efficiency gain in actual OPEX vs. the regulatory 1% annual X-factor;

Equity Market


18

• D&A factor: This shows the discrepancy between accounting D&A charge and RAB depreciation;

• WC factor: This reflects the difference between modeled net working capital changes and the regulatory ones incorporated into RAB-based tariffs;

• “Cost +” factor: This reflects the influence of the “pre-RAB” cash flows, i.e. those which are generated under “cost-plus” tariffs;

• Tax factor: The discrepancy between accounting and regulatory income taxes;

• Smoothing factor: This reflects the impact of smoothing on RAB-based tariffs;

• Supply segment factor: This shows the contribution of supply assets’ (retailing companies) cash flows belonging to the MRSKs, if any;

• XR factor: This accounts for exchange-rate fluctuations affecting ruble-denominated cash flows converted into dollars.

Figure 20: MOESK EV/RAB reconciliation Figure 21: MRSK Center EV/RAB reconciliation

$4,623

$232

$1,315$3 $120 $9 $43 $200

$431

$6,958

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Alfa fairEV

OPEX WACC D&A Tax Smoothing WC Cost+ XR EV/RAB=1

mln

$3,010

$202

$430$102 $1 $40 $16 $26

$236

$3,951

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Alfa fairEV


mln


Figure 22: MRSK Center and Volga EV/RABreconciliation

Figure 23: MRSK Volga EV/RAB reconciliation

$1,839

$84

$655 $150$15.4 $11.3 $49

$213$170

$2,768

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Alfa fairEV


mln

$936

$94

$719 $91$0.4 $0.0 $63 $112

$108

$1,817

$0

$500

$1,000

$1,500

$2,000

Alfa fairEV


mln


Equity Market


19

Figure 24: MRSK Northwest EV/RAB reconciliation Figure 25: MRSK Siberia EV/RAB reconciliation

$61$76

$16$8$0.4$7$21$365

$21

$489

$1,018

$0

$400

$800

$1,200

Alfa fairEV

OPEX WACC D&A Tax Smoothing WC Supplysegment

Cost+ XR EV/RAB=1

mln

$1,234

$107

$1,329 $88 $26 $1 $25 $143$177

$2,903

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Alfa fairEV


mln


Figure 26: MRSK North Caucasus EV/RABreconciliation

Figure 27: MRSK Urals EV/RAB reconciliation

$991

$59$77

$34$14$4$4$496

$103

$304

$0

$200

$400

$600

$800

$1,000

Alfa fairEV


mln

$2,806

$1,628

$165

$1,275 $144$53 $0.0 $93

$112$149 $184

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Alfa fairEV

OPEX WACC D&A Tax Smoothing WC Supplysegment

Cost+ XR EV/RAB=1

mln


Figure 28: MRSK South EV/RAB reconciliation Figure 29: Lenenergo EV/RAB reconciliation

$736

$82

$476 $40 $3 $7

$147 $91 $82

$1,388

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Alfa fairEV


mln

$3,075

$201$260

$120$7$36

$168$1,436

$54

$1,252

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Alfa fairEV


mln


Equity Market


20

Figure 30: Kubanenergo EV/RAB reconciliation Figure 31: Tomsk DisCo EV/RAB reconciliation

$347

$19

$586 $158

$22 $2

$163$47

$66

$1,091

$0

$200

$400

$600

$800

$1,000

$1,200

Alfa fairEV


mln

$79

$1

$100$11 $2 $1 $13

$5 $11

$186

$0

$50

$100

$150

$200

$250

$300

Alfa fairEV


mln


Figure 32: Tyumenenergo EV/RAB reconciliation

$1,485

$69

$1,896 $2 $8 $0 $39$313

$239

$3,973

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Alfa fairEV


mln


Equity Market


21

Limited Impact on End-User Tariffs How much regulatory risk? In Russia, distribution tariffs account for a relatively small share of the end-user electricity tariff compared with the power generation component. The charts below provide a breakdown of Russia’s end-user tariff:

Figure 33: End-user tariff composition, 2009 Figure 34: Change in end-user tariff breakdown after RAB introduction

Generation; 56%

Distribution; 27%

Transm-n; 5%

Market inf rastr-re;

3%

Regional generation;

5%

Retailing charge; 4%

56% 54%

5% 7%

27% 29%

0%

20%

40%

60%

80%

100%

2009 2012EGeneration Market infrastructureTransmission DistributionRegional generation Retailing charge

Source: Market Council Source: Market Council, Alfa Research

The above charts show that the total share of the “grid” component in end-user tariffs (i.e. including both transmission and distribution components) will rise from 32% currently to 36% in 2012, a very small increase. As a result, distribution tariffs could increase sharply without having a significant influence on end-user tariffs.

Figure 35: End-user tariff composition Figure 36: End-user tariff, RUB/MWh

0%

20%

40%

60%

80%

100%

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Generation Market infrastructureTransmission DistributionRegional generation Retailing charge

0

1,000

2,000

3,000

4,000

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Generation component Market infrastructureTransmission component Distribution componentRegional generation Retailing charge

Source: Market Council, Alfa Research Source: Market Council, ATS, Alfa Research

The most important conclusion to draw from all this is that in combating inflation, the government should be more concerned about double-digit annual gas tariff increases for domestic customers, predominantly in the power sector, rather than the infrastructure component, including the grid. The latter

Distribution tariff makes up only 27% of end-user price, reducing regulatory risk

Equity Market


22

has a much lower influence on the end-user tariff than power generation, whose costs are driven exclusively by the gas tariff increases lobbied for every year by Gazprom.

The table below shows that distribution is a relatively small component in overall electricity prices. These numbers speak for themselves.

Figure 37: End-user tariff evolution, RUB/MWh 2010E 2011E 2012E 2013E 2014E 2015E Generation component 1,016 1,182 1,357 1,510 1,621 1,692+ Market infrastructure 48 52 56 60 63 66+ Transmission component 109 142 176 199 225 247+ Distribution component 504 634 740 808 867 916+ Regional generation 80 86 93 99 105 110+ Retailing charge 73 87 101 111 120 126=End-user tariff 1,829 2,183 2,522 2,787 3,002 3,158Change, y-o-y: Generation 24% 16% 15% 11% 7% 4%Transmission 49% 30% 24% 13% 13% 10%Distribution 27% 26% 17% 9% 7% 6%Supply 27% 26% 17% 9% 7% 6%End-user tariff 25% 19% 16% 11% 8% 5% Tariff composition: Generation 56% 54% 54% 54% 54% 54%Market infrastructure 3% 2% 2% 2% 2% 2%Transmission 6% 7% 7% 7% 8% 8%Distribution 28% 29% 29% 29% 29% 29%Regional generation 4% 4% 4% 4% 4% 3%Retailing charge 4% 4% 4% 4% 4% 4%Source: Alfa Research

Equity Market


23

Distribution Segment at a Glance The second-largest segment of the Russian electricity sector The distribution business in the Russian utilities sector is currently represented by large, state-controlled MRSK Holding, which holds controlling stakes in 13 regional distribution companies – MRSKs and two standalone DisCos which have not been merged into the respective MRSKs (Kubanenergo and Tomsk DisCo).

MRSK Holding was created as part of the breakup of UES in mid-2008 and obtained UES’s controlling stakes in several MRSKs. The MRSKs in turn were consolidated on the basis of 58 small standalone distribution companies (DisCos, or RSKs in Russian), which were created as a result of the unbundling of vertically-integrated AO-energos by line of business, the bulk of which occurred in 2004-2005.

However, in some rare cases distribution networks remained owned by non-unbundled energos, specifically the four energos that were independent of UES (Bashkirenergo, Novosibirskenergo, Tatenergo and Irkutskenergo) and remote energos (primarily in the Russian Far East). In particular, Far East Energy Company, or DEK, owns 100% of Far East DisCo holding distribution networks in Amur, Khabarovsk, Primorye regions and Southern part of Yakutia Republic.

Apart from MRSK Holding, a significant portion of low-voltage distribution networks in some regions are still owned by local municipal authorities, particularly in Moscow and St. Petersburg.

According to government regulations (in particular, the government resolution of December 21, 2001, No. 881 “On the Criteria of Ascribing Transmission Lines and Network Units to the United National Power Grid”), all networks with voltages below 220 kV must be included in distribution companies, including those that are part of national transmission networks. All lines with voltages of 220 kV and higher have eventually been passed under the umbrella of the Federal Grid Company (FGC). Although some DisCos own overhead and cable network lines with 220 kV or higher voltages, these lines are not part of the Unified National Power Grid.

The structure of MRSK Holding is presented on the next page:

The Russian distribution segment represented by MRSK Holding, which includes 13 underlying distribution companies

The distribution sector is comprised of low-voltage networks referred to as “last mile” businesses

MRSK Holding structure

Equity Market


24

Figure 38: MRSK Holding structure

* Note: Yantarenergo is not pure DisCo owning some power generating assets as well Source: Company data, Alfa Research

The grey boxes represent pure distribution companies, i.e. the underlying MRSKs, while MRSK Holding also holds controlling stakes in some retailing companies, predominantly in the Caucasus region, and some other assets, including 100% of Yantarenergo, which is a vertically-integrated utility in the Kaliningrad region.

The geography of MRSK Holding and its subsidiaries is shown on the map below:

Figure 39: MRSK Holding geography


Twelve out of the 13 underlying distribution companies of MRSK Holding are listed and trade on Russian stock exchanges. The charts below compare the underlying companies by revenue, EBITDA, throughput and MCap:

Kubanenergo

Independent energos

Isolated areas

MRSK Center

MRSK Center-Volga

MRSK South

MRSK North Caucasus

MRSK Northwest

MRSK Volga

MRSK Urals

Tyumenenergo

MRSK Siberia

Moscow United DisCo

Lenenergo

Tomsk DisCo

Kubanenergo

Independent energos

Isolated areas

MRSK Center

MRSK Center-Volga

MRSK South

MRSK North Caucasus

MRSK Northwest

MRSK Volga

MRSK Urals

Tyumenenergo

MRSK Siberia

Moscow United DisCo

Lenenergo

Tomsk DisCo

Twelve subsidiaries of MRSK Holding are listed

Equity Market


25

Figure 40: MRSKs by 2009 revenue, $ mln Figure 41: MRSKs by 2009 EBITDA, $ mln

0 500 1,000 1,500 2,000 2,500 3,000

Tomsk DisCoMRSK N.C.

KubanenergoMRSK South

LenenergoMRSK N.W.

MRSK VolgaMRSK Siberia

Tyumen-goMRSK C&V

MRSK CenterMRSK Urals

MOESK

0 200 400 600 800 1,000 1,200


KubanenergoMRSK N.W.

MRSK SiberiaMRSK SouthMRSK VolgaMRSK C&VLenenergo

MRSK UralsTyumen-go

MRSK CenterMOESK

Source: Company data, Alfa Research Source: Company data, Alfa Research

Figure 42: MRSKs by 2009 throughput, GWh Figure 43: MRSKs by Mcap, $ mln

0 20,000 40,000 60,000 80,000


KubanenergoMRSK Siberia

MRSK N.W.MRSK SouthMRSK UralsTyumen-go

MRSK VolgaMOESK

LenenergoMRSK Center

MRSK C&V

0 500 1,000 1,500 2,000 2,500

Tomsk DisCoKubanenergo

MRSK N.C.MRSK SouthMRSK VolgaMRSK Urals

MRSK N.WestMRSK C&VLenenergo

MRSK SiberiaMRSK Center

MOESK

Source: Company data Source: Bloomberg, Alfa Research

After power generation, the distribution segment is currently the second-largest segment in the Russian utilities sector in terms of market cap, amounting to $13 bln, or 18% of the total market cap of all listed companies in the Russian utilities universe.

MRSK Holding is now the fourth largest name in the sector in terms of MCap after RusHydro, Federal GridCo and OGK-4. Mosenergo and Inter RAO are the two other largest names in the power sector.

Among MRSKs, MOESK, MRSK Center and MRSK Siberia are the three largest stocks, having the highest MCaps at the moment.

Distribution is the second-largest segment in the Russian utilities sector by market cap

Equity Market


26

Figure 44: Russian electricity sector MCap, $ bln Figure 45: Distribution is the 2nd largest segment

41

125 1 3

13

0

10

20

30

40

50

60

70

80

90 Generation Distribution TransmissionVICs Supply Other

Generation54%

VICs7%

Other4%

Transm-n16%

Distrib-n18%

Supply2%

Source: Bloomberg, Alfa Research Source: Bloomberg, Alfa Research

Figure 46: MRSK Holding has 4th largest MCap, $ Figure 47: Top 5 underlying MRSKs by MCap, $ mln

13.412.0

5.0 4.6 3.8 3.3

0.0

4.0

8.0

12.0

16.0

20.0

Rus

Hyd

ro

FGC

OG

K-4

MR

SKH

oldi

ng

Mos

ener

go

Inte

r RAO

2,110

1,353911 747 730

0

1,000

2,000

3,000

MOESK MRSKCenter

MRSKSiberia

Lenenergo MRSKCenter

and Volga

Source: Bloomberg, Alfa Research Source: Bloomberg, Alfa Research

Equity Market


27

The economics of the DisCo business The place of DisCos in the sector’s value chain For a better understanding of the role of distribution companies in the Russian utilities sector, we have provided a chart showing the place of DisCos in the sector’s overall value chain:

Figure 48: Current place of DisCos in sector value chain

electricity flowsmoney flows

Supply Companies

pay retail electricity tariffHydro-OGK

Electricity consumers - participants in WEM

Federal Grid Company

(National Grid)Small end users

pay generators' price

Block-Stations

Major Consumers

Rosenergoatom

pay distribution tariff

Distribution Companies

IPPs

Retail Electricity Marketpay transmission tariff

Wholesale Electricity Market

OGK/TGK

purchase electricity losses


The above figure demonstrates that distribution companies in Russia have supply companies as their main consumers. Supply companies purchase electricity from generators on the wholesale market and then re-sell it to their customers on the regional level. However, they are obliged to pay distribution tariffs to the DisCos for the physical “last mile” delivery of the electricity to end-users.

On the other hand, DisCos are obliged to pay transmission tariffs established by the government to the Federal Grid Company. This transmission tariff is set by the Federal Tariff Service. In fact, this payment for electricity transmission by DisCos is a component of their operating expenses, amounting on average to 20-30% of total OPEX and thus always reflected in the respective tariff for DisCos. Transmission tariffs are thus passed through distribution tariffs onto supply companies purchasing the electricity on the wholesale market, and eventually onto their customers through regional end-user tariffs.

Essentially, DisCos’ role in the sector value chain protects them from the non-payment and cash accumulation problems still persisting in some problematic regions of Russia. Supply companies fully take on these risks as they directly interact with end-users, including households, regional communal services and small and medium-sized industrial consumers. Meanwhile, supply companies are obliged to pay DisCos for providing physical electricity distribution services regardless of their ability to collect cash from their end-user customers on a timely basis. At this time, supply companies are exposed to much greater risk from this situation and are thus less predictable than distribution companies, for whom local authorities constitute the sole uncertainty regarding state-controlled regulations.

However, during the crisis in 2009, many MRSKs faced serious problems with non-payment owing to the poor payment discipline of end-user customers, who were late in paying their suppliers. This in turn made it difficult for the suppliers to pay MRSKs.

Figure 47 depicts the value chain in the Russian utilities sector as it is expected to be after the completion of all the transformations caused by the current cycle of reforms:

DisCos collect cash from supply companies but are obliged to pay tariffs to the FGC

DisCos’ position in the value chain better protects them from non-payments unlike supply companies

The role of MRSKs will remain the same going forward

Equity Market


28

Figure 49: The target value chain and DisCos

electricity flowsmoney flowsElectricity consumers -

participants in WEM

Block-Stations

Wholesale Electricity Market

OGK/TGK

pay competitive generators' price

Major Consumers

IPPsFederal Grid

Company MRSKs Supply Companies

Hydro-OGK

pay RAB distribution tariff

Small end usersRosenergoatom

pay liberalized retail electricity tariff

pay RAB transmission tariff

purchase electricity losses

Retail Electricity Market


The DisCos’ position in the value chain is unlikely to change as even the new tariff regulation scheme does not assume any change in the role of DisCos in the industry.

Electricity loss reimbursement Distribution networks accept electricity from high-voltage grids owned mainly by the Federal Grid Company and other suppliers (i.e. power plants directly connected to distribution networks). Transmission of this electricity to end-consumers through their low-voltage distribution networks is then referred to as the “last mile.” However, as with any electricity transfers over a network, DisCos lose a portion of the transmitted electricity in the process, which they are then obliged to reimburse through additional purchases.

In Russia, all DisCos purchase power from supply companies to compensate for their electricity losses in accordance with the tariffs set by the local Regulatory Energy Commissions for loss payments. Electricity loss reimbursement expenses in the framework of approved loss standards are included in the tariff for DisCos because this is an item of operating expenses for the companies. DisCos are thus able to purchase their losses on the wholesale market, where prices are usually lower than retail tariffs set by supply companies. However, this is not currently favorable because of the high cost of equipping all DisCos’ reception centers with electricity calculation systems. Nevertheless, Russian DisCos do not rule out that they may begin purchasing electricity directly on the wholesale electricity market soon.

The mechanism for DisCo electricity loss reimbursement is shown in Figure 48 below.

DisCos reimburse electricity losses through purchases from supply companies

Equity Market


29

Figure 50: Electricity loss reimbursement

High-voltage Grid DisCo End Consumers

Electricity input

Electricity salesElectricity sales

Electricity losses

Supply Company

Purchases losses

Electricity bought from supply company

Source: Alfa Bank Research

Generally, total electricity losses pertaining to networking companies (both transmission and distribution) are divided into two main types: technological losses and commercial losses. The former occur due to the physical process of electricity transmission through the networks and change depending on the state of the networks, their depreciation, the outdoor temperature and other factors. More significantly, there is a strong negative correlation between voltage and loss, a result of the physics of electricity.

Commercial losses, on the other hand, are caused by poor counting of electricity leading to ordinary theft. Commercial losses are currently considered the main lever for diminishing total electricity losses via implementation of modern technologies for better measurement of electricity consumption.

The technology of electricity distribution The main technological process behind electricity distribution is shown in Figure 49. Electricity is supplied to DisCos from a national grid through electric power supply centers, which are generally owned by the Federal Grid Company as they involve high-voltage networking assets. The electricity then goes to distribution centers (owned by DisCos) via high-voltage supply cables and is then delivered to transformer centers through distribution cable lines, which lower electricity voltage and deliver electricity through transformer substations to end users.

Electricity distribution involves a number of stages

Electricity losses over networks are divided into two types

Equity Market


30

Figure 51: Electricity distribution technology National Grid

Electric Power Supply Center High-voltage

Distribution Center

Transformer Center

Transformer Substation 1

Transformer Substation 2 … Transformer

Substation N 0.4 kV

End electricity users

Supply Cables

Distribution Cables

Source: Alfa Bank Research

Equity Market


31

RAB-based tariff setting: How does it work? RAB framework to replace inefficient and archaic “cost plus” tariff setting approach In 2011 the electricity market will be fully liberalized, i.e. the generating business will become completely deregulated (except for electricity sold to households). On the other hand, monopolistic businesses, primarily networks including distribution and transmission, will become state-regulated. However, the current “cost plus” mechanism is set to be replaced with the more progressive and internationally accepted RAB regulation-based system.

“Cost plus,” as its title suggests, involves setting tariffs by tying them to the regulated company’s operating costs, interest expenses, taxes, dividends and necessary capital expenditures financed through own funds, deriving so-called “necessary regulated revenues.” The distribution tariff is then calculated by dividing necessary regulated revenues by electricity sales, i.e. electricity input net of network losses. Figures 50-51 below compare the typical breakdown of “cost plus” distribution tariffs for Russian MRSKs.

Figure 52: “Cost plus” tariff breakdown Figure 53: “Cost +” vs. RAB tariff setting methodology

76.5%

10.8%

8.5%

4.0% 0.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 DividendsNecessary CAPEX TaxesOperating expenses Depreciation

"Cost +" regulation RAB-based regulation

Margin RAB depreciation

Return on new CAPEXReturn on old CAPEX

Income tax Income taxControllable OPEX Controllable OPEX

Non-controllable OPEX Non-controllable OPEX

"Cost +" revenue RAB tariff revenue

Depreciation


“Cost plus” tariff regulation approach has three major drawbacks discussed below.

“Cost plus” tariffs for regional DisCos are set on an annual basis by local regulators (Regional Energy Committees). Tariff-setting usually becomes a subject of debate between local governments – who control the Regional Energy Committees – and their regional DisCo’s management, meaning that establishing economically justified and adequate tariffs under “cost plus” directly depends on the lobbying abilities of the local DisCo management. Tariff-setting under “cost plus” thus becomes more a political than an economic issue.

The “cost plus” system, because of its reliance on operating expenses and political favor, is not ideal for DisCos. On the contrary, it sometimes leads to artificially exaggerated operating costs in order to justify higher tariffs. If a company reports that it has substantially reduced costs within the previous regulated period, it would likely face a reduction in its tariffs during the next period because the local regulator is always interested in keeping tariffs as low as possible to satisfy the local authorities’ constituents. Thus, under the current framework, DisCos are unable to retain saving from reduced costs if they report their operating expenses properly. Therefore it does not come as a surprise that

RAB approach is being adopted by Russian electric utilities

Decisions on tariffs highly politicized, especially at regional level

“Cost plus” fails to encourage cost savings

Equity Market


32

operating expenses for Russian DisCos (less depreciation) are currently exaggerated so much, which suggests decent upside potential on cost savings from cutting out the “operating fat”. Needless to say, that all these inefficiencies of DisCos are passed through their tariffs on to the end-user customers.

Another unfavorable peculiarity of the “cost plus” regulation system is the one-year term for tariffs. This system makes DisCo business less predictable as their prices may change dramatically from year to year without any relationship to the market. This consequently leads to a situation in which distribution companies in Russia are virtually unable to attract long-term loans as their creditors consider the one-year tariff terms as very risky because no one knows what tariff the company will receive in the next period due to political decisions.

RAB-based regulatory approach is free of virtually all the above-mentioned drawbacks of the “cost plus” mechanism and thus proved itself in many countries around the globe such as the Czech Republic, Hungary, Bulgaria, Romania, Ukraine, Lithuania and Latvia as very efficient and progressive way to regulate tariffs of natural monopolies.

Considering these problems and the large-scale investment needs of the power distribution segment, the government has decided to adopt the RAB-based regulatory approach for MRSKs (see the section below on the timeframe discussion). Below we provide a comparative analysis of “cost plus” and RAB.

Figure 54: RAB vs. “cost plus” Criteria "Cost plus" regulation RAB-based regulation

Attractiveness for investors No mechanisms of regulation of return on investments Approved market return reflecting industrial risks - important part of regulation

Efficiency incentives 2 years after payback period of cost savings measures 5 years for cost saving fact

Reliability incentives No regulation of reliability Economic incentives and responsibility for reliability and quality of provided services

Reduction of regulatory risks One-year regulation period: risks are unacceptable bystrategic investors

5 year regulation period (3 year - for the first transitional period)

Reduction of macroeconomic risks Tariffs are indexed with inflationTariffs are indexed with factual inflation and change of federal factors, i.e. tariffs are irrelevant to the all non-

controlled factorsSource: Federal Grid Company, Alfa Bank Research

The comparison of RAB-based tariff setting and “cost plus” is additionally visualized by the below chart:

Figure 55: The evolution of tariff regulation

Operating expenses Depreciation of initial RAB Return on iRAB

Asset depreciation + Depreciation of newly invested capital (new RAB)

Return on newly invested capital

+CAPEX Operating expenses

Taxes and charges Controlled by Company Watched by Regulator

Encourages investments and operating efficiencyComposition of the tariff-based revenue:

Compensates for the incurred costsComposition of the tariff-based revenue:

"Cost plus" tariff approach

Net income

Reserved for reinvestment and

dividends

RAB-based regulatory approach

Source: Federal Grid Company, Alfa Research

The legislation for RAB-based tariff regulation was approved by the government and went into force with Decree #109 of June 18, 2008,

Legislation came in force, rules are clear

“Cost plus” prevents active borrowing restraining efficiency of MRSK business

RAB regulation is more progressive according to all criteria

Equity Market


33

accompanied by an order by the Federal Tariff Service describing the methodology of tariff regulation. Decree #30 of January 19, 2010 sets the schedule of RAB-based tariff introduction in various regions across Russia for MRSKs and other distribution companies (discussed below).

The RAB-based regulation being applied to Russian companies in the meantime is illustrated in the figure below:

Figure 56: RAB regulation in Russia Network reliability and development requirements:- Reliability and quality standards- Forecasting of on-peak loads and new connections

Economic incentives for efficiency and reliability:

- Bonuses/penalties for reliability based on the benchmarking approach- Retention of costs cut for some period

Adjustments to impartial factors:- Adjustment to inflation- Reimbursement of costs not subject to company control- Adjustment to volume of electricity sales

Regulated gross revenue

Tariff

- Plans for improvement of service quality

Depreciation of Invested Capital + Return on Invested Capital + Operating expenses

CAPEX:Market cost of

capital (reflecting risks)

OPEX reimbursement:- Reconstruction plans - Level of historical costs- Network development plans - Order for reducing costs along with technical progress

Source: Federal Grid Company

The guiding principle behind RAB is its encouragement of private investment in the sector through guaranteed fair returns and efficiency incentives. As in most foreign countries that have adopted the system, RAB in Russia relies on several key assumptions:

• The establishment of a regulatory asset base (RAB) at the replacement cost of a company’s assets determined by independent appraisers and approved by regulators. New investments will increase this base while depreciation will diminish it;

• Inclusion into the tariff of a 12% post-tax rate of return from the RAB for the newly-built assets while using 6-9-12% rates of return for the first three years of the first regulatory period for the “old” assets included into initial RAB (iRAB);

• A five-year tariff-setting period (three years for the first transitional period) and an annual adjustment for inflation and changing national macroeconomic factors;

• Allowing companies to retain the benefits of operating cost savings within the five-year period while bearing the economic responsibility to fulfill the reliability and service requirements.

It is expected that in real terms the RAB tariff will decline in the future, primarily thanks to OPEX improvements and an increasing share of RAB depreciation and return on RAB components in the aggregate RAB-based tariff vs. the OPEX component.

The general decision-making system for RAB-based tariff setting for MRSKs and their branches is depicted in the below chart.

Assumptions behind RAB

Who are the decision makers?

Equity Market


34

Russia’s Federal Tariff Service (FTS) plays a central role in this scheme, as it is responsible for general supervision of the process and development and adjustment of the methodology of tariff setting while also determining and estimating the key macroeconomic parameters that should be incorporated into the tariffs. In turn, the FTS works with the Ministry of Energy to set various industry standards and also with the Ministry of Economic Development, which is responsible for macro forecasts and therefore closely watches the tariffs of natural monopolies.

Every region of Russia has a Regional Energy Committee (REC), which is responsible for tariff setting at the regional level. Not surprisingly, RECs report directly to local authorities, which usually fight high tariff increases. RECs are the final decision-makers for MRSKs, since their tariffs are set at the regional level. RECs are in turn supervised by the FTS, which must approve their tariff decisions. MRSKs submit the required data, including operational reports and OPEX numbers, to RECs for tariff calculation.

Figure 57: Decision-making scheme for MRSK RAB-based tariffs Regional Authorities

Ministry of Energy Regional Energy Committee (REC) 1 DisCo (MRSK branch) 1

… …

Federal Tariff Service (FTS) Regional Energy Committee (REC) j DisCo (MRSK branch) k

… …

Ministry of Economic Development

Regional Energy Committee (REC) n DisCo (MRSK branch) m

Regional Authorities

Regional Authorities

Submissions of required data, e.g. OPEX



RAB-based tariff setting



Main macro parameters for tariff regulation; general supervision and methodology

Calculate tariffs and determine the expected tariff growth rates, submit to FTS for approval




RAB introduction timeframe RAB-based tariffs were introduced for the first time in 2008 for distribution companies in five regions: MRSK Center (Belgorod and Tver), MRSK South (Astrakhan), MRSK Volga (Orenburg) and MRSK Urals (Perm). In 2009 the list of RAB-based regulated regional branches of MRSKs was extended to include five more regions.

The official schedule for adoption of RAB-based tariffs by MRSKs approved by the government is presented below:

MRSK Holding to be 100% RAB-regulated as of 2011

Equity Market


35

Figure 58: The official schedule for introduction of RAB-based tariffs for MRSKs RAB tariffs in place RAB tariffs in place MRSK Center 2008 2009 1H10 2H10 2011 MRSK North Caucasus 2008 2009 1H10 2H10 2011 Belgorodenergo 1 1 1 1 1 Dagenergo 1Bryanskenergo 1 1 Stavropolenergo 1 1Kostromaenergo 1 1 Kabardino-Balkarian Branch 1Kurskenergo 1 1 1 Karachaevo-Cherkessian Branch 1Lipetskenergo 1 1 1 1 Severo-Ossetian Branch 1Orelenergo 1 1 Ingush Branch 1Smolenskenergo 1 1 % of RAB-regulated branches 0% 0% 0% 17% 100%Tambovenergo 1 1 Tverenergo 1 1 1 1 1 MRSK Northwest 2008 2009 1H10 2H10 2011 Voronezhenergo 1 1 Arkhenergo 1Yarenergo 1 1 1 Karelenergo 1% of RAB-regulated branches 18% 27% 45% 100% 100% Kolenergo 1 Komienergo 1MRSK Center and Volga 2008 2009 1H10 2H10 2011 Novgorodenergo 1 1 1Vladimirenergo 1 1 1 Vologdaenergo 1Ivenergo 1 Pskovenergo 1 1Kalugaenergo 1 1 1 % of RAB-regulated branches 0% 0% 14% 29% 100%Kirovenergo 1 Marienergo 1 MRSK Volga 2008 2009 1H10 2H10 2011 Nizhnovenergo 1 Samara distribution networks 1 1Ryazanenergo 1 1 1 1 Saratov distribution networks 1 1Tulenergo 1 1 1 1 Ulyanovsk distribution networks 1 1Udmurtenergo 1 1 1 Mordovenergo 1 1% of RAB-regulated branches 0% 22% 56% 56% 100% Penzaenergo 1 1 Chuvashenergo 1 1MRSK South 2008 2009 1H10 2H10 2011 Orenburgenergo 1 1 1 1 1Astrakhanenergo 1 1 1 1 1 % of RAB-regulated branches 14% 14% 14% 100% 100%Volgogradenergo 1 1 Rostovenergo 1 1 1 1 MRSK Urals 2008 2009 1H10 2H10 2011 Kalmenergo 1 1 Kurganenergo 1 1 1 1% of RAB-regulated branches 25% 50% 50% 100% 100% Permenergo 1 1 1 1 1 Sverdlovenergo 1MOESK 2008 2009 1H10 2H10 2011 Chelyabenergo 1City of Moscow 1 % of RAB-regulated branches 25% 50% 50% 50% 100%Moscow region 1 % of RAB-regulated branches 0% 0% 0% 0% 100% MRSK Siberia 2008 2009 1H10 2H10 2011 Altaienergo 1Lenenergo 2008 2009 1H10 2H10 2011 Buryatenergo 1St Petersburg 1 Krasnoyarskenergo 1Leningrad region 1 Kuzbass DisCo 1% of RAB-regulated branches 0% 0% 0% 0% 100% Omskenergo 1 1 1 Tyvaenergoholding 1Kubanenergo 2008 2009 1H10 2H10 2011 Khakasenergo 1 1Kubanenergo 1 Chitaenergo 1 1% of RAB-regulated branches 0% 0% 0% 100% 100% % of RAB-regulated branches 0% 0% 13% 38% 100% Tyumenenergo 2008 2009 1H10 2H10 2011 Tomsk DisCo 2008 2009 1H10 2H10 2011 Tyumenenergo 1 Tomsk DisCo 1% of RAB-regulated branches 0% 0% 0% 0% 100% % of RAB-regulated branches 0% 0% 100% 100% 100%Source: Government, Company data, Alfa Research

The gray cells show those branches of MRSKs which have RAB-based distribution tariffs over the respective periods. We calculated the percentage of RAB-based regulated branches as a simple ratio of the number of RAB-based regulated branches to the total number of branches in the respective distribution company.

As can be seen, all the regions covered by MRSK Holding must be RAB-based regulated as of the beginning of 2011. At the start of this year, only 29% (18 out of 63) of regional DisCos belonging to MRSK Holding had

Equity Market


36

adopted RAB-based tariffs, while this number is expected to reach 62% (39 out of 63) as of July 1, 2010 according to the above schedule, followed by 100% on January 1, 2011.

All the “pilot” DisCos adopted a three-year period as their first regulatory period, which is expected to be followed by five-year periods thereafter. Federal Grid Company also adopted a three-year period as of the beginning of 2010. Meanwhile, all those MRSK branches with three-year periods, as well as FGC, are now allowed to extend their first regulatory period to five years, and many MRSKs have already expressed interest in doing so.

The principles of RAB-based tariff setting The regulators determine the base parameters at the beginning of each regulatory period. They are fixed and cannot be revised for the entire period (this list is not complete and contains only the most important parameters):

• Base OPEX: base regulatory level of operating expenses;

• X-factor: the index of OPEX efficiency, implying the prescribed percentage of annual OPEX reduction. The X-factor must be set within a range of 1.0% and 2.5%;

• iRAB: initial regulatory asset base set by regulators;

• NWC: net working capital determined by regulators for the entire regulatory period. NWC is determined within a range of 4% and 8% of the regulatory revenue for the previous year;

• RoR: rate-of-return on invested capital determined by the FTS together with the Ministry of Economic Development.

Under the RAB regulatory framework, revenue consists of three main components. The so-called “smoothing” mechanism is sometimes applied to revenues to avoid sharp tariff increases over the regulatory period:

ttttt SmoothingreturnRABondepreciatiRABOPEXvenue +++=Re

where OPEXt is total regulatory OPEX of year t, RAB depreciationt – annual depreciation of the regulatory asset base including newly built assets, RAB returnt – regulatory return on RAB, while Smoothingt is a special adjustment applied to the revenue to smooth out tariff growth.

Below, we discuss each component of revenue in more detail.

The OPEX number consists of controllable and uncontrollable operating costs:

ttt OPEXableUncontrollOPEXleControllabOPEX +=

Controllable OPEX includes the following items:

• Raw materials;

• Repair and maintenance costs;

• Personnel expenses;

• Other OPEX.

Controllable OPEX does not include PP&E depreciation charge, interest expenses, lease payments and other costs, many of which are part of uncontrollable OPEX.

The annual controllable OPEX is calculated based on the following formula:

3-year period might be extended to 5-years, new branches will adopt 5-years period

Key base factors set for the entire regulatory period

Three components form RAB-based revenue

OPEX combines controllable and uncontrollable costs

Equity Market


37

)1(

)1()""1(1

t

ttt

indexquantityAssetsElasticity

ifactorXOPEXleControllabOPEXleControllab

⋅+⋅

⋅+⋅−−⋅= −

Where the X-factor has already been described, it – inflation, Elasticity – the index of elasticity of OPEX to asset growth (0.75x for the first regulatory period) and Assets quantity indext – the increase of the regulated company’s assets measured in special units.

Uncontrollable OPEX comprises the following cost items which cannot be controlled by the regulated company and must be reimbursed by tariffs based on the actual numbers:

• Transmission charge – paid by MRSKs to the Federal Grid Company; the FGC’s tariffs are also set in accordance with RAB-based methodology as of 2010;

• Lease payments;

• Income tax;

• Other costs.

RAB depreciation is calculated every year by dividing the previous year-end full regulatory asset base (including depreciation) by 35 years, which is the prescribed depreciation period for RAB.

RAB return comprises return on “old” RAB, i.e. the assets owned by the DisCo prior to the first year of regulation under RAB and included into its iRAB by regulators, and return on newly-built assets, which form the so-called “new” RAB:

newtoldtt RoRNewRABRoROldRABreturnRAB ⋅+⋅= −− 11

In turn, the following formula determines “new” RAB performance:

∑=

+−=t

jtjt NWCRABofondepreciatidAccumulateCAPEXRABNew

1

where jCAPEX - annual CAPEX of year j, while the other components of the equation have already been described.

It is not difficult to notice that the RAB methodology concept is not different from the residual income valuation concept, whereby the equity value of a company is equal to its book value when and only when ROIC equals the company’s WACC. Therefore, the RAB-regulated company should be valued in line with its RAB when the return on RAB set by the regulator is in line with its actual WACC, applied to discount its future free cash flow.

The table below provides an example of a perfect hypothetical company whose return on RAB coincides with its WACC and actual OPEX does not differ from that prescribed by its regulator.

RAB depreciation: depreciation period is 35 years

RAB return

When does the EV/RAB=1 equation hold?

Equity Market


38

Figure 59: The RAB-based regulated utility, hypothetical example of a perfect company* Line Unit 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 1st regulatory period 2nd regulatory period 3rd regulatory periodMacro assumptions Annual inflation 9% 9% 8% 8% 7% 6% 5% 4% 4% 4% 4% 4%OPEX Allowed controllable expenses (1) c.u. 1,000 1,069 1,143 1,211 1,271 1,321 1,360 1,400 1,442 1,484 1,528 Allowed uncontrollable expenses (2) c.u. 1,000 1,080 1,166 1,248 1,323 1,389 1,445 1,502 1,563 1,625 1,690 Factual OPEX total (5)=(3)+(4) c.u. 2,000 2,149 2,310 2,459 2,594 2,710 2,805 2,903 3,004 3,110 3,218 - controllable OPEX (3) c.u. 1,000 1,069 1,143 1,211 1,271 1,321 1,360 1,400 1,442 1,484 1,528 - uncontrollable OPEX (4) c.u. 1,000 1,080 1,166 1,248 1,323 1,389 1,445 1,502 1,563 1,625 1,690 Regulatory X-factor (6) % 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%Factual efficiency gain (factual X-factor) (7) % 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%RAB performance iRAB before depreciation (8) c.u.18,993iRAB, eoy (9) c.u.10,000"Old" RAB, boy (10) c.u. n/a 10,000 9,457 8,915 8,372 7,829 7,287 6,744 6,201 5,659 5,116 4,573 "Old" RAB depreciation (11) c.u. n/a 543 543 543 543 543 543 543 543 543 543 543 "New" RAB, eoy (12) c.u. n/a 2,000 4,000 5,943 7,829 9,657 10,429 11,143 11,829 12,486 13,114 13,714 "New" RAB depreciation (13) c.u. n/a 0 57 114 171 229 286 314 343 371 400 429 CAPEX (14) c.u. n/a 2,000 2,000 2,000 2,000 2,000 1,000 1,000 1,000 1,000 1,000 1,000 Net working capital, eoy (15) c.u. n/a 100 100 100 100 100 100 100 100 100 100 100 NWC change (16) c.u. n/a 100 0 0 0 0 0 0 0 0 0 0 Aggregate RAB, eoy (17) c.u.10,000 11,557 12,958 14,30115,586 16,815 16,987 17,130 17,244 17,330 17,388 17,416 - "old" RAB (18)=(10)-(11) c.u.10,000 9,457 8,915 8,372 7,829 7,287 6,744 6,201 5,659 5,116 4,573 4,031 - "new" RAB (19)=(12)-(13)+(15) c.u. 0 2,100 4,043 5,929 7,757 9,529 10,243 10,929 11,586 12,214 12,814 13,386 Allowed revenue Rate-of-return for the "old" assets (20) % 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%Rate-of-return for the newly built assets (21) % 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%Total RAB, eoy (22)=(23)+(24) c.u.10,000 11,557 12,958 14,30115,586 16,815 16,987 17,130 17,244 17,330 17,388 17,416 - "old" RAB, eoy (23)=(18) c.u.10,000 9,457 8,915 8,372 7,829 7,287 6,744 6,201 5,659 5,116 4,573 4,031 - "new" RAB, eoy (24)=(19) c.u. 2,100 4,043 5,929 7,757 9,529 10,243 10,929 11,586 12,214 12,814 13,386 Return on RAB, total (25)=(26)+(27) c.u. 1,408 1,627 1,824 2,014 2,195 2,368 2,392 2,412 2,428 2,440 2,448 - return on the "old" RAB (26)=(20)*(23) c.u. 1,408 1,332 1,255 1,179 1,102 1,026 950 873 797 720 644 - return on the newly built RAB (27)=(21)*(24) c.u. 0 296 569 835 1,092 1,342 1,442 1,539 1,631 1,720 1,804 Allowed OPEX (28)=(1)+(2) c.u. 2,000 2,149 2,310 2,459 2,594 2,710 2,805 2,903 3,004 3,110 3,218 RAB depreciation (29)=(11)+(13) c.u. 543 600 657 714 771 828 857 886 914 943 971 Return on RAB (30)=(25) c.u. 1,408 1,627 1,824 2,014 2,195 2,368 2,392 2,412 2,428 2,440 2,448 Income tax (31)=(38) c.u. 352 407 456 503 549 592 598 603 607 610 612 Total allowed revenue (32)=(28)+…+(31) c.u. 4,303 4,783 5,247 5,690 6,108 6,498 6,651 6,803 6,953 7,102 7,250 DCF value Revenues (33)=(32) c.u. 4,303 4,783 5,247 5,690 6,108 6,498 6,651 6,803 6,953 7,102 7,250 - % growth, y-o-y % n/a 11% 10% 8% 7% 6% 2% 2% 2% 2% 2%OPEX (inclusive D&A) (34)=(5)+(40) c.u. 2,543 2,749 2,967 3,173 3,365 3,538 3,662 3,788 3,918 4,052 4,190 - % growth, y-o-y % n/a 8% 8% 7% 6% 5% 3% 3% 3% 3% 3%EBITDA (35)=(36)+(40) c.u. 2,303 2,634 2,937 3,231 3,514 3,788 3,847 3,900 3,949 3,993 4,031 - % growth, y-o-y % n/a 14% 12% 10% 9% 8% 2% 1% 1% 1% 1% - % margin % 54% 55% 56% 57% 58% 58% 58% 57% 57% 56% 56%Operating income (EBIT) (36)=(33)-(34) c.u. 1,760 2,034 2,281 2,517 2,743 2,959 2,990 3,015 3,035 3,050 3,060 - % growth, y-o-y % n/a 16% 12% 10% 9% 8% 1% 1% 1% 0% 0% - % margin % 41% 43% 43% 44% 45% 46% 45% 44% 44% 43% 42%Tax rate (37) % 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Income tax (38)=(37)*36) c.u. 352 407 456 503 549 592 598 603 607 610 612 NOPAT (39)=(36)-(38) c.u. 1,408 1,627 1,824 2,014 2,195 2,368 2,392 2,412 2,428 2,440 2,448 Plus: D&A expense (40)=(29) c.u. 543 600 657 714 771 828 857 886 914 943 971 - % growth, y-o-y % n/a 11% 10% 9% 8% 7% 3% 3% 3% 3% 3%Less: Changes in WC (41)=(16) c.u. 100 0 0 0 0 0 0 0 0 0 0 Operating Cash Flow (42)=(39)+(40)-(41) c.u. 1,851 2,227 2,481 2,728 2,966 3,196 3,249 3,297 3,342 3,383 3,419 CAPEX (43)=(14) c.u. 2,000 2,000 2,000 2,000 2,000 1,000 1,000 1,000 1,000 1,000 1,000 - CAPEX/D&A x 3.7x 3.3x 3.0x 2.8x 2.6x 1.2x 1.2x 1.1x 1.1x 1.1x 1.0x - % of sales % 46% 42% 38% 35% 33% 15% 15% 15% 14% 14% 14%Unlevered FCF (44)=(42)-(43) c.u. -149 227 481 728 966 2,196 2,249 2,297 2,342 2,383 2,419 Projection year x 1 2 3 4 5 6 7 8 9 10 11Discount rate (WACC) % 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%Discount factor x 0.88x 0.77x 0.67x 0.59x 0.52x 0.45x 0.40x 0.35x 0.31x 0.27x 0.23x

Equity Market


39

Line Unit 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 1st regulatory period 2nd regulatory period 3rd regulatory periodPresent value of FCF c.u. -131 174 324 430 500 996 894 801 716 638 568 Terminal year cash flow c.u. 2,452 Terminal value c.u. 17,415 PV of TV (45) c.u. 3,584 Sum of PV of FCF (46) c.u. 6,415 Total EV (47)=(45)+(46) c.u. 10,000 iRAB (48)=(9) c.u. 10,000 EV/iRAB (49)=(47)/(48) x 1.0x * Note: c.u. – conditional unit Source: Alfa Research

Figure 60: Perfect RAB-based regulated company, key assumptions iRAB c.u. 10,000Depreciation of the assets reflected in iRAB % 47%Regulated rate-of-return % 14.1%WACC % 14.1%Years of return on invested capital years 35Annual X-factor for OPEX % 1.0%Assumed annual efficiency gain % 1.0%Base year OPEX: "Controllable" c.u. 1,000"Uncontrollable" c.u. 1,000Actual OPEX: "Controllable" c.u. 1,000"Uncontrollable" c.u. 1,000Net working capital c.u. 100Perpetual growth rate % 0%Income tax rate % 20%Source: Alfa Research

Figure 61: WACC of a perfect company WACC components: Share of equity 70.0%Share of debt 30.0%Risk free rate 7.0%Base equity risk premium 7.0%Liquidity premium 2.0%Cost of equity 16.0%Cost of debt (pre-tax) 12.0%Cost of debt (post-tax) 9.6%WACC 14.1%Source: Alfa Research

As can be seen, the DCF-based EV of the company (10,000) exactly matches its initial RAB (10,000) when the regulatory return on its assets (14.1%) matches its WACC (14.1%). When this condition does not hold, the company’s EV/RAB multiple differs from 1.0x depending on whether its regulatory return is higher or lower than its WACC.

Another factor that also contributes to a possible discrepancy between EV and RAB, and hence a deviation of EV/RAB from 1.0x, is OPEX, which might differ from those numbers set by the regulator. In other words, if the company exceeds its regulatory OPEX in a given regulatory period, its intrinsic value may be substantially higher than its RAB, and vice versa.

In sum, we stress that there are two main factors on which a company might out- or underperform and which then determine the EV/RAB multiple: out- or underperformance on WACC vs. rate-of-return and on actual OPEX vs. regulatory OPEX.

Equity Market


40

The charts below demonstrate the sensitivity of our perfect company’s EV/RAB multiple to various combinations of WACC vs. return and actual OPEX vs. the regulatory one.

Figure 62: Sensitivity to return-WACC spread, ppts Figure 63: Sensitivity to OPEX spread*, ppts

(0.5)x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

-14-12-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14

EV/RAB

(1.0)x

(0.5)x

0.0x

0.5x

1.0x

1.5x

-14-12-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14

EV/RAB

Source: Alfa Research * Note: OPEX spread is defined here as difference between actual efficiency gain and regulatory X-factor Source: Alfa Research

The charts depict the extent to which the EV/RAB multiple might deviate from 1.0x depending on the out- or underperformance of the regulated company on WACC and OPEX.

The EV/RAB multiples of some real-world companies regulated under RAB are provided in the table below:

Figure 64: EV/RAB of real-world companies Company Country EV/RABFederal Grid Company Russia 0.46x Transelectica SA Romania 0.78x National Grid UK 1.41x Terna Spa Italy 1.27x SP Ausnet Australia 1.01x Elia Belgium 1.16x Source: Bloomberg, Company data, Alfa Research

The table shows that some of the companies are trading at substantial discounts to their RAB, with EV/RAB multiples well below 1.0x (e.g. Russia’s Federal Grid Company, with 0.55x EV/RAB, mainly explained by the large discrepancy between its WACC and rate-of-return, as well as Romania’s Transelectrica), while others are trading at a large premium over their RAB (e.g. UK-based National Grid, valued at 1.42x EV/RAB).

Although WACC and OPEX are the two main factors affecting EV/RAB, there are a number of other factors that could also lead to EV and RAB discrepancies. Regarding our DCF-based fair EV/RAB multiples for the MRSKs covered in this report, see the discussion in the Valuation section.

Equity Market


41

MRSK Holding Address: Tel: E-mail: Website: CEO CFO Investor Relations

26/1 Ulansky pereulok,

Moscow, Russia 107996

+7 (495) 710 53 33

[email protected]

http://www.holding-mrsk.ru

Nikolay Shvets

Aleksey Demidov

Maria Stepanova

Bloomberg Ticker Reuters ticker Closing price, ord Closing price, pref Average daily volume Free float 52 week change Shares outstanding, ord Shares outstanding, pref Market Cap, mln 12 M Target price, ord 12M Target price, pref Upside, ord Recommendation, ord Upside, pref Recommendation, pref

MRKH RU

MRKH.RTS

$0.107

$0.078

$3.35 mln

25%

108%

926,021,679

93,264,311

$4,570

$0.184

$0.168

71%

O/W

115%

O/W

STRENGTHS AND OPPORTUNITIES

- The most liquid name in the MRSK universe

- Provides most diversified exposure to distribution play via big holding structure

- Possible center of consolidation of MRSKs under one umbrella of a single-share company

- Likely candidate for MSCI inclusion

WEAKNESSES AND THREATS

- Regulatory risks (only 23% of regional branches adopted RAB-based tariffs)

- State-controlled status: the interests of government might not coincide with the interests of minority shareholders

- Possible dilution via potential series of new share issues in favor of the government

- The strengths of particular MRSKs are diversified away when investors gain exposure to the sector through MRSK Holding shares

Figure 65: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 13,271 14,917 17,546 20,443 23,781 27,395 31,031EBITDA, $ mln 2,890 2,323 3,340 4,503 6,045 7,513 9,087Net Income, $ mln 463 57 502 822 1,382 2,039 2,796EV/Sales, x 1.0 0.9 0.8 0.7 0.6 0.5 0.4 EV/EBITDA, x 4.7 5.8 4.1 3.0 2.2 1.8 1.5 P/E, x 9.9 79.7 9.1 5.6 3.3 2.2 1.6Operating margin, % 11.6% 5.9% 8.9% 11.4% 14.9% 17.7% 20.1%EBITDA margin, % 21.8% 15.6% 19.0% 22.0% 25.4% 27.4% 29.3%Net margin, % 3.5% 0.4% 2.9% 4.0% 5.8% 7.4% 9.0%Net debt/EBITDA 1.39 2.33 2.02 1.74 1.35 1.04 0.49EV/Throughput, $/MWh 24.38 24.26 23.85 23.47 23.01 22.45 21.80Source: Company data, Alfa Research

Kubanenergo

Independent energos

Isolated areas

MRSK Center

MRSK Center-Volga

MRSK South

MRSK North Caucasus

MRSK Northwest

MRSK Volga

MRSK Urals

Tyumenenergo

MRSK Siberia

Moscow United DisCo

Lenenergo

Tomsk DisCo

Kubanenergo

Independent energos

Isolated areas

MRSK Center

MRSK Center-Volga

MRSK South

MRSK North Caucasus

MRSK Northwest

MRSK Volga

MRSK Urals

Tyumenenergo

MRSK Siberia

Moscow United DisCo

Lenenergo

Tomsk DisCo

Equity Market


42

Figure 66: Shareholder breakdown Figure 67: Relative share price performance

Others45%

Russian gov-t55%

$0.00

$0.05

$0.10

$0.15

$0.20

Jun-09 Dec-09 Jun-10

MRSK Holding RTSI$ Index Rebased

Source: Company data, Alfa Research Source: Alfa Research

Figure 68: MRKH MCap vs. marked-to-market Figure 69: MRKH discount to SoP value

0

50,000

100,000

150,000

200,000

250,000

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

SoP MRKH valueMRKH Mcap

RUB mln

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10


Figure 70: Grid length breakdown, km Figure 71: Transformer capacity breakdown,

259,146

1,027,711

686,01084,929

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Overhead lines (>110 kV) Overhead lines (6-35 kV)

Overhead lines (0.4 kV) Cable lines

207,17678,022

102,995

0

100,000

200,000

300,000

400,000

500,000

High voltage (>110 kV) Medium voltage (6-35 kV)

Low voltage (0.4 kV)


Equity Market


43

Figure 72: Key financial figures Figure 73: Distribution tariff evolution $mln

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%

Revenue EBITDA EBITDA Margin

0100200300400500600700800900

1000

2009

2010

2011

2012

2013

2014

2015

0%

5%

10%

15%

20%

25%RUB/MWh


Figure 74: Distribution tariff vs. inflation Figure 75: Revenue breakdown by branch, RUB bln

0%

5%

10%

15%

20%

25%

2010

2011

2012

2013

2014

2015

Distribution tarif f Ruble inflation

0

200

400

600

800

1,000

2009 2010 2011 2012 2013 2014 2015MOESK MRSK CenterMRSK Center&Volga MRSK UralsMRSK Siberia+Tomsk DisCo Other


Figure 76: CAPEX breakdown by branch, RUB mln Figure 77: MRSKs current EV/iRAB ranking

020406080

100120140160180

2009 2010 2011 2012 2013 2014 2015MOESK LenergoMRSK Center MRSK Center&VolgaMRSK Urals Other

0.16

x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est


Equity Market


44

MRSK Holding DCF valuation

Figure 78: MRSK Holding DCF model 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 14,917 17,546 20,443 23,781 27,395 31,031 31,287 33,479 35,358 37,254 39,253 - % growth, y-o-y 12% 18% 17% 16% 15% 13% 1% 7% 6% 5% 5%EBITDA 2,323 3,340 4,503 6,045 7,513 9,087 7,374 7,484 7,517 7,431 7,372 - % growth -20% 44% 35% 34% 24% 21% -19% 1% 0% -1% -1% - % margin 16% 19% 22% 25% 27% 29% 24% 22% 21% 20% 19%Operating income (EBIT) 881 1,559 2,334 3,532 4,846 6,248 4,418 4,420 4,345 4,156 4,225 - % growth -43% 77% 50% 51% 37% 29% -29% 0% -2% -4% 2% - % margin 6% 9% 11% 15% 18% 20% 14% 13% 12% 11% 11%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 176 312 467 706 969 1,250 884 884 869 831 845 NOPAT 704 1,247 1,867 2,826 3,877 4,998 3,535 3,536 3,476 3,324 3,380 Depreciation and amortization 1,443 1,781 2,169 2,513 2,667 2,839 2,956 3,065 3,172 3,276 3,393 - % growth 7% 23% 22% 16% 6% 6% 4% 4% 3% 3% 4%Changes in WC -565 -185 -192 -61 -146 -109 -728 -397 -365 -415 -425 Operating Cash Flows 2,712 3,214 4,228 5,400 6,690 7,946 7,219 6,997 7,013 7,015 7,198 CAPEX 3,324 4,243 4,422 4,811 5,301 3,669 3,033 3,140 3,211 3,295 3,393 - CAPEX/D&A 2.3x 2.4x 2.0x 1.9x 2.0x 1.3x 1.0x 1.0x 1.0x 1.0x 1.0x - % of sales 22% 24% 22% 20% 19% 12% 10% 9% 9% 9% 9%Unlevered FCF -612 -1,029 -194 589 1,389 4,277 4,186 3,857 3,802 3,720 3,805 Discount rate (WACC) 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%Discount factor 0.9 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.3 Present value of FCF -576 -858 -144 386 806 2,198 1,906 1,556 1,358 1,178 1,067 Assumed perpetual growth rate 0% Terminal year cash flow 3,805 Terminal value 29,567 PV of terminal value 8,293 Sum of PV of FCF 8,876 Total EV 17,169 Net debt, 2009 4,029 Minority interest, 2009 4,954 Fair equity value 8,186 # of shares (mln) common 41,042 preferred 2,075 pref/com discount 0.9158x Fair value per share $0.191 Source: Alfa Research

Figure 79: WACC calculation Cost of debt Risk-free rate 6.0%Corporate debt spread 3.0%Debt rate implied 9.0%Statutory tax rate 20.0%After-tax cost of debt 7.2%Cost of equity Risk-free rate 6.0%Base equity risk premium 7.0%Company-specific adjustments 0.8%Adjusted equity risk premium 7.8%Liquidity adjustment 1.2Cost of equity 15.3%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 12.9%Source: Alfa Research

Equity Market


45

MRSK Holding condensed financials

Figure 80: MRSK Holding condensed financials, $ mln INCOME STATEMENT 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 14,723 13,271 14,917 17,546 20,443 23,781 27,395 31,031 31,287 33,479 35,358 37,254 39,253 Electricity distribution 12,079 11,042 13,651 16,193 19,001 22,216 25,707 29,220 29,359 31,433 33,185 34,942 36,791 Electricity sales 803 844 935 1,006 1,079 1,178 1,277 1,380 1,479 1,579 1,688 1,807 1,936 Other 2,644 2,229 1,265 1,352 1,441 1,565 1,688 1,812 1,928 2,046 2,174 2,312 2,461Operating expenses 13,605 11,737 14,036 15,987 18,109 20,249 22,549 24,784 26,869 29,060 31,013 33,098 35,027 Electricity transmission charge 3,794 2,206 3,284 4,301 5,258 6,022 7,274 8,577 9,923 11,383 12,548 13,809 15,102 Personnel costs 2,315 2,390 2,587 2,729 2,871 3,088 3,290 3,473 3,630 3,795 3,967 4,147 4,335 Electricity losses purchased 2,449 2,461 3,123 3,374 3,807 4,316 4,720 5,027 5,265 5,492 5,757 6,041 6,346 D&A charge 1,254 1,350 1,443 1,781 2,169 2,513 2,667 2,839 2,956 3,065 3,172 3,276 3,147Operating income (EBIT) 1,202 1,540 881 1,559 2,334 3,532 4,846 6,248 4,418 4,420 4,345 4,156 4,225EBITDA 2,456 2,890 2,323 3,340 4,503 6,045 7,513 9,087 7,374 7,484 7,517 7,431 7,372Interest income 47 26 29 22 25 31 36 41 47 47 50 53 56Interest expense 339 590 803 620 783 909 966 916 603 231 0 0 0Other 76 -33 4 4 4 4 4 5 5 5 5 5 6Pre-tax income (EBT) 986 943 110 964 1,580 2,658 3,920 5,378 3,867 4,240 4,401 4,214 4,287Income tax charge 255 215 22 193 316 532 784 1,076 773 848 880 843 857Minority interest 323 266 31 270 442 744 1,098 1,506 1,083 1,187 1,232 1,180 1,200Net income 409 463 57 502 822 1,382 2,039 2,796 2,011 2,205 2,288 2,191 2,229Margins, % EBITDA margin 17% 22% 16% 19% 22% 25% 27% 29% 24% 22% 21% 20% 19%Operating margin 8% 12% 6% 9% 11% 15% 18% 20% 14% 13% 12% 11% 11%Pre-tax margin 7% 7% 1% 5% 8% 11% 14% 17% 12% 13% 12% 11% 11%Net margin 3% 3% 0% 3% 4% 6% 7% 9% 6% 7% 6% 6% 6% BALANCE SHEET 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and equivalents 662 966 749 850 1,022 1,189 1,370 1,552 1,564 2,803 6,510 10,137 13,598Accounts receivable 2,571 2,348 2,683 3,045 3,662 4,260 4,907 5,558 5,604 5,997 6,333 6,673 7,031Inventories 405 374 461 502 581 647 725 800 872 948 1,015 1,088 1,163Other 143 266 303 344 414 482 555 629 634 678 716 755 795Total current assets 3,781 3,954 4,196 4,741 5,679 6,577 7,557 8,539 8,674 10,426 14,575 18,652 22,587Net PPE 17,979 18,583 20,620 21,716 23,969 26,267 28,901 29,731 29,807 29,883 29,923 29,942 30,188Deferred tax assets 144 147 148 139 139 139 139 139 139 139 139 139 139Other non-current assets 559 1,130 1,273 1,415 1,673 1,924 2,195 2,468 2,491 2,658 2,802 2,947 3,100Total non-current assets 18,681 19,860 22,041 23,270 25,781 28,330 31,234 32,337 32,438 32,680 32,864 33,028 33,427Total assets 22,462 23,814 26,237 28,011 31,460 34,907 38,791 40,876 41,112 43,106 47,438 51,680 56,014Current debt 1,880 2,224 845 1,266 1,640 1,797 2,289 1,507 578 0 0 0 0Accounts payable 4,706 4,429 5,457 5,940 6,880 7,656 8,582 9,472 10,322 11,220 12,017 12,872 13,760Other 106 68 77 88 105 123 141 160 161 172 182 192 202Total current liabilities 6,693 6,720 6,379 7,294 8,626 9,575 11,012 11,138 11,061 11,393 12,199 13,064 13,963Non-current debt 2,951 2,772 5,329 6,345 7,195 7,561 6,868 4,520 1,735 0 0 0 0Deferred tax liabilities 966 907 914 857 857 857 857 857 857 857 857 857 857Other non-current liabilities 708 1,636 1,652 1,553 1,557 1,561 1,565 1,570 1,574 1,579 1,585 1,590 1,596Total non-current liabilities 4,625 5,314 7,895 8,754 9,608 9,979 9,290 6,946 4,166 2,436 2,441 2,447 2,452Total liabilities 11,317 12,034 14,274 16,048 18,234 19,554 20,302 18,085 15,227 13,829 14,640 15,511 16,415Minority interest 4,650 4,954 5,025 4,972 5,415 6,159 7,257 8,762 9,845 11,032 12,265 13,445 14,645Share capital 1,462 1,426 1,437 1,347 1,347 1,347 1,347 1,347 1,347 1,347 1,347 1,347 1,347Reserves 8 27 27 25 25 25 25 25 25 25 25 25 25Retained earnings 5,025 5,374 5,474 5,618 6,440 7,822 9,861 12,657 14,668 16,873 19,161 21,352 23,582Total shareholders equity 6,495 6,826 6,938 6,990 7,812 9,194 11,233 14,029 16,040 18,245 20,533 22,725 24,954Total liabilities and equity 22,462 23,814 26,237 28,011 31,460 34,907 38,791 40,876 41,112 43,106 47,438 51,680 56,014 CASH FLOW STATEMENT 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 2,568 2,276 2,899 3,358 4,408 5,609 6,915 8,166 7,380 7,085 7,057 7,062 7,001CF from investing activity -3,873 -2,109 -3,324 -4,243 -4,422 -4,811 -5,301 -3,669 -3,033 -3,140 -3,211 -3,295 -3,393CF from financing activity 1,396 158 201 1,038 187 -632 -1,434 -4,315 -4,335 -2,706 -139 -140 -148Cash flow for the period 91 325 -224 153 172 167 181 182 13 1,238 3,707 3,627 3,461XR effect -124 -20 7 -52 0 0 0 0 0 0 0 0 0Cash at the beginning of the year 695 662 966 749 850 1,022 1,189 1,370 1,552 1,564 2,803 6,510 10,137Cash at the end of the year 662 966 749 850 1,022 1,189 1,370 1,552 1,564 2,803 6,510 10,137 13,598Source: Alfa Research

Equity Market


46

MOESK (Moscow United DisCo) Address: Tel: E-mail: Website: CEO CFO Investor Relations

3, bld 2, Paveletsky proezd,

Moscow 115114, Russia

+7 (495) 980 12 88

[email protected]

http://www.moesk.ru

Andrey Konovalov

Olga Bulanova

Darya Baranova

Bloomberg Ticker Reuters ticker Closing price Average daily volume Free float 52 week change Shares outstanding Market Cap, mln 12 M Target price Upside Recommendation

MSRS RU

MSRS.RTS

$0.043

$0.57 mln

10%

32%

48,707,091,574

$2,110

$0.075

72%

O/W

STRENGTHS AND OPPORTUNITIES:

Favorable geography of business (Moscow and region)

Strong payment discipline

High liquidity relative to other MRSKs

WEAKNESSES AND THREATS:

Regulatory risks: 0% of iRAB has been approved

Figure 81: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 2,457 2,527 2,586 3,027 3,770 4,498 5,354 EBITDA, $ mln 1,029 798 701 909 1,394 1,839 2,438 Net Income, $ mln 360 117 141 280 741 1,074 1,526EV/Sales, x 1.4 1.4 1.4 1.2 0.9 0.8 0.7EV/EBITDA, x 3.4 4.4 5.0 3.9 2.5 1.9 1.4P/E, x 5.9 18.0 15.0 7.5 2.8 2.0 1.4Operating margin, % 27.9% 13.3% 10.1% 15.8% 25.2% 30.6% 36.5%EBITDA margin, % 41.9% 31.6% 27.1% 30.0% 37.0% 40.9% 45.5%Net margin, % 14.7% 4.6% 5.4% 9.3% 19.6% 23.9% 28.5%Net debt/EBITDA 1.38 1.65 2.30 2.20 1.66 1.23 0.79EV/Throughput, $/MWh 49.7 49.2 53.6 51.7 50.0 48.3 46.6EV/iRAB, x 0.51 Source: Company data, Alfa Research

MOESKMOESK

Equity Market


47


Gazprom31%

Moscow gov-t8%

Other10%

MRSK Holding

51%

$0.00

$0.02

$0.04

$0.06

$0.08

$0.10

$0.12

Jun-09 Dec-09 Jun-10MOESK RTSI$ Index RebasedMRSK Holding Rebased


Figure 84: Key financial figures Figure 85: Electricity transmission and losses

$mln

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%


ths.GWH

01020304050607080

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

Througput Losses % of losses


Figure 86: Grid length breakdown, km Figure 87: Transformer capacity breakdown, MVA

11,357

31,944

23,513

46,387

0

20,000

40,000

60,000

80,000

100,000

120,000



41,863 1,949

19,335

010,000

20,00030,00040,00050,000

60,00070,000




Equity Market


48

Figure 88: Distribution tariff evolution Figure 89: Distribution tariff vs. inflation

0200400600800

1,0001,2001,4001,6001,800

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0%

5%

10%

15%

20%

25%

30%RUB/MWh

0%

5%

10%

15%

20%

25%

30%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E



Figure 90: MOESK revenue breakdown, RUB mln Figure 91: MRSKs current EV/iRAB ranking

-20,000

30,000

80,000

130,000

180,000

230,000

2011 2012 2013 2014 2015

Smoothing OPEX RAB Depr. Return on RAB

0.16

x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est


Equity Market


49

MOESK DCF valuation Figure 92: MOESK DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 2,457 2,527 2,586 3,027 3,770 4,498 5,354 5,102 5,407 5,659 5,914 6,178 - % growth, y-o-y 30% 3% 2% 17% 25% 19% 19% -5% 6% 5% 5% 4% - distribution revenues 2,091 2,527 2,586 3,027 3,770 4,498 5,354 5,102 5,407 5,659 5,914 6,178 - connection fee proceeds 336 - - - - - - - - - - - - other 30 - - - - - - - - - - -EBITDA 1,029 798 701 909 1,394 1,839 2,438 1,948 1,995 2,009 2,012 2,014 - % growth 50% -22% -12% 30% 53% 32% 33% -20% 2% 1% 0% 0% - % margin 42% 32% 27% 30% 37% 41% 46% 38% 37% 36% 34% 33%Operating income (EBIT) 686 335 262 480 948 1,375 1,954 1,446 1,475 1,484 1,481 1,476 - % growth 82% -51% -22% 83% 98% 45% 42% -26% 2% 1% 0% 0% - % margin 28% 13% 10% 16% 25% 31% 36% 28% 27% 26% 25% 24%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 137 67 52 96 190 275 391 289 295 297 296 295 NOPAT 549 268 210 384 759 1,100 1,563 1,156 1,180 1,187 1,184 1,181Depreciation and amortization 343 463 439 429 446 464 484 502 520 525 531 538 - % growth 11% 35% -5% -2% 4% 4% 4% 4% 3% 1% 1% 1%Changes in WC -196 -127 -69 -69 5 9 62 -39 37 62 75 94 Operating Cash Flows 1,087 858 717 881 1,199 1,555 1,985 1,697 1,662 1,651 1,640 1,625 CAPEX 585 570 995 1,018 1,100 1,006 997 576 592 609 626 644 - CAPEX/D&A 1.7x 1.2x 2.3x 2.4x 2.5x 2.2x 2.1x 1.1x 1.1x 1.2x 1.2x 1.2x - % of sales 24% 23% 38% 34% 29% 22% 19% 11% 11% 11% 11% 10%Unlevered FCF 502 288 -278 -137 99 549 988 1,122 1,070 1,041 1,014 981 Discount rate (WACC) 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%Discount factor 1.0 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 0.3 Present value of FCF 502 270 -230 -100 64 312 496 496 418 359 308 263 Assumed perpetual growth rate 0% Terminal year cash flow 981 Terminal value 7,340 PV of terminal value 1,967 Sum of PV of FCF 2,656 Total EV 4,623 Net debt, 2009 1,422 Fair equity value 3,201 # of shares: Common, mln 48,707 Fair value per share $0.066 Implied EV/RAB 0.67 Implied 2010E EV/EBITDA 5.8 Implied 2010E EV/S 1.8 Source: Alfa Research

Figure 93: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 3%Debt rate implied 9%Statutory tax rate 20%After-tax cost of debt 7%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: IFRS standards 0%Transparency and disclosure 0%Presence of large institutional investor 0%Payment discipline in the region 0%Regulatory risk 2%Liquidity 1%Adjusted equity risk premium 10%Cost of equity 16%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 13.4%Source: Alfa Research

Equity Market


50

MOESK condensed financials Figure 94: MOESK condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 1,894 2,457 2,527 2,586 3,027 3,770 4,498 5,354 5,102 5,407 5,659 5,914 6,178 Electricity distribution 1,386 2,091 2,527 2,586 3,027 3,770 4,498 5,354 5,102 5,407 5,659 5,914 6,178 Connection fees 394 336 - - - - - - - - - - - Other 114 30 - - - - - - - - - - -Operating expenses 1,597 1,807 2,192 2,324 2,548 2,822 3,123 3,401 3,656 3,932 4,175 4,434 4,702 Raw materials 65 60 65 69 73 79 84 89 93 97 102 107 112 Personnel costs 263 311 337 357 376 405 433 458 480 503 527 552 578 Payroll taxes 39 29 31 33 35 37 40 42 44 46 48 51 53 Federal Grid charge 54 196 292 392 491 572 701 831 964 1,112 1,233 1,364 1,498 Electricity losses purchased 169 359 453 452 531 621 695 748 789 833 878 927 978 Depreciation 519 420 553 585 616 664 709 750 786 824 863 905 948 Other expenses 488 433 461 436 427 443 461 482 500 517 523 529 535Other operating income 81 37 - - - - - - - - - - -Operating income (EBIT) 378 686 335 262 480 948 1,375 1,954 1,446 1,475 1,484 1,481 1,476EBITDA 686 1,029 798 701 909 1,394 1,839 2,438 1,948 1,995 2,009 2,012 2,014Interest income 18 12 - - - - - - - - - - -Interest expense 95 226 185 82 121 - - - - - - - -Other operating expenses -5 4 - - - - - - - - - - -Pre-tax income (EBT) 305 468 150 180 359 948 1,375 1,954 1,446 1,475 1,484 1,481 1,476Profit tax 45 116 30 36 72 190 275 391 289 295 297 296 295 Income before minority interest 260 352 120 144 287 759 1,100 1,563 1,156 1,180 1,187 1,184 1,181Minority interest: share of net result 17 8 -3 -3 -7 -18 -26 -37 -27 -28 -28 -28 -28Net income 276 360 117 141 280 741 1,074 1,526 1,129 1,152 1,159 1,157 1,153Margins, % EBITDA margin 36.2% 41.9% 31.6% 27.1% 30.0% 37.0% 40.9% 45.5% 38.2% 36.9% 35.5% 34.0% 32.6%Operating margin 19.9% 27.9% 13.3% 10.1% 15.8% 25.2% 30.6% 36.5% 28.3% 27.3% 26.2% 25.0% 23.9%Pre-tax margin 16.1% 19.1% 6.0% 7.0% 11.8% 25.2% 30.6% 36.5% 28.3% 27.3% 26.2% 25.0% 23.9%Net margin 14.6% 14.7% 4.6% 5.4% 9.3% 19.6% 23.9% 28.5% 22.1% 21.3% 20.5% 19.6% 18.7%Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 209 251 127 125 151 189 225 268 255 270 330 970 1,575 Accounts receivable 354 290 303 299 362 451 538 640 610 646 676 707 738 Inventories 97 73 87 92 107 119 134 147 159 172 184 196 209 Other current assets 0 23 23 22 22 22 22 22 22 22 22 22 22 Total current assets 660 637 540 538 641 780 918 1,076 1,045 1,110 1,211 1,894 2,544 Intangible assets 5 3 3 3 3 3 3 3 3 3 3 3 3 PPE 5,515 5,857 6,011 6,174 6,764 7,418 7,961 8,473 8,547 8,620 8,703 8,799 8,905 Deferred tax assets 85 - - - - - - - - - - - -Other non-current assets 862 739 773 763 922 1,148 1,370 1,631 1,554 1,647 1,724 1,802 1,882 Total non-current assets 6,467 6,599 6,787 6,940 7,689 8,570 9,334 10,107 10,104 10,269 10,430 10,603 10,790 Total assets 7,127 7,236 7,328 7,478 8,330 9,350 10,252 11,183 11,149 11,379 11,641 12,498 13,334 Current financial debt 671 1,002 193 275 538 627 623 549 319 152 - - -Accounts payable 763 1,290 1,453 1,454 1,600 1,696 1,789 1,842 1,863 1,875 1,855 1,824 1,775 Other current liabilities 29 24 24 23 23 23 23 23 23 23 23 23 23 Total current liabilities 1,463 2,316 1,670 1,751 2,161 2,346 2,435 2,414 2,204 2,050 1,878 1,846 1,797 Non-current debt 1,236 671 1,255 1,460 1,615 1,881 1,869 1,648 957 457 - - -Deferred tax liabilities 253 251 253 237 237 237 237 237 237 237 237 237 237 Other non-current liabilities 1,502 1,042 1,051 985 985 985 985 985 985 985 985 985 985 Total non-current liabilities 2,991 1,965 2,559 2,682 2,837 3,103 3,091 2,870 2,179 1,679 1,222 1,222 1,222 Total liabilities 4,454 4,281 4,228 4,433 4,998 5,449 5,525 5,285 4,384 3,729 3,100 3,069 3,020 Minority interest 22 13 16 18 25 43 69 106 133 161 189 217 244 Share capital 826 805 812 761 761 761 761 761 761 761 761 761 761 Additional paid-in capital 630 614 619 581 581 581 581 581 581 581 581 581 581 Retained earnings 1,196 1,522 1,652 1,685 1,965 2,516 3,316 4,451 5,291 6,148 7,011 7,871 8,729Total shareholders equity 2,651 2,942 3,083 3,027 3,307 3,858 4,657 5,793 6,633 7,490 8,352 9,213 10,070 Total liabilities and shareholders equity 7,127 7,236 7,328 7,478 8,330 9,350 10,252 11,183 11,149 11,379 11,641 12,498 13,334 Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 1,037 1,082 895 733 906 1,199 1,555 1,985 1,697 1,662 1,651 1,640 1,625 CF from investing activity -1,492 -575 -570 -995 -1,018 -1,100 -1,006 -997 -576 -592 -609 -626 -644 CF from financing activity 406 -459 -451 268 139 -62 -513 -946 -1,134 -1,055 -982 -374 -376 Cash flow for the period -50 48 -126 7 26 37 36 43 -13 15 59 640 605 XR effect -19 -3 1 -4 - - - - - - - - -Cash at the beginning of the year 277 206 252 123 125 151 189 225 268 255 270 330 970 Cash at the end of the year 209 251 127 125 151 189 225 268 255 270 330 970 1,575 Source: Alfa Research

Equity Market


51

Lenenergo Address: Tel: E-mail: Website: CEO CFO Investor Relations

1 Konstitutsyi square,

St.Petersburg 196247,

Russia

+7 (812) 595 86 13

[email protected]

http://www. lenenergo.ru

Dmitry Ryabov

Sergey Nikolaev

Ulyana Davydova

Bloomberg Ticker Reuters ticker Closing price, ord Closing price, pref Average daily volume Free float 52 week change Shares outstanding, ord Shares outstanding, pref Market Cap, mln 12 M Target price, ord 12M Target price, pref Upside, ord Recommendation, ord Upside, pref Recommendation, pref

LSNG RU

LSNG.RTS

$0.72

$0.80

$0.02 mln

20%

46%

926,021,679

93,264,311

$747

$0.91

$0.83

25%

E/W

4%

E/W


- Favorable geography of business (St. Petersburg and Leningrad region)

- High historical dividend yield for preferred shares

- Strong payment discipline

- Good transparency and disclosure


- Regulatory risks (none of two branches have adopted RAB-based tariffs)

- Poor liquidity

- Planned additional preferred share issue

- Very high debt burden

Figure 95: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 764 850 855 1,084 1,428 1,942 2,496 EBITDA, $ mln 188 280 275 196 347 615 1,041 Net Income, $ mln 92 36 -11 42 336 668 1,032EV/Sales, x 1.6 1.4 1.4 1.1 0.8 0.6 0.5EV/EBITDA, x 6.4 4.3 4.4 6.1 3.5 2.0 1.2P/E, x 8.1 20.6 - 18.0 2.2 1.1 0.7Operating margin, % 18.9% 12.5% 2.2% 15.1% 29.5% 43.1% 51.9%EBITDA margin, % 24.6% 32.9% 32.2% 18.1% 24.3% 31.7% 41.7%Net margin, % 12.1% 4.3% -1.3% 3.8% 23.5% 34.4% 41.4%Net debt/EBITDA 2.41 2.31 4.32 8.80 5.82 3.33 1.59EV/Throughput, $/MWh 43.4 42.6 41.9 41.9 41.9 41.5 40.3EV/iRAB, x 0.40 Source: Company data, Alfa Research

LenenergoLenenergo

Equity Market


52


MRSK Holding

46%

Other31%

$0.00

$0.50

$1.00

$1.50

$2.00

Jun-09 Dec-09 Jun-10Lenenergo RTSI$ Index RebasedMRSK Holding Rebased



$mln

0.00

500.00

1,000.00

1,500.00

2,000.00

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%


ths.GWH

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




7,015

20,684

11,587

12,219

0

10,000

20,000

30,000

40,000

50,000

60,000



2,123

10,961

6,818

0

5,000

10,000

15,000

20,000

25,000




St.Petersburg administration

23%

Equity Market


53


0200400600800

1,0001,2001,4001,6001,800

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0%

10%

20%

30%

40%

50%

60%RUB/MWh

0%

10%

20%

30%

40%

50%

60%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E



Figure 104: Lenenergo revenue breakdown, RUB mln Figure 105: MRSKs current EV/iRAB ranking

-10,0000

10,00020,00030,00040,00050,00060,00070,00080,000

2011 2012 2013 2014 2015


0.16

x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est


Equity Market


54

Lenenergo DCF valuation Figure 106: Lenenergo DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 764 850 855 1,084 1,428 1,942 2,496 2,130 2,256 2,363 2,462 2,561 - % growth, y-o-y 10% 11% 1% 27% 32% 36% 29% -15% 6% 5% 4% 4% - distribution revenues 603 947 887 1,152 1,474 1,942 2,496 2,130 2,256 2,363 2,462 2,561 - connection fee proceeds 259 - - - - - - - - - - - - other 29 - - - - - - - - - - -EBITDA 188 280 275 196 347 615 1,041 1,506 1,040 1,072 1,093 1,102 - % growth ! 49% -2% -29% 77% 77% 69% 45% -31% 3% 2% 1% - % margin 27% 37% 32% 23% 32% 43% 54% 60% 49% 47% 46% 45%Operating income (EBIT) 122 144 106 19 164 421 838 1,294 824 860 885 897 - % growth ! 18% -26% -83% 781% 157% 99% 55% -36% 4% 3% 1% - % margin 18% 19% 13% 2% 15% 30% 43% 52% 39% 38% 37% 36%Tax rate 29% -20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 35 -29 21 4 33 84 168 259 165 172 177 179NOPAT 173 85 15 131 337 670 1,036 659 688 708 718 724Depreciation and amortization 135 169 178 183 194 203 211 216 212 208 204 201 - % growth 106% 24% 5% 3% 6% 5% 4% 2% -2% -2% -2% -2%Changes in WC 89 45 -51 -24 12 11 23 -27 15 29 35 44Operating Cash Flows 220 209 243 339 519 862 1,223 903 885 887 887 881CAPEX 238 347 817 788 721 716 566 272 279 287 295 201 - CAPEX/D&A 1.8x 2.1x 4.6x 4.3x 3.7x 3.5x 2.7x 1.3x 1.3x 1.4x 1.4x 1.0x - % of sales 31% 41% 96% 73% 50% 37% 23% 13% 12% 12% 12% 8%Unlevered FCF -19 -138 -574 -450 -202 146 658 631 605 600 592 680Discount rate (WACC) 15% 50% 150% 250% 350% 450% 550% 650% 750% 850% 950% 1050%Discount factor 1.00 0.93 0.81 0.70 0.60 0.52 0.45 0.39 0.34 0.29 0.26 0.22Present value of FCF -19 -129 -462 -314 -122 76 298 248 206 177 151 150Assumed perpetual growth rate 0% Terminal year cash flow 680 Terminal value 4,399 PV of terminal value 972 Sum of PV of FCF 280 Total EV 1,252 Net debt, 2009 454 Fair equity value 798 # of shares: common 926,021,679 preferred 93,264,311 pref/com discount 0.9158 Fair value per share $0.789 Implied EV/RAB 0.42Implied 2010E EV/EBITDA 4.6Implied 2010E EV/S 1.5Source: Alfa Research

Figure 107: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 3%Debt rate implied 9%Statutory tax rate 20%After-tax cost of debt 7%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: IFRS standards 0%Transparency and disclosure 1%Presence of large institutional investor 0%Payment discipline in the region 0%Regulatory risk 2%Liquidity 3%Adjusted equity risk premium 13%Cost of equity 19%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 15.5%Source: Alfa Research

Equity Market


55

Lenenergo condensed financials Figure 108: Lenenergo condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 692 764 850 855 1,084 1,428 1,942 2,496 2,130 2,256 2,363 2,462 2,561 Electricity distribution 462 516 850 855 1,084 1,428 1,942 2,496 2,130 2,256 2,363 2,462 2,561 Connection fees 210 222 - - - - - - - - - - - Other 20 25 - - - - - - - - - - -Operating expenses 570 619 743 836 920 1,007 1,104 1,201 1,305 1,397 1,478 1,565 1,657 Raw materials 9 7 8 8 8 9 10 10 11 11 12 12 13 Personnel costs 93 94 100 106 112 121 129 136 143 150 157 164 172 Federal Grid charge 111 98 164 215 255 282 330 381 447 511 564 621 679 Electricity losses purchased 125 131 167 186 211 239 260 278 297 311 326 342 359 Depreciation 68 135 169 178 183 194 203 211 216 212 208 204 201 Other expenses 165 154 135 143 151 163 174 184 193 202 212 222 232Operating income (EBIT) 122 144 106 19 164 421 838 1,294 824 860 885 897 905EBITDA 188 280 275 196 347 615 1,041 1,506 1,040 1,072 1,093 1,102 1,106Interest income 13 2 - - - - - - - - - - -Interest expense 50 41 61 33 112 - - - - - - - -Other operating expenses -70 28 - - - - - - - - - - -Pre-tax income (EBT) 155 77 46 -14 52 421 838 1,294 824 860 885 897 905Profit tax 45 -15 9 -3 10 84 168 259 165 172 177 179 181 Income before minority interest 111 92 36 -11 42 337 670 1,036 659 688 708 718 724Minority interest: share of net result 0 0 0 0 0 -1 -2 -3 -2 -2 -2 -2 -2Net income 111 92 36 -11 42 336 668 1,032 657 686 706 715 722Margins, % EBITDA margin 27.2% 36.6% 32.4% 23.0% 32.0% 43.1% 53.6% 60.3% 48.8% 47.5% 46.3% 44.7% 43.2%Operating margin 17.7% 18.9% 12.5% 2.2% 15.1% 29.5% 43.1% 51.9% 38.7% 38.1% 37.5% 36.4% 35.3%Pre-tax margin 22.5% 10.1% 5.4% -1.7% 4.8% 29.5% 43.1% 51.9% 38.7% 38.1% 37.5% 36.4% 35.3%Net margin 16.0% 12.1% 4.3% -1.3% 3.8% 23.5% 34.4% 41.4% 30.9% 30.4% 29.9% 29.1% 28.2% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 85 98 17 17 22 29 39 50 43 45 47 79 474 Accounts receivable 41 44 50 48 63 83 113 146 124 132 138 144 150 Inventories 8 12 14 16 18 20 23 25 27 30 32 34 36 Other current assets 217 156 157 148 148 148 148 148 148 148 148 148 148 Total current assets 350 310 239 228 251 280 322 368 342 354 365 404 808 Intangible assets 19 23 23 22 22 22 22 22 22 22 22 22 22 PPE 2,245 2,425 2,624 3,079 3,684 4,211 4,725 5,079 5,135 5,202 5,281 5,372 5,475 Long-term financial investments 10 17 18 16 16 16 16 16 16 16 16 16 16 Deferred tax assets 170 137 138 129 129 129 129 129 129 129 129 129 129 Other non-current assets 30 9 10 10 13 17 23 30 25 27 28 29 31 Total non-current assets 2,475 2,611 2,813 3,256 3,865 4,396 4,915 5,276 5,328 5,397 5,477 5,569 5,673 Total assets 2,826 2,921 3,051 3,485 4,116 4,676 5,238 5,644 5,669 5,751 5,842 5,973 6,481 Current financial debt 15 219 77 254 438 512 522 426 307 200 95 - -Accounts payable 477 609 576 593 635 645 666 677 686 681 660 633 597 Other current liabilities 38 18 18 17 17 17 17 17 17 17 17 17 17 Total current liabilities 529 845 672 865 1,090 1,175 1,205 1,121 1,010 898 772 650 614 Non-current debt 439 333 587 950 1,314 1,537 1,565 1,279 921 599 284 - -Deferred tax liabilities 199 175 176 165 165 165 165 165 165 165 165 165 165 Other non-current liabilities 193 52 52 49 49 49 49 49 49 49 49 49 49 Total non-current liabilities 830 560 815 1,164 1,528 1,751 1,779 1,493 1,135 813 499 214 214 Total liabilities 1,360 1,405 1,487 2,029 2,618 2,925 2,985 2,614 2,145 1,711 1,270 864 828 Minority interest 1 1 1 1 1 2 4 7 10 12 14 16 19 Share capital 186 182 183 172 172 172 172 172 172 172 172 172 172 Additional paid-in capital 1,166 1,143 1,152 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080 Retained earnings 112 191 229 204 245 497 997 1,771 2,263 2,777 3,306 3,842 4,382 Total shareholders equity 1,464 1,515 1,564 1,455 1,496 1,748 2,249 3,022 3,515 4,028 4,557 5,093 5,634 Total liabilities and shareholders equity 2,826 2,921 3,051 3,485 4,116 4,676 5,238 5,644 5,669 5,751 5,842 5,973 6,481

Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 364 213 221 250 361 519 862 1,223 903 885 887 887 881 CF from investing activity -409 -210 -347 -817 -788 -721 -716 -566 -272 -279 -287 -295 -304 CF from financing activity 138 12 45 568 433 209 -136 -647 -638 -603 -598 -560 -182 Cash flow for the period 92 15 -81 1 5 7 10 11 -7 3 2 32 395 XR effect -8 -1 0 -1 - - - - - - - - -Cash at the beginning of the year - 84 98 17 17 22 29 39 50 43 45 47 79 Cash at the end of the year 85 98 17 17 22 29 39 50 43 45 47 79 474 Source: Alfa Research

Equity Market


56

MRSK Center Address: Tel: E-mail: Website: CEO CFO Investor Relations

4/2 Glukharev alley,

Moscow, Russia 129090

+7 (495) 747 92 92

[email protected]

http://www.mrsk-1.ru

Eugeny Makarov

Eugeny Bronnikov

Eugeny Ochkasov


MRKC RU

MRKC.RTS

$0.032

$0.34 mln

30%

55%

42,217,941,468

$1,353

$0.069

115%

O/W


- Low regulatory risk (54% of iRAB approved by regulators)

- One of the most liquid MRSK stocks

- The best transparency and disclosure vs. other MRSKs

- Good chance of being privatized

- Presence of large institutional shareholder

- Strong payment discipline


- Regulatory risks (the remaining 46% of iRAB has yet to be approved; 55% of branches have yet to adopt RAB-based tariffs)

Figure 109: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 1,397 1,734 2,161 2,352 2,538 2,815 3,101 EBITDA, $ mln 345 537 828 875 904 986 1,084 Net Income, $ mln 101 256 493 536 542 586 626EV/Sales, x 1.3 1.0 0.8 0.8 0.7 0.6 0.6EV/EBITDA, x 5.2 3.3 2.2 2.0 2.0 1.8 1.6P/E, x 13.4 5.3 2.7 2.5 2.5 2.3 2.2Operating margin, % 13.6% 20.4% 29.6% 28.5% 26.7% 26.0% 25.3%EBITDA margin, % 24.7% 30.9% 38.3% 37.2% 35.6% 35.0% 35.0%Net margin, % 7.2% 14.7% 22.8% 22.8% 21.4% 20.8% 20.2%Net Debt/EBITDA 1.03 0.75 0.23 -0.10 0.03 0.20 -0.16EV/Throughput, $/MWh 33.5 34.2 34.0 33.9 33.6 32.8 31.6EV/iRAB, x 0.45 Source: Company data, Alfa Research

MRSK Tyumen

MRSK Siberia

Far East DisCo

Kostroma region

Yaroslavl regionTver region

Smolensk region

Orel regionKursk regionBelgorod region

Voronezh regionTambov region

Lipetsk region

Bryansk region MRSK Tyumen

MRSK Siberia

Far East DisCo

Kostroma region

Yaroslavl regionTver region

Smolensk region

Orel regionKursk regionBelgorod region

Voronezh regionTambov region

Lipetsk region

Bryansk region

Equity Market


57


MRSK Holding

50%

Other31%

Vladimir Lisin's

structures3%

Prosperity Capital16%

$0.00$0.01$0.02$0.03$0.04$0.05$0.06$0.07$0.08


MRSK Center RTSI$ Index RebasedMRSK Holding Rebased


Figure 112: Key financial figures Figure 113: Electricity transmission and losses $mln

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%


ths.GWH

0

10

20

30

40

50

60

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




29,673

201,033

145,041 4,921

050,000

100,000150,000200,000250,000300,000350,000400,000



22,062

8,952

14,864

0

10,000

20,000

30,000

40,000

50,000




Equity Market


58


0

200

400

600

800

1000

1200

2009

2010

2011

2012

2013

2014

2015

0%5%

10%15%20%

25%30%

35%40%

RUB/MWh

0%5%

10%15%20%25%30%35%40%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E



Figure 118: Revenue breakdown, RUB mln Figure 119: MRSKs current EV/iRAB ranking

0

20,000

40,000

60,000

80,000

100,000

2010 2011 2012 2013 2014


0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est


Figure 120: Revenue breakdown by branch, RUB mln Figure 121: Throughput breakdown by branch,

0

20,000

40,000

60,000

80,000

100,000

2011 2012 2013 2014 2015

Belgorodenergo Bryanskenergo VoronezhenergoKostromaenergo Kurskenergo LipetskenergoOrelenergo Smolenskenergo TambovenergoTverenergo Yarenergo

10,045

3,571

7,188

2,4014,804

6,036

2,087

3,339

2,589

4,506

6,564 BelgorodenergoBryanskenergoVoronezhenergoKostromaenergoKurskenergoLipetskenergoOrelenergoSmolenskenergoTambovenergoTverenergoYarenergo


Equity Market


59

MRSK Center DCF valuation Figure 122: MRSK Center DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 1,397 1,734 2,161 2,352 2,538 2,815 3,101 3,299 3,503 3,637 3,819 3,980 - % growth, y-o-y 2% 24% 25% 9% 8% 11% 10% 6% 6% 4% 5% 4% - distribution revenues 1,312 1,734 2,161 2,352 2,538 2,815 3,101 3,299 3,503 3,637 3,819 3,980 - connection fee proceeds 55 - - - - - - - - - - - - other 30 - - - - - - - - - - -EBITDA 345 537 828 875 904 986 1,084 1,103 1,112 1,082 1,088 1,067 - % growth -4% 56% 54% 6% 3% 9% 10% 2% 1% -3% 1% -2% - % margin 25% 31% 38% 37% 36% 35% 35% 33% 32% 30% 28% 27%Operating income (EBIT) 190 354 639 670 678 733 783 766 780 756 770 736 - % growth -14% 87% 80% 5% 1% 8% 7% -2% 2% -3% 2% -4% - % margin 14% 20% 30% 28% 27% 26% 25% 23% 22% 21% 20% 18%Tax rate 18% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 33 71 128 134 136 147 157 153 156 151 154 147NOPAT 157 284 511 536 542 587 626 613 624 605 616 589Depreciation and amortization 155 182 189 205 227 253 301 337 332 326 319 331

- % growth 12% 18% 4% 8% 10% 12% 19% 12% -1% -2% -2% 4%Changes in WC 36 40 34 4 -0 5 7 -2 -4 -8 -3 -7Operating Cash Flows 276 426 667 737 769 834 920 952 960 938 938 927CAPEX 220 442 457 452 749 863 394 405 417 384 390 331 - CAPEX/D&A 1.4x 2.4x 2.4x 2.2x 3.3x 3.4x 1.3x 1.2x 1.3x 1.2x 1.2x 1.0x - % of sales 16% 26% 21% 19% 29% 31% 13% 12% 12% 11% 10% 8%Unlevered FCF 56 -17 210 285 20 -28 526 547 543 555 548 596Discount rate (WACC) 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%Discount factor 1.00 0.94 0.84 0.74 0.66 0.58 0.52 0.46 0.41 0.36 0.32 0.29Present value of FCF 56 -16 175 211 13 -17 273 252 222 201 177 170Assumed perpetual growth rate 0%

Terminal year cash flow 596 Terminal value 4,708 PV of terminal value 1,347 Sum of PV of FCF 1,663 Total EV 3,010 Net debt, 2009 429 Fair equity value 2,581 # of shares: Common, mln 42,218 Fair value per share $0.061 Implied EV/RAB 0.76 Implied 2010E EV/EBITDA 5.6 Implied 2010E EV/S 1.7 Source: Alfa Research

Figure 123: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 3%Debt rate implied 9%Statutory tax rate 20%After-tax cost of debt 7.2%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 2%IFRS standards 0%Transparency and disclosure 0%Presence of large institutional investor 0%Payment discipline in the region 1%Regulatory risk 0%Liquidity 1%Adjusted equity risk premium 9%Cost of equity 15%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 12.7%Source: Alfa Research

Equity Market


60

MRSK Center condensed financials Figure 124: MRSK Center condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 1,371 1,397 1,734 2,161 2,352 2,538 2,815 3,101 3,299 3,503 3,637 3,819 3,980 Electricity distribution 1,238 1,312 1,734 2,161 2,352 2,538 2,815 3,101 3,299 3,503 3,637 3,819 3,980 Connection fees 104 55 - - - - - - - - - - - Other 29 30 - - - - - - - - - - -Operating expenses 1,190 1,231 1,380 1,521 1,681 1,861 2,082 2,318 2,533 2,723 2,881 3,050 3,244 Raw materials 56 49 50 53 55 59 63 66 69 72 75 78 81 Personnel costs 210 242 254 266 278 298 315 331 344 358 372 387 402 Payroll taxes 49 49 67 70 73 78 83 87 90 94 98 102 106 Federal Grid charge 159 176 258 345 427 502 628 763 906 1,068 1,178 1,297 1,418 Electricity losses purchased 279 327 378 398 432 473 501 519 526 528 550 574 600 Depreciation 139 155 182 189 205 227 253 301 337 332 326 319 331 Other expenses 300 233 191 201 210 225 238 250 261 271 282 294 306Other operating income 39 24 - - - - - - - - - - -Operating income (EBIT) 220 190 354 639 670 678 733 783 766 780 756 770 736EBITDA 358 345 537 828 875 904 986 1,084 1,103 1,112 1,082 1,088 1,067Interest income 0 0 - - - - - - - - - - -Interest expense 50 71 35 23 - - - - - - - - -Other operating expenses 8 -3 - - - - - - - - - - -Pre-tax income (EBT) 162 122 320 617 670 678 733 783 766 780 756 770 736Profit tax 59 21 64 123 134 136 147 157 153 156 151 154 147Income before minority interest 103 101 256 493 536 542 587 626 613 624 605 616 589Minority interest: share of net result 0 0 0 0 0 0 0 0 0 0 0 0 0Net income 103 101 256 493 536 542 586 626 613 624 605 616 589Margins, % EBITDA margin 26.1% 24.7% 30.9% 38.3% 37.2% 35.6% 35.0% 35.0% 33.4% 31.8% 29.7% 28.5% 26.8%Operating margin 16.0% 13.6% 20.4% 29.6% 28.5% 26.7% 26.0% 25.3% 23.2% 22.3% 20.8% 20.2% 18.5%Pre-tax margin 11.8% 8.7% 18.4% 28.5% 28.5% 26.7% 26.0% 25.3% 23.2% 22.3% 20.8% 20.2% 18.5%Net margin 7.5% 7.2% 14.7% 22.8% 22.8% 21.4% 20.8% 20.2% 18.6% 17.8% 16.6% 16.1% 14.8%Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 3 12 17 21 91 25 28 168 561 948 1,351 1,745 2,153Accounts receivable 176 167 214 257 289 312 346 381 405 430 447 469 489Inventories 46 41 53 57 66 73 81 89 97 106 113 121 129Other current assets 4 6 6 5 5 5 5 5 5 5 5 5 5Total current assets 229 225 290 341 451 415 460 644 1,069 1,490 1,917 2,341 2,776Intangible assets 31 42 40 38 38 38 38 38 38 38 38 38 38PPE 1,402 1,435 1,708 1,861 2,108 2,630 3,239 3,332 3,401 3,485 3,543 3,614 3,655Long-term financial investments 1 25 25 24 24 24 24 24 24 24 24 24 24Deferred tax assets 28 - - - - - - - - - - - -Other non-current assets 4 4 4 5 6 6 7 8 8 9 9 10 10Total non-current assets 1,465 1,505 1,777 1,927 2,175 2,697 3,308 3,401 3,471 3,555 3,613 3,684 3,726Total assets 1,694 1,730 2,068 2,268 2,626 3,112 3,768 4,046 4,540 5,045 5,530 6,025 6,502Current financial debt 183 197 62 20 - 12 57 - - - - - -Accounts payable 236 210 230 247 283 313 350 386 420 458 489 523 558Other current liabilities 54 47 47 44 44 44 44 44 44 44 44 44 44Total current liabilities 473 454 339 311 327 369 451 430 464 502 533 567 602Non-current debt 135 171 358 194 - 37 171 - - - - - -Deferred tax liabilities 91 62 63 59 59 59 59 59 59 59 59 59 59Other non-current liabilities 111 99 100 93 93 93 93 93 93 93 93 93 93Total non-current liabilities 337 332 520 346 152 190 324 152 152 152 152 152 152Total liabilities 810 786 859 657 479 559 775 583 617 654 686 719 754Minority interest - 0 0 0 0 0 1 1 1 1 1 1 1Share capital 143 140 141 132 132 132 132 132 132 132 132 132 132Additional paid-in capital 3 3 3 3 3 3 3 3 3 3 3 3 3Retained earnings 738 802 1,065 1,476 2,012 2,418 2,858 3,328 3,787 4,255 4,709 5,170 5,612Total shareholders equity 884 944 1,208 1,610 2,146 2,553 2,993 3,462 3,922 4,390 4,843 5,305 5,746Total liabilities and shareholders equity 1,694 1,730 2,068 2,268 2,626 3,112 3,768 4,046 4,540 5,045 5,530 6,025 6,502Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 315 277 433 671 737 769 834 920 952 960 938 938 927CF from investing activity -354 -218 -442 -457 -452 -749 -863 -394 -405 -417 -384 -390 -372CF from financing activity 29 -49 15 -209 -214 -86 31 -386 -154 -156 -152 -154 -148Cash flow for the period -11 10 5 5 70 -66 3 140 393 387 403 394 407XR effect - - - -1 - - - - - - - - -Cash at the beginning of the year 14 2 12 17 21 91 25 28 168 561 948 1,351 1,745Cash at the end of the year 3 12 17 21 91 25 28 168 561 948 1,351 1,745 2,153Source: Alfa Research

Equity Market


61

MRSK Center-Volga Address: Tel: E-mail: Website: CEO CFO Investor Relations

33 Rozhdestvenskaya st,

Nizhny Novgorod 603950, Russia

+7 (831) 431-91-51

[email protected]

http://www. mrsk-cp.ru

Eugeny Ushakov

Olga Tikhomirova

Natalya Kiseleva


MRKP RU

MRKP.RTS

$0.006

$0.2 mln

30%

24%

112,679,817,043

$730

$0.015

135%

O/W

STRENGHTS AND OPPORTUNITIES

- Low regulatory risk (the highest share of branches under RAB tariffs – 56%, the 2nd highest share of approved iRAB among multiregional MRSKs – 45%)

- High liquidity relative to other MRSK stocks


- Likely privatization candidate

- Presence of large institutional shareholder


- Regulatory risk

- Anticipated increase of debt burden

Figure 125: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 1,257 1,455 1,809 2,161 2,417 2,716 3,179 EBITDA, $ mln 199 182 380 568 645 729 982 Net Income, $ mln 26 -22 151 280 380 446 647EV/Sales, x 0.9 0.7 0.6 0.5 0.4 0.4 0.3EV/EBITDA, x 5.4 5.9 2.8 1.9 1.7 1.5 1.1P/E, x 28.5 - 4.8 2.6 1.9 1.6 1.1Operating margin, % 5.9% 1.3% 12.1% 18.8% 19.7% 20.5% 25.4%EBITDA margin, % 15.8% 12.5% 21.0% 26.3% 26.7% 26.9% 30.9%Net margin, % 2.0% -1.5% 8.3% 13.0% 15.7% 16.4% 20.4%Net debt/EBITDA 1.70 2.75 1.60 1.05 0.62 0.22 -0.20EV/Throuhput, $/MWh 21.0 20.6 20.4 20.3 20.1 19.6 18.9EV/iRAB, x 0.39 Source: Company data, Alfa Research

MRSK Tyumen

MRSK Siberia

Far East DisCo

UdmurtiaRepublic

Kirov region

Nizhnov region

Vladimir region

Mariy-El Republic

Ivanovo region

Ryazan regionTula regionKaluga region

MRSK Tyumen

MRSK Siberia

Far East DisCo

UdmurtiaRepublic

Kirov region

Nizhnov region

Vladimir region

Mariy-El Republic

Ivanovo region

Ryazan regionTula regionKaluga region

Equity Market


62


Energosouz5%

HQ5%

Prosperity Capital16%

MRSK Holding

48%

Other26%

$0.000

$0.005

$0.010

$0.015

$0.020

Jun-09 Dec-09 Jun-10MRSK Center&Volga RTSI$ Index RebasedMRSK Holding Rebased



0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%


ths.GWH

0

10

20

30

40

50

60

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




25,551

134,456

95,349 4,442

0

50,000

100,000

150,000

200,000

250,000

300,000



24,0104,479

10,932

0

10,000

20,000

30,000

40,000

50,000




Equity Market


63


0

200

400

600

800

1000

1200

2009

2010

2011

2012

2013

2014

2015

0%5%

10%15%20%

25%30%

35%40%

RUB/MWh

0%5%

10%15%20%25%30%35%40%

2010

2011

2012

2013

2014

2015




-5,000

15,000

35,000

55,000

75,000

95,000

115,000

2011 2012 2013 2014 2015Smoothing OPEX RAB Depr. Return on RAB

0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est



0

20,00040,000

60,000

80,000100,000

120,000

2011 2012 2013 2014 2015Vladimirenergo Ivenergo KalugaenergoKirovenergo Marienergo NizhnovenergoRyazanenergo Tulenergo Udmurtenergo

5,488

3,210

3,557

5,083

2,187

14,809

4,032

5,576

6,946 Vladimirenergo

Ivenergo

Kalugaenergo

Kirovenergo

Marienergo

Nizhnovenergo

Ryazanenergo

Tulenergo

Udmurtenergo


Equity Market


64

MRSK Center-Volga DCF valuation

Figure 138: MRSK Center-Volga DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 1,257 1,455 1,809 2,161 2,417 2,716 3,179 3,106 3,314 3,488 3,678 3,868 - % growth, y-o-y 5% 16% 24% 19% 12% 12% 17% -2% 7% 5% 5% 5% - distribution revenues 1,201 1,455 1,809 2,161 2,417 2,716 3,179 3,106 3,314 3,488 3,678 3,868 - connection fee proceeds 39 - - - - - - - - - - - - other 16 - - - - - - - - - - -EBITDA 199 182 380 568 645 729 982 714 726 725 726 720 - % growth -4% -8% 109% 50% 13% 13% 35% -27% 2% 0% 0% -1% - % margin 16% 13% 21% 26% 27% 27% 31% 23% 22% 21% 20% 19%Operating income (EBIT) 74 19 219 405 475 558 809 538 548 544 542 532 - % growth -21% -74% 1058% 85% 17% 17% 45% -33% 2% -1% 0% -2% - % margin 6% 1% 12% 19% 20% 21% 25% 17% 17% 16% 15% 14%Tax rate 38% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 28 4 44 81 95 112 162 108 110 109 108 106 NOPAT 45 15 175 324 380 446 647 430 438 435 433 426 Depreciation and amortization 125 163 161 163 169 171 174 176 179 182 185 188 - % growth 9% 30% -1% 1% 4% 1% 1% 1% 2% 2% 2% 2%Changes in WC 52 -2 33 32 12 13 41 -45 1 -1 -1 -2 Operating Cash Flows 119 181 303 455 538 605 780 652 616 617 619 616 CAPEX 142 301 420 395 244 251 258 265 272 280 288 188 - CAPEX/D&A 1.1x 1.8x 2.6x 2.4x 1.4x 1.5x 1.5x 1.5x 1.5x 1.5x 1.6x 1.0x - % of sales 11% 21% 23% 18% 10% 9% 8% 9% 8% 8% 8% 5%Unlevered FCF -23 -120 -117 60 294 354 522 387 343 337 330 428 Discount rate (WACC) 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14%Discount factor 1.00 0.94 0.82 0.72 0.63 0.55 0.49 0.43 0.37 0.33 0.29 0.25 Present value of FCF -23 -112 -96 43 186 196 253 165 128 110 95 107 Assumed perpetual growth rate 0% Terminal year cash flow 428 Terminal value 3,042 PV of terminal value 764 Sum of PV of FCF 1,075 Total EV 1,839 Net Debt, 2009 338 Fair equity value 1,501 # of shares: 112,697,817,043 common 112,697,817,043 Fair value per share $0.013 Implied EV/RAB 0.67 Implied 2010E EV/EBITDA 10.1 Implied 2010E EV/S 1.3 Source: Alfa Research

Figure 139: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 3%Debt rate implied 9%Statutory tax rate 20%After-tax cost of debt 7.2%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 4%IFRS standards 0%Transparency and Disclosure 0%Presence of large institutional investor 0%Payment discipline in the region 1%Regulatory risk 1%Liquidity 1%Adjusted equity risk premium 11%Cost of equity 17%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 14.1%Source: Alfa Research

Equity Market


65

MRSK Center-Volga condensed financials Figure 140: MRSK Center-Volga condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 1,199 1,257 1,455 1,809 2,161 2,417 2,716 3,179 3,106 3,314 3,488 3,678 3,868 Electricity distribution 1,106 1,201 1,455 1,809 2,161 2,417 2,716 3,179 3,106 3,314 3,488 3,678 3,868 Connection fees 71 39 - - - - - - - - - - - Other 22 16 - - - - - - - - - - -Operating expenses 1,121 1,190 1,436 1,591 1,756 1,941 2,158 2,370 2,568 2,766 2,945 3,136 3,336 Raw materials 47 37 40 42 44 48 51 54 57 59 62 65 68 Personnel costs 210 240 260 274 289 311 332 351 367 384 402 421 441 Payroll taxes 44 50 54 57 60 65 69 73 76 80 83 87 91 Federal Grid charge 191 222 334 438 530 602 730 868 1,009 1,154 1,273 1,401 1,532 Electricity losses purchased 308 334 422 456 505 571 628 675 711 741 774 809 847 Depreciation 115 126 163 161 163 169 171 174 176 179 182 185 188 Other expenses 206 182 163 162 164 175 178 177 173 169 168 168 168Other operating income 14 7 - - - - - - - - - - -Operating income (EBIT) 93 74 19 219 405 475 558 809 538 548 544 542 532EBITDA 207 199 182 380 568 645 729 982 714 726 725 726 720Interest income 2 1 - - - - - - - - - - -Interest expense 15 33 47 30 55 - - - - - - - -Other operating expenses -0 0 - - - - - - - - - - -Pre-tax income (EBT) 80 41 -28 188 350 475 558 809 538 548 544 542 532Profit tax 10 16 -6 38 70 95 112 162 108 110 109 108 106 Income before minority interest 69 26 -22 151 280 380 446 647 430 438 435 433 426Minority interest: share of net result -33 0 0 0 0 0 0 0 0 0 0 0 0Net income 37 26 -22 151 280 380 446 647 430 438 435 433 426Margins, % EBITDA margin 17.3% 15.8% 12.5% 21.0% 26.3% 26.7% 26.9% 30.9% 23.0% 21.9% 20.8% 19.7% 18.6%Operating margin 7.7% 5.9% 1.3% 12.1% 18.8% 19.7% 20.5% 25.4% 17.3% 16.5% 15.6% 14.7% 13.8%Pre-tax margin 6.6% 3.3% -1.9% 10.4% 16.2% 19.7% 20.5% 25.4% 17.3% 16.5% 15.6% 14.7% 13.8%Net margin 3.1% 2.0% -1.5% 8.3% 13.0% 15.7% 16.4% 20.4% 13.9% 13.2% 12.5% 11.8% 11.0% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 83 83 29 35 43 48 54 196 476 708 935 1,156 1,372 Accounts receivable 153 206 242 291 359 401 451 527 515 550 579 610 642 Inventories 24 27 33 36 41 46 52 57 62 67 72 77 82 Other current assets 17 13 13 12 12 12 12 12 12 12 12 12 12 Total current assets 277 329 318 374 455 507 569 793 1,066 1,337 1,598 1,855 2,108 Intangible assets 4 2 3 3 3 3 3 3 3 3 3 3 3 PPE 1,341 1,338 1,486 1,644 1,876 1,950 2,029 2,113 2,202 2,296 2,395 2,498 2,601 Long-term financial investments 1 1 1 1 1 1 1 1 1 1 1 1 1 Deferred tax assets 19 16 16 15 15 15 15 15 15 15 15 15 15 Other non-current assets 7 11 12 15 18 20 23 27 26 28 30 31 33 Total non-current assets 1,372 1,368 1,519 1,678 1,913 1,990 2,071 2,159 2,248 2,343 2,443 2,549 2,653 Total assets 1,649 1,697 1,837 2,052 2,369 2,497 2,640 2,952 3,314 3,681 4,041 4,403 4,761 Current financial debt 36 176 71 125 129 105 54 - - - - - -Accounts payable 227 206 251 272 313 348 390 431 470 508 543 580 618 Other current liabilities 8 14 14 13 13 13 13 13 13 13 13 13 13 Total current liabilities 271 397 336 410 455 467 457 445 483 521 556 593 632 Non-current debt 327 245 460 520 511 343 161 - - - - - -Deferred tax liabilities 83 84 84 79 79 79 79 79 79 79 79 79 79 Other non-current liabilities 48 48 49 46 46 46 46 46 46 46 46 46 46 Total non-current liabilities 459 377 593 644 635 468 285 125 125 125 125 125 125 Total liabilities 730 774 929 1,055 1,091 934 742 569 608 646 681 718 756 Share capital 382 373 376 352 352 352 352 352 352 352 352 352 352 Retained earnings 537 549 531 644 925 1,210 1,544 2,030 2,353 2,681 3,007 3,332 3,652 Total shareholders equity 920 923 908 997 1,278 1,563 1,898 2,383 2,706 3,034 3,360 3,685 4,005 Total liabilities and shareholders equity 1,649 1,697 1,837 2,052 2,369 2,497 2,640 2,952 3,314 3,681 4,041 4,403 4,761 Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 214 130 190 309 466 538 605 780 652 616 617 619 616 CF from investing activity -388 -141 -301 -420 -395 -244 -251 -258 -265 -272 -280 -288 -291 CF from financing activity 247 13 57 118 -63 -289 -348 -380 -107 -111 -110 -110 -108 Cash flow for the period 74 1 -54 8 8 5 6 142 280 232 227 221 217 XR efferct -8 -1 0 -1 - - - - - - - - -Cash at the beginning of the year 17 82 83 28 35 43 48 54 196 476 708 935 1,156 Cash at the end of the year 83 83 29 35 43 48 54 196 476 708 935 1,156 1,372 Source: Alfa Research

Equity Market


66

MRSK Northwest Address: Tel: E-mail: Website: CEO CFO Investor Relations

5 bld A Voronezhskaya st.,

St.Petersburg, Russia 191119

+7 (812) 305 10 00

[email protected]

http://www.mrsksevzap.ru

Alexander Kukhmay

Olga Makarova

Andrey Karandashev


MRKZ RU

MRKZ.RTS

$0.07

$0.09 mln

35%

167%

95,785,923,138

$681

$0.0043

-40%

U/W


- Upside risk to iRAB estimate (looks abnormally low)

- Involvement in retailing business (Pskov region) adjacent to its core power distribution business


- High regulatory risk (only 18% of iRAB is approved; only one branch has RAB-based tariffs)

- Poor transparency and disclosure

- Low liquidity

- The most expensive on EV/RAB

Figure 141: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 835 913 1,148 1,314 1,442 1,587 1,734 EBITDA, $ mln 107 53 166 214 230 235 238 Net Income, $ mln 2 -35 56 94 116 117 115EV/Sales, x 1.0 0.9 0.7 0.6 0.6 0.5 0.5EV/EBITDA, x 7.7 15.4 5.0 3.8 3.6 3.5 3.4P/E, x - - 12.2 7.3 5.9 5.8 5.9Operating margin, % 2.9% -2.9% 6.9% 10.3% 10.2% 9.3% 8.4%EBITDA margin, % 12.8% 5.8% 14.4% 16.3% 16.0% 14.8% 13.7%Net margin, % 0.2% -3.8% 4.9% 7.1% 8.1% 7.3% 6.6%Net Debt/EBITDA 1.29 3.18 0.87 0.47 0.09 -0.26 -0.62EV/Throuhput, $/MWh 21.1 20.9 20.6 20.6 20.5 20.3 19.7EV/iRAB, x 0.81 Source: Company data, Alfa Research

MRSK Tyumen

MRSK Siberia

Far East DisCo

Komi Republic

Murmansk regionKarelia Republic

Pskov region

Novgorod region

Vologda region

Arkhangelsk region

MRSK Tyumen

MRSK Siberia

Far East DisCo

Komi Republic

Murmansk regionKarelia Republic

Pskov region

Novgorod region

Vologda region

Arkhangelsk region

Equity Market


67


MRSK Holding

55%

Other45%

$0.000

$0.002

$0.004

$0.006

$0.008

$0.010


MRSK Northw est RTSI$ Index Rebased

MRSK Holding Rebased



0.00

500.00

1,000.00

1,500.00

2,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%


ths.GWH

0

10

20

30

40

50

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




24,557

91,442

51,227 4,035

0

50,000

100,000

150,000

200,000



13,8154,020

6,914

0

5,000

10,000

15,000

20,000

25,000

30,000




Equity Market


68


0

100

200

300

400

500

600

2009

2010

2011

2012

2013

2014

2015

0%

5%

10%

15%

20%

25%RUB/MWh

0%

5%

10%

15%

20%

25%

2010

2011

2012

2013

2014

2015




-1,000

9,000

19,000

29,000

39,000

49,000

59,000

2011 2012 2013 2014 2015Smoothing OPEX RAB Depr. Return on RAB

0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est



010,00020,00030,000

40,00050,00060,000

2011 2012 2013 2014 2015

Vologdaenergo Arhenergo KomienergoKarelenergo Kolenergo PskovenergoNovgorodenergo

7,956

3,492

5,401

6,796

10,525

1,608

3,170

Vologdaenergo

Arhenergo

Komienergo

Karelenergo

Kolenergo

Pskovenergo

Novgorodenergo


Equity Market


69

MRSK Northwest DCF valuation

Figure 154: MRSK Northwest DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 835 913 1,148 1,314 1,442 1,587 1,734 1,890 2,043 2,172 2,312 2,456 - % growth, y-o-y 3% 9% 26% 14% 10% 10% 9% 9% 8% 6% 6% 6% - distribution revenues 664 845 1,074 1,229 1,346 1,484 1,627 1,781 1,931 2,059 2,196 2,338 - connection fee proceeds 17 - - - - - - - - - - - - other 31 - - - - - - - - - - -EBITDA 107 53 166 214 230 235 238 243 247 249 252 257 - % growth -22% -50% 211% 29% 8% 2% 1% 2% 2% 1% 1% 2% - % margin 13% 6% 14% 16% 16% 15% 14% 13% 12% 11% 11% 10%Operating income (EBIT) 25 -27 80 135 147 147 145 159 160 158 156 156 - % growth -57% -209% -397% 70% 8% 0% -1% 10% 0% -1% -1% 0% - % margin 3% -3% 7% 10% 10% 9% 8% 8% 8% 7% 7% 6%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 5 -5 16 27 29 29 29 32 32 32 31 31NOPAT 20 -21 64 108 117 118 116 128 128 126 125 125Depreciation and amortization 82 80 86 78 84 88 93 83 87 92 96 101 - % growth 2% -3% 7% -9% 7% 6% 6% -11% 5% 5% 5% 5%Changes in WC -3 -7 25 13 5 4 3 4 4 3 3 4Operating Cash Flows 105 66 125 173 195 202 206 207 211 215 217 222CAPEX 84 80 96 111 84 86 89 91 93 96 99 101 - CAPEX/D&A 1.0x 1.0x 1.1x 1.4x 1.0x 1.0x 1.0x 1.1x 1.1x 1.0x 1.0x 1.0x - % of sales 10% 9% 8% 8% 6% 5% 5% 5% 5% 4% 4% 4%Unlevered FCF 21 -15 28 62 112 116 117 116 118 119 119 121Discount rate (WACC) 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18%Discount factor 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2Present value of FCF 21 -14 22 41 63 55 48 40 34 29 25 22Assumed perpetual growth rate 0%Terminal year cash flow 121 Terminal value 681 PV of terminal value 122 Sum of PV of FCF 367 Total EV 489 Net debt, 2009 139 Fair equity value 349 # of shares: Common, mln 95,786 Fair value per share $0.0036 Implied EV/RAB 0.48Implied 2010E EV/EBITDA 9.2 Implied 2010E EV/S 0.5Source: Alfa Research

Figure 155: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 4%Debt rate implied 10%Statutory tax rate 20%After-tax cost of debt 8%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 9%IFRS standards 0%Transparency and Disclosure 1%Presence of large institutional investor 2%Payment discipline in the region 1%Regulatory risk 2%Liquidity 3%Adjusted equity risk premium 16%Cost of equity 22%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 17.8%Source: Alfa Research

Equity Market


70

MRSK Northwest condensed financials Figure 156: MRSK Northwest condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 812 835 913 1,148 1,314 1,442 1,587 1,734 1,890 2,043 2,172 2,312 2,456 Electricity distribution 627 664 845 1,074 1,229 1,346 1,484 1,627 1,781 1,931 2,059 2,196 2,338 Connection fees 28 17 - - - - - - - - - - - Electricity retail 123 123 68 75 84 95 103 107 109 111 114 116 118 Other 34 31 - - - - - - - - - - -Operating expenses 761 813 940 1,069 1,178 1,295 1,439 1,589 1,731 1,883 2,015 2,156 2,300 Raw materials 45 43 46 49 51 54 57 60 62 64 67 69 72 Personnel costs 198 222 238 250 260 278 294 308 319 331 343 356 370 Federal Grid charge 0 0 0 0 0 0 0 0 0 0 0 0 0 Electricity losses purchased 160 180 271 358 432 487 581 686 804 920 1,015 1,117 1,222 Depreciation 106 108 132 145 162 181 195 208 221 231 241 252 264 Other expenses 80 82 80 86 78 84 88 93 83 87 92 96 101Other operating income 5 2 - - - - - - - - - - -Operating income (EBIT) 57 25 -27 80 135 147 147 145 159 160 158 156 156EBITDA 137 107 53 166 214 230 235 238 243 247 249 252 257Interest income 1 2 - - - - - - - - - - -Interest expense 5 18 17 9 17 - - - - - - - -Other operating expenses - 5 - - - - - - - - - - -Pre-tax income (EBT) 53 3 -44 71 118 147 147 145 159 160 158 156 156Profit tax 8 1 -9 14 24 29 29 29 32 32 32 31 31 Income before minority interest 45 2 -35 56 95 117 118 116 128 128 126 125 125Minority interest: share of net result 3 0 0 1 1 1 1 1 1 1 1 1 1

Net income 42 2 -35 56 94 116 117 115 126 126 125 124 124Margins, % EBITDA margin 16.9% 12.8% 5.8% 14.4% 16.3% 16.0% 14.8% 13.7% 12.8% 12.1% 11.5% 10.9% 10.4%Operating margin 7.0% 2.9% -2.9% 6.9% 10.3% 10.2% 9.3% 8.4% 8.4% 7.8% 7.3% 6.7% 6.4%Pre-tax margin 6.5% 0.3% -4.8% 6.1% 9.0% 10.2% 9.3% 8.4% 8.4% 7.8% 7.3% 6.7% 6.4%Net margin 5.1% 0.2% -3.8% 4.9% 7.1% 8.1% 7.3% 6.6% 6.7% 6.2% 5.7% 5.3% 5.0%Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 24 19 9 11 13 14 62 147 228 310 394 479 564 Accounts receivable 110 160 178 216 255 280 308 336 367 396 421 448 476 Inventories 25 23 28 30 35 39 43 48 53 57 61 66 70 Other current assets 9 9 9 9 9 9 9 9 9 9 9 9 9 Total current assets 168 211 224 266 312 341 422 540 655 772 885 1,001 1,119 Intangible assets 5 3 3 3 3 3 3 3 3 3 3 3 3 PPE 910 895 902 856 889 889 887 882 890 896 900 903 904 Long-term financial investments 4 3 3 3 3 3 3 3 3 3 3 3 3 Other non-current assets 14 19 21 26 31 34 37 40 44 48 51 54 57 Total non-current assets 932 921 930 888 925 929 930 929 940 950 957 963 967 Total assets 1,101 1,132 1,154 1,154 1,237 1,270 1,352 1,469 1,596 1,722 1,843 1,964 2,087 Current financial debt 106 63 21 39 28 9 - - - - - - -Accounts payable 110 149 178 196 227 250 278 308 339 370 396 424 453 Other current liabilities 6 2 2 2 2 2 2 2 2 2 2 2 2 Total current liabilities 222 214 201 236 256 260 280 310 341 371 398 426 455 Non-current debt 53 93 157 116 85 26 - - - - - - -Deferred tax liabilities 64 64 65 61 61 61 61 61 61 61 61 61 61 Other non-current liabilities 48 62 63 59 59 59 59 59 59 59 59 59 59 Total non-current liabilities 165 220 285 236 205 146 120 120 120 120 120 120 120 Total liabilities 387 433 486 473 461 406 400 429 461 491 517 546 574 Minority interest 0 0 0 0 1 2 3 4 6 7 8 9 10 Share capital 325 317 319 299 299 299 299 299 299 299 299 299 299 Additional paid-in capital 34 35 35 33 33 33 33 33 33 33 33 33 33 Retained earnings 354 346 314 348 442 529 616 702 797 891 985 1,077 1,169 Total shareholders equity 714 698 669 681 775 862 949 1,035 1,129 1,224 1,317 1,410 1,502 Total liabilities and shareholders equity 1,101 1,132 1,154 1,154 1,237 1,270 1,352 1,469 1,596 1,722 1,843 1,964 2,087

Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 42 101 69 126 177 195 202 206 207 211 215 217 222 CF from investing activity -134 -83 -80 -96 -111 -84 -86 -89 -91 -93 -96 -99 -101 CF from financing activity 94 -24 2 -28 -64 -110 -68 -32 -36 -35 -35 -34 -35 Cash flow for the period 1 -5 -10 3 2 1 48 85 80 82 84 84 86 XR effect -2 - - - - - - - - - - - -Cash at the beginning of the year 25 24 19 9 11 13 14 62 147 228 310 394 479

Cash at the end of the year 24 19 9 11 13 14 62 147 228 310 394 479 564 Source: Alfa Research

Equity Market


71

MRSK Urals Address: Tel: E-mail: Website: CEO Investor Relations

140, Mamina-Sibiryaka st.,

Ekaterinburg, Russia 620026

+7 (343) 215 26 00

[email protected]

http://www.mrsk-ural.ru

Valery Rodin

Pavel Chingin


MRKU RU

MRKU.RTS

$0.008

$0.14 mln

20%

108%

87,430,485,711

$679

$0.020

152%

O/W


- Half of branches have already adopted RAB-based tariffs; 35% of iRAB approved by regulators

- One of the cheapest MRSKs on EV/RAB

- Operates in highly industrialized Urals region


- Involvement in retailing business adjacent to its core power distribution business


- Regulatory risk

- Low liquidity

Figure 157: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 1,487 1,745 1,976 2,301 2,600 2,864 3,144 EBITDA, $ mln 298 387 421 540 648 674 714 Net Income, $ mln 140 176 244 340 422 436 462EV/Sales, x 0.6 0.5 0.4 0.4 0.3 0.3 0.3EV/EBITDA, x 3.0 2.3 2.1 1.6 1.4 1.3 1.2P/E, x 4.8 3.9 2.8 2.0 1.6 1.6 1.5Operating margin, % 12.5% 15.8% 15.6% 18.6% 20.5% 19.2% 18.6%EBITDA margin, % 20.1% 22.2% 21.3% 23.4% 24.9% 23.5% 22.7%Net margin, % 9.4% 10.1% 12.4% 14.8% 16.2% 15.2% 14.7%Net debt/EBITDA 0.68 0.30 0.09 -0.06 -0.15 -0.13 -0.48EV/Throughput, $/MWh 12.0 11.8 11.7 11.6 11.6 11.5 11.1EV/iRAB, x 0.29 Source: Company data, Alfa Research

MRSK Tyumen

MRSK Siberia

Far East DisCo

Sverdlovsk region

Perm region

Chelyabinsk region

MRSK Tyumen

MRSK Siberia

Far East DisCo

Sverdlovsk region

Perm region

Chelyabinsk region

Equity Market


72


MRSK Holding

52%

Other48%

$0.000

$0.005

$0.010

$0.015

$0.020

$0.025

Jun-09 Dec-09 Jun-10MRSK Urals RTSI$ Index RebasedMRSK Holding Rebased



0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%


ths.GWH

01020304050607080

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




30,298

74,306

46,772 4,509

0

50,000

100,000

150,000



23,1323,775

10,166

05,000

10,00015,00020,00025,00030,00035,00040,000




Equity Market


73


050

100150200250300350400450500

2010

2011

2012

2013

2014

2015

0%

5%

10%

15%

20%

25%RUB/MWh

0%

5%

10%

15%

20%

25%

2009

2010

2011

2012

2013

2014




0

20,000

40,000

60,000

80,000

100,000

2010 2011 2012 2013 2014OPEX RAB Depr. Return on RAB

0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est


Figure 168: Revenue breakdown by branch, RUB mln Figure 169: Throughput breakdown by branch, GWh

020,00040,00060,00080,000

100,000120,000

2011 2012 2013 2014 2015

Sverdlovenergo PermenergoChelyabenergo Ekaterinburg gridEkaterinburg supply

1,952

2,754

2,701

1,436Sverdlovenergo

Permenergo

Chelyabenergo

EkaterinburgElectric GridCompany


Equity Market


74

MRSK Urals DCF valuation Figure 170: MRSK Urals DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 1,487 1,745 1,976 2,301 2,600 2,864 3,144 3,390 3,636 3,848 4,072 4,304 - % growth, y-o-y n/a 17% 13% 16% 13% 10% 10% 8% 7% 6% 6% 6% - distribution revenues 1,109 1,507 1,721 2,036 2,316 2,563 2,829 3,062 3,295 3,495 3,705 3,923 - electricity sales 317 237 254 266 284 301 315 328 340 353 367 381 - connection fee proceeds 41 - - - - - - - - - - - - other 37 - - - - - - - - - - -EBITDA 298 387 421 540 648 674 714 736 746 751 751 750 - % growth n/a 30% 9% 28% 20% 4% 6% 3% 1% 1% 0% 0% - % margin 20% 22% 21% 23% 25% 24% 23% 22% 21% 20% 18% 17%Operating income (EBIT) 185 276 308 429 532 550 584 595 602 603 599 595 - % growth n/a 49% 12% 39% 24% 3% 6% 2% 1% 0% -1% -1% - % margin 12% 16% 16% 19% 20% 19% 19% 18% 17% 16% 15% 14%Tax rate 10% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 18 55 62 86 106 110 117 119 120 121 120 119 NOPAT 168 220 247 343 426 440 467 476 482 482 479 476 Depreciation and amortization 113 112 112 111 116 123 130 141 144 148 152 260 - % growth n/a -1% 1% -1% 4% 6% 6% 8% 2% 3% 3% 71%Changes in WC 35 8 -2 11 10 -5 -3 -5 -8 -8 -9 -9 Operating Cash Flows 246 324 361 443 532 569 600 622 633 638 640 745 CAPEX 118 190 285 365 356 467 226 232 239 246 253 260 - CAPEX/D&A 1.0x 1.7x 2.5x 3.3x 3.1x 3.8x 1.7x 1.7x 1.7x 1.7x 1.7x 1.0x - % of sales 8% 11% 14% 16% 14% 16% 7% 7% 7% 6% 6% 6%Unlevered FCF 128 134 77 78 176 102 374 390 394 392 387 485 Discount rate (WACC) 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17%Discount factor 1.00 0.92 0.79 0.67 0.58 0.49 0.42 0.36 0.31 0.26 0.22 0.19 Present value of FCF 128 124 61 52 101 50 157 140 121 102 86 92 Assumed perpetual growth rate 0% Terminal year cash flow 485 Terminal value 2,837 PV of terminal value 541 Sum of PV of FCF 1,087 Total EV 1,628 Net Debt, 2009 209 Stake in Kurganenergo 40 Fair equity value 1,458 # of shares: Common, mln 87,430 Fair value per share $0.0167 Implied EV/RAB 0.54 Implied 2010E EV/EBITDA 4.2 Implied 2010E EV/S 0.9 Source: Alfa Research


Equity Market


75

MRSK Urals condensed financials Figure 172: MRSK Urals condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 1,241 1,487 1,745 1,976 2,301 2,600 2,864 3,144 3,390 3,636 3,848 4,072 4,304 Electricity distribution 841 1,109 1,507 1,721 2,036 2,316 2,563 2,829 3,062 3,295 3,495 3,705 3,923 Electricity sales 308 317 237 254 266 284 301 315 328 340 353 367 381 Connection fees 64 41 - - - - - - - - - - - Other 28 37 - - - - - - - - - - -Operating expenses 1,191 1,306 1,469 1,668 1,873 2,068 2,314 2,560 2,795 3,034 3,246 3,473 3,710 Raw materials 19 20 21 22 24 25 27 29 30 32 33 35 36 Personnel costs 140 146 157 166 175 189 201 213 223 234 245 257 269 Payroll taxes 32 30 32 34 36 39 41 44 46 48 50 53 55 Federal Grid charge 250 262 394 514 627 705 845 1,000 1,155 1,322 1,458 1,605 1,755 Electricity losses purchased 277 318 402 444 507 573 627 673 707 741 777 815 857 Depreciation 109 113 112 112 111 116 123 130 141 144 148 152 156 Other expenses 364 418 352 375 394 422 448 472 492 513 535 558 581Other operating income 0 4 - - - - - - - - - - -Operating income (EBIT) 50 185 276 308 429 532 550 584 595 602 603 599 595EBITDA 159 298 387 421 540 648 674 714 736 746 751 751 750Interest income 1 0 - - - - - - - - - - -Interest expense 21 33 53 - - - - - - - - - -Other operating expenses -4 -3 - - - - - - - - - - -Pre-tax income (EBT) 34 157 222 308 429 532 550 584 595 602 603 599 595Profit tax -6 15 44 62 86 106 110 117 119 120 121 120 119 Income before minority interest 40 142 178 247 343 426 440 467 476 482 482 479 476Minority interest: share of net result 5 1 2 2 3 4 4 5 5 5 5 5 5Net income 35 140 176 244 340 422 436 462 471 477 478 475 471Margins, % EBITDA margin 12.8% 20.1% 22.2% 21.3% 23.4% 24.9% 23.5% 22.7% 21.7% 20.5% 19.5% 18.4% 17.4%Operating margin 4.0% 12.5% 15.8% 15.6% 18.6% 20.5% 19.2% 18.6% 17.6% 16.6% 15.7% 14.7% 13.8%Pre-tax margin 2.7% 10.5% 12.7% 15.6% 18.6% 20.5% 19.2% 18.6% 17.6% 16.6% 15.7% 14.7% 13.8%Net margin 2.8% 9.4% 10.1% 12.4% 14.8% 16.2% 15.2% 14.7% 13.9% 13.1% 12.4% 11.7% 10.9% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 29 48 97 85 32 98 86 340 607 878 1,146 1,410 1,669 Accounts receivable 153 225 268 293 352 398 438 481 519 556 589 623 659 Inventories 22 26 30 33 39 43 49 54 59 64 69 74 79 Other current assets 17 7 9 9 11 13 14 15 17 18 19 20 21 Total current assets 221 306 403 421 435 552 587 890 1,201 1,516 1,823 2,127 2,428 Intangible assets 5 2 2 2 2 2 2 2 2 2 2 2 2 PPE 1,582 1,528 1,619 1,685 1,939 2,179 2,523 2,618 2,710 2,805 2,903 3,004 3,108 Long-term financial investments 19 22 22 21 21 21 21 21 21 21 21 21 21 Deferred tax assets 5 3 3 3 3 3 3 3 3 3 3 3 3 Other non-current assets 31 21 25 27 33 37 40 44 48 51 54 58 61 Total non-current assets 1,641 1,576 1,671 1,737 1,997 2,242 2,589 2,689 2,784 2,882 2,983 3,087 3,194 Total assets 1,862 1,882 2,075 2,158 2,432 2,794 3,176 3,579 3,985 4,398 4,805 5,214 5,622 Current financial debt 191 34 - - - - - - - - - - -Accounts payable 180 259 300 331 387 429 481 534 583 635 681 730 781 Other current liabilities 12 6 6 5 5 5 5 5 5 5 5 5 5 Total current liabilities 383 298 305 336 392 434 487 539 589 640 686 735 786 Non-current debt 121 218 214 125 - - - - - - - - -Deferred tax liabilities 114 106 107 100 100 100 100 100 100 100 100 100 100 Other non-current liabilities 52 32 32 30 30 30 30 30 30 30 30 30 30 Total non-current liabilities 288 356 354 256 131 131 131 131 131 131 131 131 131 Total liabilities 670 655 659 592 523 565 617 670 719 771 817 866 917 Minority interest 21 22 24 25 28 32 36 41 45 50 55 59 64 Share capital 296 289 291 273 273 273 273 273 273 273 273 273 273 Retained earnings 875 917 1,101 1,269 1,608 1,923 2,249 2,595 2,947 3,304 3,661 4,016 4,368 Total shareholders equity 1,171 1,206 1,392 1,542 1,881 2,197 2,523 2,868 3,221 3,577 3,934 4,289 4,641 Total liabilities and shareholders equity 1,862 1,882 2,075 2,158 2,432 2,794 3,176 3,579 3,985 4,398 4,805 5,214 5,622 Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 101 229 335 361 443 532 569 600 622 633 638 640 641 CF from investing activity -139 -110 -190 -285 -365 -356 -467 -226 -232 -239 -246 -253 -260 CF from financing activity 34 -99 -97 -82 -130 -111 -114 -121 -122 -124 -124 -123 -122 Cash flow for the period -3 20 48 -6 -53 66 -12 254 267 271 268 264 259 Cash at the beginning of the year 32 29 48 90 85 32 98 86 340 607 878 1,146 1,410 Cash at the end of the year 29 48 97 85 32 98 86 340 607 878 1,146 1,410 1,669 Source: Alfa Research

Equity Market


76

MRSK Siberia Address: Tel: E-mail: Website: CEO CFO Investor Relations

144a, Bograda st.,

Krasnoyarsk 660021, Russia

+7 (3912) 74 41 74

[email protected]

http://www.mrsk-sib.ru

Aleksandr Antropenko

Alena Grigoryeva

Igor Troukhachyov


MRKS RU

MRKS.RTS

$0.01

$0.12 mln

10%

129%

89,367,655,115

$911

$0.013

30%

E/W


- Exposure to highly industrialized regions in Siberia


- Possible merger of Tomsk DisCo into MRSK Siberia


- Regulatory risks (only 25% of iRAB has been approved by regulators)

- Poor liquidity

- Ongoing problems with “last-mile” agreements

Figure 173: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 1,120 1,323 1,667 2,035 2,509 3,101 3,733 EBITDA, $ mln 120 112 243 415 671 980 1,364 Net Income, $ mln -26 -45 76 190 367 570 815EV/Sales, x 1.0 0.9 0.7 0.6 0.4 0.4 0.3EV/EBITDA, x 9.4 10.1 4.6 2.7 1.7 1.2 0.8P/E, x - - 11.9 4.8 2.5 1.6 1.1Operating margin, % 0.1% -1.3% 7.0% 14.3% 21.5% 27.0% 32.2%EBITDA margin, % 10.7% 8.5% 14.6% 20.4% 26.7% 31.6% 36.5%Net margin, % -2.3% -3.4% 4.6% 9.3% 14.6% 18.4% 21.8%Net debt/EBITDA 1.78 2.60 1.92 1.71 1.64 1.67 0.91EV/Throughput, $/MWh 12.2 12.0 11.8 11.5 11.0 10.6 10.4EV/iRAB, x 0.39Source: Company data, Alfa Research

MRSK Tyumen

Far East DisCo

Chita region

Krasnoyarsk region

Tyva Republic

Buryatia Republic

Omsk region

Altai region

Khakassia Republic

Kemerovo region

MRSK Tyumen

Far East DisCo

Chita region

Krasnoyarsk region

Tyva Republic

Buryatia Republic

Omsk region

Altai region

Khakassia Republic

Kemerovo region

Equity Market


77


Donalink Limited29%

Nornikel8%

Other10%

MRSK Holding

53%

$0.000

$0.005

$0.010

$0.015

$0.020

Jun-09 Dec-09 Jun-10MRSK Siberia RTSI$ Index RebasedMRSK Holding Rebased



$mln

0.00

500.00

1,000.00

1,500.002,000.00

2,500.00

3,000.00

3,500.00

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%


ths.GWH

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




39,840

147,416

82,928 3,746

0

50,000

100,000

150,000

200,000

250,000

300,000



24,7637,200

11,762

0

10,000

20,000

30,000

40,000

50,000




Equity Market


78


0

100

200

300

400

500

600

700

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0%5%10%15%20%25%30%35%40%RUB/MWh

0%5%

10%15%20%25%30%35%40%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E




-10,000

0

10,000

20,000

30,000

40,000

50,000

2011 2012 2013 2014 2015


0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est



020000400006000080000

100000120000

2011 2012 2013 2014 2015

Altaienergo Gorno-Altaisk grids BuryatenergoKrasnoyarskenergo Kuzbassenergo OmskenergoKhakasenergo Chitaenergo Tyvaenergo

32,834

22,931

8,141

11,6627,346 404

3,713

3884,765

Altaienergo

Gorno-AltaiskElectric NetworksBuryatenergo

Krasnoyarskenergo

Kuzbassenergo

Omskenergo

Khakasenergo


Equity Market


79

MRSK Siberia DCF valuation

Figure 186: MRSK Siberia DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 1,120 1,323 1,667 2,035 2,509 3,101 3,733 3,579 3,881 4,128 4,357 4,627 - % growth, y-o-y n/a 18% 26% 22% 23% 24% 20% -4% 8% 6% 6% 6% - distribution revenues 1,039 1,305 1,667 2,035 2,509 3,101 3,733 3,579 3,881 4,128 4,357 4,627 - connection fee proceeds 47 - - - - - - - - - - - - other 34 - - - - - - - - - - -EBITDA 120 112 243 415 671 980 1,364 974 996 1,002 971 971 - % growth n/a -7% 117% 70% 62% 46% 39% -29% 2% 1% -3% 0% - % margin 11% 8% 15% 20% 27% 32% 37% 27% 26% 24% 22% 21%Operating income (EBIT) 1 -17 116 290 539 837 1,203 785 803 802 765 759 - % growth n/a -1911% -770% 150% 86% 55% 44% -35% 2% 0% -5% -1% - % margin 0% -1% 7% 14% 21% 27% 32% 22% 21% 19% 18% 16%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 0 -3 23 58 108 167 241 157 161 160 153 152 NOPAT 1 -14 93 232 431 670 963 628 642 642 612 607 Depreciation and amortization 119 129 127 124 132 143 161 188 194 200 206 330 - % growth n/a 9% -2% -2% 6% 9% 13% 17% 3% 3% 3% 61%Changes in WC -5 -19 16 25 39 47 62 -79 -5 -7 -14 -9 Operating Cash Flows 125 134 204 332 523 766 1,062 895 841 848 832 946 CAPEX 125 179 386 529 755 1,064 318 327 336 345 321 330 - CAPEX/D&A 1.0x 1.4x 3.0x 4.3x 5.7x 7.4x 2.0x 1.7x 1.7x 1.7x 1.6x 1.0x - % of sales 11% 14% 23% 26% 30% 34% 9% 9% 9% 8% 7% 7%Unlevered FCF 0 -45 -182 -198 -232 -298 744 568 505 503 511 616 Discount rate (WACC) 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%Discount factor 1.00 0.93 0.80 0.68 0.59 0.50 0.43 0.37 0.32 0.28 0.24 0.20 Present value of FCF 0 -41 -145 -135 -136 -150 323 212 162 138 121 125 Assumed perpetual growth rate 0%Terminal year cash flow 616 Terminal value 3,754 PV of terminal value 762 Sum of PV of FCF 472 Total EV 1,234 Net debt, 2009 216 Fair equity value 1,018 # of shares: Common, mln 89,368 Fair value per share $0.011 Implied EV/RAB 0.4 Implied 2010E EV/EBITDA 11.0 Implied 2010E EV/S 0.9 Source: Alfa Research

Figure 187: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 4%Debt rate implied 10%Statutory tax rate 20%After-tax cost of debt 8%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 7%IFRS standards 0%Transparency and disclosure 0%Presence of large institutional investor 1%Payment discipline in the region 1%Regulatory risk 2%Liquidity 3%Adjusted equity risk premium 14%Cost of equity 20%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 16.4%Source: Alfa Research

Equity Market


80

MRSK Siberia condensed financials Figure 188: MRSK Siberia condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 1,162 1,120 1,323 1,667 2,035 2,509 3,101 3,733 3,579 3,881 4,128 4,357 4,627 Electricity distribution 1,034 1,039 1,305 1,667 2,035 2,509 3,101 3,733 3,579 3,881 4,128 4,357 4,627 Connection fees 78 47 - - - - - - - - - - - Other 50 34 - - - - - - - - - - -Operating expenses 1,128 1,139 1,340 1,550 1,745 1,970 2,264 2,530 2,794 3,078 3,325 3,592 3,868 Raw materials 39 36 39 41 43 47 50 53 55 58 61 63 66 Personnel costs 205 183 197 209 220 237 253 268 281 294 308 323 338 Payroll taxes 44 43 46 49 51 55 59 62 65 69 72 75 79 Federal Grid charge 318 323 483 640 791 933 1,145 1,333 1,517 1,737 1,915 2,107 2,305 Electricity losses purchased 159 196 225 252 270 302 332 355 374 400 427 457 490 Depreciation 120 119 129 127 124 132 143 161 188 194 200 206 212 Other expenses 243 239 220 232 245 264 282 298 313 327 343 360 377Other operating income 19 19 - - - - - - - - - - -Operating income (EBIT) 54 1 -17 116 290 539 837 1,203 785 803 802 765 759EBITDA 174 120 112 243 415 671 980 1,364 974 996 1,002 971 971Interest income 0 0 - - - - - - - - - - -Interest expense 20 30 38 21 53 80 123 184 141 105 75 42 6 Other operating expenses -1 1 - - - - - - - - - - -Pre-tax income (EBT) 34 -30 -56 95 237 459 714 1,020 644 698 728 723 753Profit tax -26 -4 -11 19 47 92 143 204 129 140 146 145 151 Income before minority interest 61 -26 -45 76 190 367 571 816 515 558 582 578 602Minority interest: share of net result 0 0 0 0 0 0 1 1 1 1 1 1 1Net income 61 -26 -45 76 190 367 570 815 515 557 581 578 601Margins, % EBITDA margin 15.0% 10.7% 8.5% 14.6% 20.4% 26.7% 31.6% 36.5% 27.2% 25.7% 24.3% 22.3% 21.0%Operating margin 4.6% 0.1% -1.3% 7.0% 14.3% 21.5% 27.0% 32.2% 21.9% 20.7% 19.4% 17.6% 16.4%Pre-tax margin 2.9% -2.7% -4.2% 5.7% 11.7% 18.3% 23.0% 27.3% 18.0% 18.0% 17.6% 16.6% 16.3%Net margin 5.2% -2.3% -3.4% 4.6% 9.3% 14.6% 18.4% 21.8% 14.4% 14.4% 14.1% 13.3% 13.0% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 1 5 13 16 20 25 31 37 36 39 41 44 330 Accounts receivable 166 210 207 251 317 390 482 581 557 604 642 678 720 Inventories 21 21 27 31 36 41 47 53 58 65 70 76 82 Other current assets 28 7 35 42 53 66 81 98 94 102 108 114 121 Total current assets 215 243 282 340 426 522 642 769 745 809 861 911 1,252 Intangible assets 14 13 13 12 12 12 12 12 12 12 12 12 12 PPE 1,196 1,167 1,226 1,400 1,805 2,429 3,349 3,506 3,645 3,787 3,933 4,048 4,166 Long-term financial investments 18 23 23 22 22 22 22 22 22 22 22 22 22 Other non-current assets 7 3 4 5 6 8 10 12 11 12 13 13 14 Total non-current assets 1,234 1,207 1,267 1,439 1,846 2,471 3,393 3,551 3,690 3,833 3,979 4,096 4,215 Total assets 1,449 1,449 1,548 1,780 2,272 2,993 4,035 4,320 4,434 4,641 4,841 5,007 5,467 Current financial debt 132 85 44 121 182 281 417 321 239 170 96 14 -Accounts payable 174 238 287 326 383 435 501 560 616 682 739 800 864 Other current liabilities 37 3 3 3 3 3 3 3 3 3 3 3 3 Total current liabilities 343 327 334 450 568 718 922 884 858 855 838 817 867 Non-current debt 64 133 261 362 546 842 1,252 963 717 509 288 41 -Deferred tax liabilities 112 103 103 97 97 97 97 97 97 97 97 97 97 Other non-current liabilities 18 24 24 23 23 23 23 23 23 23 23 23 23 Total non-current liabilities 194 259 388 482 666 961 1,372 1,083 836 629 408 161 120 Total liabilities 538 586 722 931 1,234 1,679 2,293 1,967 1,694 1,483 1,246 978 987 Minority interest 0 0 0 0 0 1 1 2 3 3 4 5 5 Share capital 303 296 298 279 279 279 279 279 279 279 279 279 279 Retained earnings 609 568 528 569 758 1,033 1,461 2,072 2,458 2,876 3,312 3,745 4,196 Total shareholders equity 912 864 826 848 1,038 1,313 1,740 2,351 2,737 3,155 3,591 4,024 4,475 Total liabilities and shareholders equity 1,449 1,449 1,548 1,780 2,272 2,993 4,035 4,320 4,434 4,641 4,841 5,007 5,467 Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 113 135 142 208 342 539 790 1,099 923 862 863 840 829 CF from investing activity -139 -119 -179 -386 -529 -755 -1,064 -318 -327 -336 -345 -321 -330 CF from financing activity 13 -12 45 182 191 220 279 -774 -598 -523 -515 -517 -213 Cash flow for the period -13 3 9 4 4 5 6 6 -2 3 2 2 286 XR Effect - - - -1 - - - - - - - - -Cash at the beginning of the year 15 1 5 13 16 20 25 31 37 36 39 41 44 Cash at the end of the year 1 5 13 16 20 25 31 37 36 39 41 44 330 Source: Alfa Research

Equity Market


81

MRSK Volga Address: Tel: E-mail: Website: CEO CFO Investor Relations

42/44 Pervomayskaya st.,

Saratov, 410031, Russia

+7 (8452) 30 24 89

[email protected]

http://www.mrsk-volgi.ru

Vladimir Ryabikin

Aleksey Berezovskyi

Yulia Burtseva


MRKV RU

MRKV.RTS

$0.003

$0.15 mln

30%

21%

178,577,801,146

$618

$0.005

43%

O/W


- Good chance of being privatized


- Regulatory risk (only 24% of iRAB has been approved by regulator; 14% of branches have adopted RAB-based tariffs)

- Low liquidity

- Poor transparency and disclosure

Figure 189: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 923 1,028 1,271 1,483 1,732 1,973 2,073 EBITDA, $ mln 163 142 249 317 426 495 429 Net Income, $ mln 44 23 100 157 243 298 244EV/Sales, x 0.9 0.8 0.6 0.5 0.5 0.4 0.4EV/EBITDA, x 4.9 5.6 3.2 2.5 1.9 1.6 1.9P/E, x 14.1 26.9 6.2 3.9 2.5 2.1 2.5Operating margin, % 7.3% 2.8% 9.9% 13.2% 17.6% 18.9% 14.7%EBITDA margin, % 17.6% 13.8% 19.6% 21.4% 24.6% 25.1% 20.7%Net margin, % 4.7% 2.2% 7.9% 10.6% 14.0% 15.1% 11.8%Net debt/EBITDA 1.14 1.38 0.53 0.07 -0.25 -0.56 -0.98EV/Throuhput, $/MWh 13.9 13.7 13.4 13.2 13.0 12.8 12.4EV/iRAB, x 0.44 Source: Company data, Alfa Research

MRSK Tyumen

MRSK Siberia

Far East DisCo

Chuvashia Republic

Orenburg region

Samara regionSaratov region

Penza region

Mordov Republic

Ulyanovsk region

MRSK Tyumen

MRSK Siberia

Far East DisCo

Chuvashia Republic

Orenburg region

Samara regionSaratov region

Penza region

Mordov Republic

Ulyanovsk region

Equity Market


82


Agana6%

Other26%

MRSK Holding

68%

$0.000

$0.002

$0.004

$0.006

$0.008

$0.010

$0.012


MRSK Volga RTSI$ Index RebasedMRSK Holding Rebased



0.00200.00400.00600.00800.00

1,000.001,200.001,400.001,600.001,800.002,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%


ths.GWH

01020304050607080

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




29,837

116,214

75,727

0

50,000

100,000

150,000

200,000

250,000


Overhead lines (0.4 kV)

21,4285,144

7,201

05,000

10,00015,00020,00025,00030,00035,00040,000




Equity Market


83


0

100

200

300

400

500

600

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

-10%-5%0%5%10%15%20%25%30%35%

RUB/MWh

-10%-5%0%5%

10%15%20%25%30%35%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E




-2,000

8,000

18,000

28,000

38,000

48,000

58,000

68,000

2011 2012 2013 2014 2015

Smoothing OPEX RAB Depr. Return

0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est



01000020000300004000050000600007000080000

2011 2012 2013 2014 2015Samara distribution grids Saratov distribution gridsUlyanovsk distribution grids M ordovenergoOrenburgenergo PenzaenergoChuvashenergo

12,497

3,7574,844

2,623

20,569

8,8484,499

Samara distributiongridsSaratov distributiongridsUlyanovskdistribution gridsM ordovenergo

Orenburgenergo

Penzaenergo

Chuvashenergo


Equity Market


84

MRSK Volga DCF valuation

Figure 202: MRSK Volga DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 923 1,028 1,271 1,483 1,732 1,973 2,073 2,231 2,395 2,549 2,707 2,869 - % growth, y-o-y -19% 11% 24% 17% 17% 14% 5% 8% 7% 6% 6% 6% - distribution revenues 1,038 1,146 1,319 1,576 1,788 1,973 2,073 2,231 2,395 2,549 2,707 2,869 - connection fee proceeds 18 - - - - - - - - - - - - other 20 - - - - - - - - - - -EBITDA 163 142 249 317 426 495 429 429 429 437 439 439 - % growth -23% -13% 75% 27% 34% 16% -13% 0% 0% 2% 0% 0% - % margin 18% 14% 20% 21% 25% 25% 21% 19% 18% 17% 16% 15%Operating income (EBIT) 68 29 125 196 304 372 305 303 301 308 308 306 - % growth -44% -58% 336% 57% 55% 22% -18% -1% -1% 2% 0% -1% - % margin 7% 3% 10% 13% 18% 19% 15% 14% 13% 12% 11% 11%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 14 6 25 39 61 74 61 61 60 62 62 61NOPAT 54 23 100 157 243 298 244 242 241 247 247 245Depreciation and amortization 95 113 124 121 122 123 124 126 127 129 131 133 - % growth 7% 19% 9% -2% 1% 1% 1% 1% 1% 1% 1% 2%Changes in WC 33 -40 7 7 9 7 -2 2 2 3 2 2Operating Cash Flows 116 176 217 270 356 414 370 366 366 373 375 375CAPEX 73 183 153 153 157 162 166 171 175 180 185 133 - CAPEX/D&A 0.8x 1.6x 1.2x 1.3x 1.3x 1.3x 1.3x 1.4x 1.4x 1.4x 1.4x 1.0x - % of sales 8% 18% 12% 10% 9% 8% 8% 8% 7% 7% 7% 5%Unlevered FCF 42 -6 64 117 199 252 204 195 191 193 190 243Discount rate (WACC) 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18%Discount factor 1.0 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.3 0.2 0.2Present value of FCF -86 42 -6 50 78 112 121 83 67 56 48 40Assumed perpetual growth rate 0%Terminal year cash flow 243 Terminal value 1,364 PV of terminal value 244 Sum of PV of FCF 692 Total EV 936 Net debt, 2009 185 Fair equity value 851 # of shares: Common, mln 178,578 Fair value per share $0.0042 Implied EV/RAB 0.52Implied 2010E EV/EBITDA 6.6 Implied 2010E EV/S 0.9Source: Alfa Research


Equity Market


85

MRSK Volga condensed financials

Figure 204: MRSK Volga condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 1,137 923 1,028 1,271 1,483 1,732 1,973 2,073 2,231 2,395 2,549 2,707 2,869 Electricity distribution 1,010 890 1,028 1,271 1,483 1,732 1,973 2,073 2,231 2,395 2,549 2,707 2,869 Connection fees 100 16 - - - - - - - - - - - Other 28 17 - - - - - - - - - - -Operating expenses 1,014 856 999 1,146 1,287 1,428 1,601 1,769 1,928 2,094 2,241 2,399 2,563 Raw materials 43 38 41 44 46 50 53 56 59 61 64 67 71 Personnel costs 149 135 147 155 163 176 188 199 208 218 229 240 251 Payroll taxes 36 33 36 38 40 43 46 49 51 54 56 59 62 Federal Grid charge 143 176 264 350 429 490 592 701 811 928 1,023 1,126 1,231 Electricity losses purchased 311 217 266 296 340 388 428 459 483 506 530 557 585 Depreciation 181 122 132 139 147 158 169 179 187 196 206 216 226 Other expenses 151 135 113 124 121 123 125 126 128 130 132 134 137Other operating income -1 1 - - - - - - - - - - -Operating income (EBIT) 122 68 29 125 196 304 372 305 303 301 308 308 306EBITDA 210 163 142 249 317 426 495 429 429 429 437 439 439Interest income 0 0 - - - - - - - - - - -Interest expense 20 17 - - - - - - - - - - -Other operating expenses -4 - - - - - - - - - - - -Pre-tax income (EBT) 106 51 29 125 196 304 372 305 303 301 308 308 306Profit tax 27 7 6 25 39 61 74 61 61 60 62 62 61 Income before minority interest 78 44 23 100 157 243 298 244 242 241 247 247 245Minority interest: share of net result 0 0 0 0 0 0 0 0 0 0 0 0 0Net income 78 44 23 100 157 243 298 244 242 241 247 247 245Margins, % EBITDA margin 18.5% 17.6% 13.8% 19.6% 21.4% 24.6% 25.1% 20.7% 19.2% 17.9% 17.2% 16.2% 15.3%Operating margin 10.7% 7.3% 2.8% 9.9% 13.2% 17.6% 18.9% 14.7% 13.6% 12.6% 12.1% 11.4% 10.7%Pre-tax margin 9.3% 5.5% 2.8% 9.9% 13.2% 17.6% 18.9% 14.7% 13.6% 12.6% 12.1% 11.4% 10.7%Net margin 6.9% 4.7% 2.2% 7.9% 10.6% 14.0% 15.1% 11.8% 10.9% 10.1% 9.7% 9.1% 8.5% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 16 14 10 12 15 108 278 418 548 673 799 923 1,041 Accounts receivable 86 101 70 81 97 113 129 136 146 157 167 177 188 Inventories 29 26 30 34 40 44 50 56 61 67 72 77 83 Other current assets 23 35 35 33 33 33 33 33 33 33 33 33 33 Total current assets 154 175 146 159 184 299 490 642 788 929 1,070 1,209 1,344 Intangible assets 11 5 5 5 5 5 5 5 5 5 5 5 5 PPE 868 836 912 884 916 952 990 1,032 1,077 1,126 1,177 1,232 1,289 Other non-current assets 27 29 33 39 47 55 63 66 71 76 81 86 91 Total non-current assets 905 870 950 928 968 1,012 1,058 1,103 1,153 1,207 1,263 1,323 1,386 Total assets 1,059 1,045 1,095 1,087 1,152 1,310 1,548 1,746 1,941 2,136 2,334 2,532 2,730 Current financial debt 102 6 7 16 9 - - - - - - - -Accounts payable 98 63 76 85 100 112 127 141 155 169 182 195 209 Other current liabilities 8 24 24 23 23 23 23 23 23 23 23 23 23 Total current liabilities 208 94 108 124 132 135 150 164 178 192 204 218 232 Non-current debt 119 193 200 127 27 - - - - - - - -Deferred tax liabilities 36 35 35 33 33 33 33 33 33 33 33 33 33 Other non-current liabilities 25 25 25 23 23 23 23 23 23 23 23 23 23 Total non-current liabilities 179 253 260 183 84 57 57 57 57 57 57 57 57 Total liabilities 387 346 368 308 216 192 206 221 234 248 261 274 288 Share capital 605 591 595 558 558 558 558 558 558 558 558 558 558 Retained earnings 67 108 132 221 378 561 784 967 1,149 1,329 1,515 1,700 1,883 Total shareholders equity 672 699 728 779 936 1,119 1,342 1,525 1,707 1,888 2,073 2,258 2,441 Total liabilities and shareholders equity 1,059 1,045 1,095 1,087 1,152 1,310 1,548 1,746 1,941 2,136 2,334 2,532 2,730 Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity 164 117 176 217 270 356 414 370 366 366 373 375 375 CF from investing activity -234 -73 -183 -153 -153 -157 -162 -166 -171 -175 -180 -185 -190 CF from financing activity 68 -45 2 -61 -115 -105 -82 -64 -66 -66 -67 -67 -66 Cash flow for the period -2 -2 -4 3 3 94 170 140 130 125 126 123 119 Cash at the beginning of the year 18 16 14 10 12 15 108 278 418 548 673 799 923 Cash at the end of the year 16 14 10 12 15 108 278 418 548 673 799 923 1,041 Source: Alfa Research

Equity Market


86

MRSK South Address: Tel: E-mail: Website: CEO CFO Investor Relations

327 Severnaya st.,

Krasnodar 350015, Russia

+7 (861) 279 87 86

[email protected]

http://www. mrsk-yuga.ru

Aleksandr Gavrilov

Igor Lounyov

Anna Yourchenko


MRKY RU

MRKY.RTS

$0.005

$0.28 mln

19%

37%

49,811,096,064

$259

$0.008

55%

O/W


- Limited regulatory risk (50% of branches have adopted RAB-based tariffs)

- Possible merger of Kubanenergo into MRSK South


- Regulatory risks

- No IFRS financial statements and low transparency

- High debt burden

Figure 205: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 605 689 867 1,003 1,167 1,297 1,328 EBITDA, $ mln 128 125 222 268 341 369 310 Net Income, $ mln -37 36 106 120 207 227 177EV/Sales, x 1.1 0.9 0.8 0.7 0.6 0.5 0.5EV/EBITDA, x 5.1 5.2 2.9 2.4 1.9 1.8 2.1P/E, x - 7.1 2.4 2.2 1.2 1.1 1.5Operating margin, % 9.9% 7.4% 16.6% 18.9% 22.2% 21.9% 16.7%EBITDA margin, % 21.1% 18.2% 25.6% 26.8% 29.2% 28.4% 23.3%Net margin, % -6.1% 5.3% 12.2% 11.9% 17.8% 17.5% 13.3%Net debt/EBITDA 3.05 3.93 1.61 1.08 0.62 0.22 -0.16EV/Throughput, $/MWh 22.2 21.6 21.0 20.2 19.5 19.0 18.5EV/iRAB, x 0.47 Source: Company data, Alfa Research

MRSK Tyumen

MRSK Siberia

Far East DisCo

Volgograd region

Astrakhan regionKalmykia Republic

Rostov regionMRSK Tyumen

MRSK Siberia

Far East DisCo

Volgograd region

Astrakhan regionKalmykia Republic

Rostov region

Equity Market


87


MRSK Holding

52%

Other19%

Investment funds8%

Lukoil's structures

21%

$0.000

$0.004

$0.008

$0.012

$0.016

Jun-09 Dec-09 Jun-10MRSK South RTSI$ Index RebasedMRSK Holding Rebased



0.00200.00400.00600.00800.00

1,000.001,200.001,400.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%


ths.GWH

0

10

20

30

40

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




25,558

128,573

93,818 2,385

0

50,000

100,000

150,000

200,000

250,000

300,000



20,8865,606

9,051

05,000

10,00015,00020,00025,00030,00035,00040,000




Equity Market


88


0

100

200

300

400

500

600

700

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

-10%-5%0%5%10%15%20%25%30%35%40%

RUB/MWh

-10%

0%

10%

20%

30%

40%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E




-3,0002,0007,000

12,00017,00022,00027,00032,00037,00042,00047,000

2011 2012 2013 2014 2015


0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est



0

10,000

20,000

30,000

40,000

50,000

60,000

2011 2012 2013 2014 2015

Volgogradenergo AstrakhanenergoRostovenergo Kalmenergo

13,905

2,963

12,230

368

Volgogradenergo

Astrakhanenergo

Rostovenergo

Kalmenergo


Equity Market


89

MRSK South DCF valuation

Figure 218: MRSK South DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 605 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774 - % growth, y-o-y 2% 14% 26% 16% 16% 11% 2% 6% 7% 6% 5% 5% - distribution revenues 531 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774 - connection fee proceeds 29 - - - - - - - - - - - - other 44 - - - - - - - - - - -EBITDA 128 125 222 268 341 369 310 310 319 329 330 330 - % growth 13% -2% 77% 21% 27% 8% -16% 0% 3% 3% 0% 0% - % margin 21% 18% 26% 27% 29% 28% 23% 22% 21% 21% 20% 19%Operating income (EBIT) 60 51 144 190 259 284 221 218 223 230 227 223 - % growth 25% -16% 183% 32% 36% 10% -22% -2% 2% 3% -1% -2% - % margin 10% 7% 17% 19% 22% 22% 17% 15% 15% 14% 13% 13%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 12 10 29 38 52 57 44 44 45 46 45 45NOPAT 48 41 115 152 207 227 177 174 179 184 182 178Depreciation and amortization 68 74 78 79 82 85 88 92 95 99 103 107 - % growth 4% 10% 5% 0% 4% 4% 4% 4% 4% 4% 4% 4%Changes in WC - -4 -21 25 31 9 -33 -6 -3 -4 -8 -10Operating Cash Flows 116 119 214 206 258 303 298 272 277 286 293 295CAPEX 98 213 98 104 126 117 120 124 127 131 135 107 - CAPEX/D&A 1.4x 2.9x 1.3x 1.3x 1.5x 1.4x 1.4x 1.3x 1.3x 1.3x 1.3x 1.0x - % of sales 16% 31% 11% 10% 11% 9% 9% 9% 8% 8% 8% 6%Unlevered FCF 18 -94 116 102 131 186 178 148 150 155 158 188Discount rate (WACC) 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17%Discount factor 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.4 0.3 0.3 0.2 0.2Present value of FCF 18 -87 92 68 76 91 75 53 46 41 35 36Assumed perpetual growth rate 0%Terminal year cash flow 188 Terminal value 1,102 PV of terminal value 210 Sum of PV of FCF 526 Total EV 736 Net debt, 2009 395 Fair equity value 341 # of shares: Common, mln 49,811 Fair value per share $0.007 Implied EV/RAB 0.53Implied 2010E EV/EBITDA 5.9 Implied 2010E EV/S 1.1Source: Alfa Research

Figure 219: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 4%Debt rate implied 10%Statutory tax rate 20%After-tax cost of debt 8%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 8%IFRS standarts application 2%Transparency and Disclosure 1%Presence of large institutional investor 1%Payment discipline in the region 1%% of branches under RAB 1%Liquidity 2%Adjusted equity risk premium 15%Cost of equity 21%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 17.1%Source: Alfa Research

Equity Market


90

MRSK South condensed financials

Figure 220: MRSK South condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 595 605 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774 Electricity distribution 502 531 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774 Connection fees 80 29 - - - - - - - - - - - Other 13 44 - - - - - - - - - - -Operating expenses 546 545 638 723 813 908 1,013 1,107 1,195 1,290 1,372 1,461 1,551 Raw materials 27 25 27 29 30 33 35 37 39 41 43 45 47 Personnel costs 92 102 110 117 123 132 141 149 156 163 171 179 187 Payroll taxes 22 24 26 28 29 31 33 35 37 38 40 42 44 Federal Grid charge 97 102 154 205 256 298 362 426 491 562 620 682 746 Electricity losses purchased 130 131 168 185 210 238 257 266 271 275 279 283 288 Depreciation 135 66 72 76 80 86 92 97 102 107 112 117 123 Other expenses 44 96 80 84 85 89 93 96 100 104 108 112 117Operating income (EBIT) 48 60 51 144 190 259 284 221 218 223 230 227 223EBITDA 113 128 125 222 268 341 369 310 310 319 329 330 330Interest expense 21 59 5 11 40 - - - - - - - -Other operating expenses 9 34 - - - - - - - - - - -Pre-tax income (EBT) 17 -32 45 132 150 259 284 221 218 223 230 227 223Profit tax 18 5 9 26 30 52 57 44 44 45 46 45 45 Income before minority interest -1 -37 36 106 120 207 227 177 174 179 184 182 178Minority interest: share of net result 0 0 0 0 0 0 0 0 0 0 0 0 0Net income -1 -37 36 106 120 207 227 177 174 179 184 182 178Margins, % EBITDA margin 19.1% 21.1% 18.2% 25.6% 26.8% 29.2% 28.4% 23.3% 21.9% 21.1% 20.5% 19.5% 18.6%Operating margin 8.1% 9.9% 7.4% 16.6% 18.9% 22.2% 21.9% 16.7% 15.4% 14.8% 14.3% 13.5% 12.6%Pre-tax margin 2.9% -5.3% 6.6% 15.3% 14.9% 22.2% 21.9% 16.7% 15.4% 14.8% 14.3% 13.5% 12.6%Net margin -0.1% -6.1% 5.3% 12.2% 11.9% 17.8% 17.5% 13.3% 12.3% 11.8% 11.5% 10.8% 10.1% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 17 46 7 8 10 12 13 51 155 260 369 481 593 Accounts receivable 238 370 409 404 478 549 603 611 642 679 710 739 767 Inventories 47 45 54 60 71 79 89 98 106 115 123 131 139 Total current assets 302 462 470 473 558 640 705 760 904 1,054 1,202 1,351 1,499 PPE 891 892 1,038 992 1,017 1,062 1,094 1,126 1,158 1,190 1,222 1,254 1,286 Deferred tax assets 15 15 15 14 14 14 14 14 14 14 14 14 14 Other non-current assets 2 3 3 4 5 5 6 6 6 7 7 8 8 Total non-current assets 908 910 1,056 1,010 1,036 1,082 1,114 1,146 1,179 1,211 1,243 1,276 1,308 Total assets 1,210 1,371 1,526 1,483 1,594 1,722 1,820 1,906 2,082 2,265 2,445 2,626 2,807 Current financial debt 72 48 27 92 75 56 24 - - - - - -Accounts payable 157 253 303 335 394 443 498 546 592 641 683 728 775 Other current liabilities 3 3 3 3 3 3 3 3 3 3 3 3 3 Total current liabilities 232 304 333 429 471 501 524 549 595 643 686 731 777 Non-current debt 244 388 472 275 225 167 71 - - - - - -Deferred tax liabilities 9 9 9 9 9 9 9 9 9 9 9 9 9 Other non-current liabilities 3 2 2 2 2 2 2 2 2 2 2 2 2 Total non-current liabilities 256 399 483 286 236 178 83 11 11 11 11 11 11 Total liabilities 488 704 817 715 707 679 607 560 606 655 697 742 789 Share capital 169 165 166 156 156 156 156 156 156 156 156 156 156 Additional paid-in capital 508 496 500 468 468 468 468 468 468 468 468 468 468 Retained earnings 45 7 44 143 263 419 589 722 852 986 1,124 1,260 1,394 Total shareholders equity 722 668 709 768 887 1,043 1,213 1,346 1,477 1,610 1,748 1,884 2,018 Total liabilities and shareholders equity 1,210 1,371 1,526 1,483 1,594 1,722 1,820 1,906 2,082 2,265 2,445 2,626 2,807

Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity -6 60 120 217 214 258 303 298 272 277 286 293 295 CF from investing activity -126 -97 -213 -98 -104 -126 -117 -120 -124 -127 -131 -135 -139 CF from financing activity 150 68 53 -117 -108 -130 -184 -140 -44 -45 -46 -46 -45 Cash flow for the period 18 30 -40 2 2 2 1 38 104 104 109 112 111 XR effect -1 -1 - - - - - - - - - - -Cash at the beginning of the year - 17 46 7 8 10 12 13 51 155 260 369 481 Cash at the end of the year 17 46 7 8 10 12 13 51 155 260 369 481 593 Source: Alfa Research

Equity Market


91

MRSK North Caucasus Address: Tel: E-mail: Website: CEO Investor Relations

18 Podstantsionnaya st.,

Energetik,

Pyatigorsk 357506, Russia

+7 (8793) 33-66-80

[email protected]

http://www. mrsk-sk.ru

Magomed Kaitov

Anna Kountsevitch


MRKK RU

MRKK.RTS

$4.28

$0.54 mln

30%

256%

29,532,052

$126

$11.2

161%

O/W


- One of the most liquid MRSKs

- The cheapest MRSK on EV/iRAB


- The highest regulatory risks – none of the branches has RAB-based tariffs, and MRSK Holding’s iRAB guidance looks abnormally high and unrealistic

- The poorest payment discipline of all MRSKs

- The highest percentage of electricity losses

- Unfavorable location of business

- No IFRS financial statements

- Expected sharp increase in debt burden

Figure 221: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 386 454 536 674 829 842 386 EBITDA, $ mln 25 52 81 161 257 220 25 Net Income, $ mln -22 -1 23 91 168 137 -22EV/Sales, x 0.4 0.4 0.3 0.2 0.2 0.2 0.4EV/EBITDA, x 6.4 3.1 2.0 1.0 0.6 0.7 6.4P/E, x -5.7 -116.9 5.4 1.4 0.8 0.9 -5.7Operating margin, % -5.3% 1.4% 6.7% 16.9% 25.3% 20.3% -5.3%EBITDA margin, % 6.4% 11.5% 15.2% 23.8% 31.0% 26.1% 6.4%Net margin, % -5.7% -0.2% 4.3% 13.5% 20.2% 16.2% -5.7%Net Debt/EBITDA 3.18 1.07 0.41 -0.14 -0.52 -1.13 3.18EV/Throughput, $/MWh 13.3 13.3 12.8 12.4 12.1 11.8 13.3EV/iRAB, x 0.16 Source: Company data, Alfa Research

MRSK Tyumen

MRSK Siberia

Far East DisCo

Stavropol region

Dagestan RepublicChechnya

Republic

North Ossetia Republic

Kabardino-Balkaria RepublicKarachaevo-

CherkessiaRepublic

MRSK Tyumen

MRSK Siberia

Far East DisCo

Stavropol region

Dagestan RepublicChechnya

Republic

North Ossetia Republic

Kabardino-Balkaria RepublicKarachaevo-

CherkessiaRepublic

Equity Market


92


MRSK Holding

58%

Other42%

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

Jun-09 Dec-09 Jun-10MRSK NC RTSI$ Index RebasedMRSK Holding Rebased



$mln

0.00

200.00

400.00

600.00

800.00

1,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%


ths.GWH

0

3

6

9

12

15

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




10,407

61,391

48,600

020,000

40,00060,00080,000

100,000

120,000140,000



8,5302,624

3,882

(2,000)

3,000

8,000

13,000

18,000




Equity Market


93


0

200

400

600

800

1000

1200

1400

2009

2010

2011

2012

2013

2014

2015

-10%-5%0%5%10%15%20%25%30%35%

RUB/MWh

-10%-5%0%5%

10%15%20%25%30%35%

2010

2011

2012

2013

2014

2015




-3,000

2,000

7,000

12,000

17,000

22,000

27,000

2011 2012 2013 2014 2015


0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est



0

5,000

10,000

15,000

20,000

25,000

30,000

2011 2012 2013 2014 2015Stavropolenergo Kabardino-BalkariaKarachaevo-Cherkessia North OssetiaDagenergo

5,201

1,143954

1,441

2,997

Stavropolenergo

Kabardino-Balkaria branch

Karachaevo-CherkessiabranchNorth Ossetiabranch

Dagenergo


Equity Market


94

MRSK North Caucasus DCF valuation

Figure 234: MRSK North Caucasus DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 331 386 454 536 674 829 842 829 878 926 973 1,021 - % growth, y-o-y 35% 17% 18% 18% 26% 23% 2% -2% 6% 5% 5% 5% - distribution revenues 316 386 454 536 674 829 842 829 878 926 973 1,021 - connection fee proceeds 9 - - - - - - - - - - - - other 6 - - - - - - - - - - -EBITDA 30 25 52 81 161 257 220 161 161 164 163 161 - % growth -11% -17% 110% 56% 97% 60% -15% -27% 0% 2% -1% -1% - % margin 9% 6% 11% 15% 24% 31% 26% 19% 18% 18% 17% 16%Operating income (EBIT) -16 -21 7 36 114 210 171 111 110 111 108 105 - % growth 738% 30% -132% 455% 216% 84% -18% -35% -1% 1% -3% -3% - % margin -5% -5% 1% 7% 17% 25% 20% 13% 13% 12% 11% 10%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes -3 -4 1 7 23 42 34 22 22 22 22 21 NOPAT -13 -16 5 29 91 168 137 89 88 89 87 84 Depreciation and amortization 46 45 46 45 46 48 49 50 52 53 55 56 - % growth 29% 0% 0% -1% 3% 3% 3% 3% 3% 3% 3% 3%Changes in WC -23 15 -18 2 12 15 -10 -14 -3 -2 -3 -3 Operating Cash Flows 56 14 69 72 126 200 196 153 142 144 144 143 CAPEX 52 53 43 43 44 45 46 48 49 51 52 53 - CAPEX/D&A 1.1x 1.2x 0.9x 0.9x 0.9x 0.9x 0.9x 0.9x 1.0x 1.0x 1.0x 1.0x - % of sales 16% 14% 9% 8% 7% 5% 6% 6% 6% 5% 5% 5%Unlevered FCF 4 -39 27 29 82 155 149 105 93 94 92 90 Discount rate (WACC) 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%Discount factor 1.0 0.9 0.7 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2 0.1 Present value of FCF 4 -35 20 18 41 64 51 29 21 18 14 11 Assumed perpetual growth rate 0%Terminal year cash flow 90 Terminal value 412 PV of terminal value 52 Sum of PV of FCF 252 Total EV 304 Net debt, 2009 33 Fair equity value 271 # of shares: common 29.5 Fair value per share $9.17Implied EV/RAB 0.31 Implied 2010E EV/EBITDA 12.2 Implied 2010E EV/S 0.8 Source: Alfa Research

Figure 235: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 6%Debt rate implied 12%Statutory tax rate 20%After-tax cost of debt 9.6%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 14%IFRS standards 2%Transparency and disclosure 2%Presence of large institutional investor 2%Payment discipline in the region 3%Regulatory risk 4%Liquidity 1%Adjusted equity risk premium 21%Cost of equity 27%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 21.8%Source: Alfa Research

Equity Market


95

MRSK North Caucasus condensed financials

Figure 236: MRSK North Caucasus condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 245 331 386 454 536 674 829 842 829 878 926 973 1,021 Electricity distribution 233 316 386 454 536 674 829 842 829 878 926 973 1,021 Connection fees 3 9 - - - - - - - - - - - Other 9 6 - - - - - - - - - - -Operating expenses 247 347 406 448 500 560 620 671 718 768 815 865 917 Raw materials 16 22 24 25 27 29 31 32 34 36 37 39 41 Personnel costs 47 69 75 79 83 90 96 101 106 111 116 122 128 Payroll taxes 12 18 19 20 21 23 25 26 27 29 30 32 33 Federal Grid charge 17 37 55 73 91 106 129 152 175 201 221 243 266 Electricity losses purchased 74 109 137 151 176 205 227 242 254 266 279 293 308 Depreciation 42 25 27 28 30 32 34 36 38 40 42 44 46 Other expenses 39 68 69 71 72 75 78 81 83 86 89 92 95Operating income (EBIT) -2 -16 -21 7 36 114 210 171 111 110 111 108 105EBITDA 33 30 25 52 81 161 257 220 161 161 164 163 161Interest income 0 0 - - - - - - - - - - -Interest expense 1 1 7 8 7 - - - - - - - -Other operating expenses 3 0 - - - - - - - - - - -Pre-tax income (EBT) -6 -17 -28 -1 29 114 210 171 111 110 111 108 105Profit tax 3 2 -6 -0 6 23 42 34 22 22 22 22 21 Income before minority interest -9 -19 -22 -1 23 91 168 137 89 88 89 87 84Minority interest: share of net result 0 0 0 0 0 0 0 0 0 0 0 0 0Net income -9 -19 -22 -1 23 91 168 137 89 88 89 87 84Margins, % EBITDA margin 13.7% 9.0% 6.4% 11.5% 15.2% 23.8% 31.0% 26.1% 19.4% 18.4% 17.8% 16.7% 15.7%Operating margin -0.8% -4.8% -5.3% 1.4% 6.7% 16.9% 25.3% 20.3% 13.3% 12.5% 12.0% 11.1% 10.2%Pre-tax margin -2.5% -5.1% -7.2% -0.3% 5.4% 16.9% 25.3% 20.3% 13.3% 12.5% 12.0% 11.1% 10.2%Net margin -3.7% -5.7% -5.7% -0.2% 4.3% 13.5% 20.2% 16.2% 10.7% 10.0% 9.6% 8.9% 8.2% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 30 31 8 9 11 23 133 248 332 402 473 543 610 Accounts receivable 85 81 96 84 103 129 159 161 159 168 178 187 196 Inventories 34 33 40 43 50 56 63 68 73 79 84 89 95 Other current assets 0 5 5 5 5 5 5 5 5 5 5 5 5 Total current assets 149 150 149 141 169 214 360 483 569 654 739 823 906 PPE 543 537 549 512 509 506 504 501 499 496 494 491 489 Long-term financial investments 1 0 0 0 0 0 0 0 0 0 0 0 0 Deferred tax assets 14 12 12 12 12 12 12 12 12 12 12 12 12 Other non-current assets 6 6 7 8 10 12 15 15 15 16 17 17 18 Total non-current assets 564 555 568 531 530 530 530 528 525 523 522 520 518 Total assets 713 706 717 672 699 744 891 1,011 1,094 1,178 1,261 1,343 1,424 Current financial debt 56 52 18 16 11 - - - - - - - -Accounts payable 101 124 131 141 164 185 206 225 241 259 275 292 311 Other current liabilities 1 1 1 1 1 1 1 1 1 1 1 1 1 Total current liabilities 158 177 151 158 177 187 208 226 242 260 276 294 312 Non-current debt 12 13 68 48 33 - - - - - - - -Deferred tax liabilities 3 5 5 5 5 5 5 5 5 5 5 5 5 Other non-current liabilities 24 26 26 25 25 25 25 25 25 25 25 25 25 Total non-current liabilities 39 44 100 78 63 30 30 30 30 30 30 30 30 Total liabilities 197 221 251 236 240 216 237 255 272 289 306 323 342 Share capital 1 1 1 1 1 1 1 1 1 1 1 1 1 Additional paid-in capital 532 519 523 491 491 491 491 491 491 491 491 491 491 Retained earnings -17 -36 -58 -56 -32 36 162 264 331 397 463 528 591 Total shareholders equity 516 485 466 436 459 528 653 756 822 888 955 1,020 1,083 Total liabilities and shareholders equity 713 706 717 672 699 744 891 1,011 1,094 1,178 1,261 1,343 1,424

Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity -21 51 15 71 74 126 200 196 153 142 144 144 143 CF from investing activity 35 -52 -53 -43 -43 -44 -45 -46 -48 -49 -51 -52 -53 CF from financing activity 19 3 13 -27 -29 -70 -45 -34 -22 -23 -23 -22 -22 Cash flow for the period 32 2 -24 2 2 12 110 115 83 70 71 70 68 XR effect -2 - - - - - - - - - - - -Cash at the beginning of the year 0 29 32 7 9 11 23 133 248 332 402 473 543 Cash at the end of the year 30 31 8 9 11 23 133 248 332 402 473 543 610 Source: Alfa Research

Equity Market


96

Tomsk DisCo Address: Tel: E-mail: Website: Management:

36 Kirova st.,

Tomsk 634041, Russia

+7 (3822) 43 19 92

[email protected]

http://www.trk.tom.ru

managed by MRSK Siberia

Bloomberg Ticker Reuters ticker Closing price Average daily volume Free float 52 week change Shares outstanding, ord Shares outstanding, pref Market Cap, mln 12 M Target price, ord 12 M Target price, pref Upside, ord Recommendation, ord Upside, pref Recommendation, pref

TORS RU

TORS.RTS

$0.016

$0.01 mln

20%

282%

3,819,315,580

576,693,000

$67

$0.024

$0.022

48%

O/W

101%

O/W


- The lowest regulatory risk – the company has already fully adopted RAB-based tariffs

- Good transparency and disclosure through MRSK Siberia

- Possible merger into MRSK Siberia

- One of the cheapest on EV/RAB

- Net cash position


- Low liquidity

- No IFRS financial statements

Figure 237: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 119 121 143 196 220 250 283 EBITDA, $ mln 17 22 10 14 51 56 63 Net Income, $ mln 12 1 4 33 36 41 49EV/Sales, x 0.5 0.5 0.4 0.3 0.3 0.2 0.2EV/EBITDA, x 3.4 2.7 6.2 4.2 1.2 1.1 0.9P/E, x 5.5 100.5 16.7 2.0 1.9 1.6 1.4Operating margin, % 11.3% 0.7% 3.5% 21.3% 20.5% 20.4% 21.6%EBITDA margin, % 14.5% 18.1% 6.7% 7.1% 23.2% 22.3% 22.3%Net margin, % 10.2% 0.5% 2.8% 16.7% 16.4% 16.3% 17.3%Net Debt/EBITDA -0.37 -0.18 0.41 0.32 0.50 1.11 0.54EV/Throughput, $/MWh 3.8 4.2 4.1 4.0 3.9 3.8 3.7EV/iRAB, x 0.32 Source: Company data, Alfa Research

MRSK Tyumen

Far East DisCo

Tomsk region

MRSK Tyumen

Far East DisCo

Tomsk region

Equity Market


97


MRSK Holding

52%

Other22%

Rosneft's structures

26%

$0.000

$0.005

$0.010

$0.015

$0.020

$0.025

Jun-09 Dec-09 Jun-10Tomsk DisCo RTSI$ Index RebasedMRSK Holding Rebased



$mln

0.0050.00

100.00150.00200.00250.00300.00350.00400.00

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%


ths.GWH

0

2

4

6

8

10

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




4,471

8,520

3,152 238

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

1



2,107 601

553

0

1,000

2,000

3,000

4,000

5,000

1




Equity Market


98


0

100

200

300

400

500

600

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

-10%-5%0%5%10%15%20%25%30%35%40%45%

RUB/MWh

-10%-5%0%5%

10%15%20%25%

2010

E

2011

E

2012

E

2013

E

2014

E




-500

1,500

3,500

5,500

7,500

9,500

2010 2011 2012 2013 2014


0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est


Equity Market


99

Tomsk DisCo valuation

Figure 248: Tomsk DisCo DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 119 121 143 196 220 250 283 303 327 348 371 395 - % growth, y-o-y 13% 2% 18% 37% 12% 14% 13% 7% 8% 6% 7% 6% - distribution revenues 116 121 143 196 220 250 283 303 327 348 371 395 - connection fee proceeds 3 - - - - - - - - - - - - other 0 - - - - - - - - - - -EBITDA 17 22 10 14 51 56 63 76 77 78 79 80 - % growth 27% -56% 47% 265% 9% 13% 20% 1% 1% 1% 2% - % margin 16% 18% 8% 10% 26% 25% 25% 27% 25% 24% 23% 22%Operating income (EBIT) 9 13 1 5 42 45 51 61 62 62 62 63 - % growth 45% -94% 510% 723% 8% 13% 20% 1% 1% 1% 2% - % margin 9% 11% 1% 4% 21% 21% 20% 22% 20% 19% 18% 17%Tax rate 27% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 3 3 0 1 8 9 10 12 12 12 12 13 NOPAT 11 1 4 33 36 41 49 49 50 50 51 51 D&A 8 9 9 9 11 12 14 15 16 16 17 18 - % growth 6% 3% 2% 3% 15% 13% 20% 4% 4% 4% 4% 4%Changes in WC -3 -1 -0 2 -0 -0 0 -1 -1 -1 -1 -1 Operating Cash Flows 22 10 13 41 47 53 63 65 66 67 68 69 CAPEX 12 17 21 50 50 85 21 22 23 23 24 25 - CAPEX/D&A 1.4x 1.9x 2.3x 5.4x 4.7x 7.0x 1.5x 1.5x 1.4x 1.4x 1.4x 1.4x - % of sales 10% 14% 14% 25% 23% 34% 8% 7% 7% 7% 6% 6%Unlevered FCF 11 -6 -7 -9 -2 -31 42 43 43 44 44 45 Discount rate (WACC) 18% 50% 150% 250% 350% 450% 550% 650% 750% 850% 950% 1050%Discount factor 1.00 0.92 0.78 0.66 0.56 0.47 0.40 0.34 0.28 0.24 0.20 0.17 Present value of FCF 11 -6 -6 -6 -1 -15 17 14 12 10 9 8 Assumed perpetual growth rate 0%

Terminal year cash flow 45 Terminal value 245 PV of terminal value 42 Sum of PV of FCF 37 Total EV 79 Net debt, 2009 (8)Fair equity value 87 # of shares: common 4,347 Fair value per share $0.02 Implied EV/RAB 0.42Implied 2010E EV/EBITDA 8.2 Implied 2010E EV/S 0.6Source: Alfa Research

Figure 249: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 6%Debt rate implied 12%Statutory tax rate 20%After-tax cost of debt 9.6%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 9%IFRS standards 2%Transparency and Disclosure 1%Presence of large institutional investor 1%Payment discipline in the region 1%Regulatory risks 0%Liquidity 4%Adjusted equity risk premium 16%Cost of equity 22%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 18.3%Source: Alfa Research

Equity Market


100

Tomsk DisCo condensed financials

Figure 250: Tomsk DisCo condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 105 119 121 143 196 220 250 283 303 327 348 371 395 Electricity distribution 102 116 121 143 196 220 250 283 303 327 348 371 395 Connection fees 3 3 - - - - - - - - - - - Other 0 0 - - - - - - - - - - -Operating expenses 96 106 120 138 155 175 199 222 242 265 286 308 331 Raw materials 3 4 4 4 4 5 5 5 5 6 6 6 7 Personnel costs 17 17 19 20 21 22 24 25 27 28 29 31 32 Payroll taxes 3 4 4 5 5 5 6 6 6 6 7 7 7 Federal Grid charge 19 24 35 47 58 68 84 98 111 127 140 154 169 Electricity losses purchased 26 26 30 33 36 40 44 47 50 53 57 61 65 Depreciation 8 8 9 9 9 11 12 14 15 16 16 17 18 Other expenses 19 23 20 21 22 24 25 27 28 29 31 32 34 Other operating income - - - - - - - - - - - - -Operating income (EBIT) 9 13 1 5 42 45 51 61 62 62 62 63 64EBITDA 17 22 10 14 51 56 63 76 77 78 79 80 81Interest income 0 - - - - - - - - - - - -Interest expense - - - 0 1 - - - - - - - -Other operating expenses -1 -2 - - - - - - - - - - -Pre-tax income (EBT) 10 15 1 5 41 45 51 61 62 62 62 63 64Profit tax 3 3 0 1 8 9 10 12 12 12 12 13 13 Income before minority interest 8 12 1 4 33 36 41 49 49 50 50 51 51Net income 8 12 1 4 33 36 41 49 49 50 50 51 51Margins, % EBITDA margin 16.4% 18.4% 7.9% 9.8% 26.0% 25.4% 25.2% 26.7% 25.3% 23.7% 22.6% 21.6% 20.6%Operating margin 8.9% 11.3% 0.7% 3.5% 21.3% 20.5% 20.4% 21.6% 20.3% 18.9% 17.9% 17.0% 16.1%Pre-tax margin 9.8% 12.7% 0.7% 3.5% 20.8% 20.5% 20.4% 21.6% 20.3% 18.9% 17.9% 17.0% 16.1%Net margin 7.1% 10.2% 0.5% 2.8% 16.7% 16.4% 16.3% 17.3% 16.2% 15.1% 14.3% 13.6% 12.9% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 0 8 2 3 4 4 5 6 6 21 51 83 115 Accounts receivable 6 9 9 11 15 17 19 21 23 25 26 28 30 Inventories 3 3 4 5 6 7 7 8 9 10 11 12 13 Total current assets 9 20 16 18 25 28 31 35 38 55 88 123 157 PPE 85 87 95 101 142 181 253 260 267 274 281 288 295 Other non-current assets 1 1 1 1 2 2 2 3 3 3 3 3 4 Total non-current assets 86 88 97 102 143 183 255 263 270 277 284 292 299 Total assets 95 108 113 121 168 210 287 298 308 332 373 414 456 Current financial debt - - 0 2 5 8 19 12 4 - - - -Accounts payable 9 15 17 19 23 25 29 32 35 39 42 45 49 Other current liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0 Total current liabilities 9 15 18 22 28 34 48 44 40 39 42 45 49 Non-current debt - - 1 6 15 24 56 35 12 - - - -Deferred tax liabilities 0 1 1 1 1 1 1 1 1 1 1 1 1 Total non-current liabilities 0 1 1 7 16 25 57 35 13 1 1 1 1 Total liabilities 9 16 19 29 44 59 105 79 52 40 43 46 50 Share capital 73 71 72 68 68 68 68 68 68 68 68 68 68 Retained earnings 12 20 21 24 56 83 114 151 188 225 262 300 338 Total shareholders equity 86 92 93 92 124 151 182 219 256 293 330 368 406 Total liabilities and shareholders equity 95 108 113 121 168 210 287 298 308 332 373 414 456

Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity - 24 10 13 41 47 53 63 65 66 67 68 69 CF from investing activity -429 -12 -17 -21 -50 -50 -85 -21 -22 -23 -23 -24 -25 CF from financing activity 429 -4 1 8 10 3 32 -41 -42 -29 -13 -13 -13 Cash flow for the period 0 8 -6 1 1 0 1 1 0 14 31 31 32 Cash at the beginning of the year - 0 8 2 3 4 4 5 6 6 21 51 83

Cash at the end of the year 0 8 2 3 4 4 5 6 6 21 51 83 115 Source: Alfa Research

Equity Market


101

Kubanenergo Address: Tel: E-mail: Website: CEO CFO Investor Relations

2 Stavropolskaya st.,

Krasnodar 350033, Russia

+7 (861) 219 63 79

[email protected]

http://www. kubanenergo.ru

Eugeny Kryuchkov

Tatyana Petrova

Svetlana Krouglova


KUBE RU

KUBE.RTS

$5.844

$0.33 mln

8%

53%

77,254,204

$104

$6.1

4%

E/W


- Involvement in construction of infrastructure for 2014 Winter Olympic Games

- High government support via equity structure

- Relatively liquid stock


- Regulatory risks – the company is still operating under “cost-plus” tariffs

- No IFRS financial statements and low transparency

- Huge 2010 CAPEX prior to RAB-based tariffs introduction

Figure 251: Financial data* 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 462 527 587 730 907 1,113 1,305 EBITDA, $ mln 72 81 78 143 236 360 482 Net Income, $ mln 57 -3 26 76 148 244 339EV/Sales, x 0.9 0.8 0.7 0.6 0.4 0.4 0.3EV/EBITDA, x 5.7 5.0 5.2 2.8 1.7 1.1 0.8P/E, x 7.9 - 17.4 5.9 3.1 1.8 1.3Operating margin, % 8.0% 8.0% 5.5% 13.1% 20.4% 27.4% 32.5%EBITDA margin, % 15.5% 15.4% 13.3% 19.6% 26.1% 32.3% 36.9%Net margin, % 12.4% -0.5% 4.4% 10.5% 16.3% 21.9% 26.0%Net Debt/EBITDA 5.51 4.33 5.95 1.98 0.86 0.20 -0.24EV/Throughput, $/MWh 25.9 29.1 28.6 27.6 26.7 26.0 25.4EV/iRAB, x 0.38 * Note: financial multiples are calculated based on post-money equity value (including ongoing share placement) Source: Company data, Alfa Research

KubanenergoKubanenergo

Equity Market


102


Russian Federation

34%

Rosneft structures

33%

Other8%

MRSK Holding

25%

$0$2$4$6$8

$10$12$14


Kubanenergo RTSI$ Index Rebased

MRSK Holding Rebased

*Note: After the ongoing additional share placement Source: Company data, Alfa Research



$mln

-300.00

200.00

700.00

1,200.00

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%


ths.GWH

0

5

10

15

20

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%




6,152

40,113

41,073 1,613

0

20,000

40,000

60,000

80,000

100,000



5,9302,324

4,141

02,0004,0006,000

8,00010,00012,00014,000




Equity Market


103


0200400600800

1,0001,2001,4001,600

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0%

5%

10%

15%

20%

25%

30%

35%RUB/MWh

0%5%

10%15%20%25%30%35%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E




-10,000

0

10,000

20,000

30,000

40,000

50,000

2011 2012 2013 2014 2015


0.

16x

0.29

x

0.32

x

0.38

x

0.39

x

0.39

x

0.40

x

0.44

x

0.45

x

0.47

x

0.51

x 0.81

x

0.0x0.2x0.4x0.6x0.8x1.0x1.2x

NC

Ura

ls

Tom

sk D

isC

o

Kuba

nene

rgo

Cen

ter&

Volg

a

Sibe

ria

Lene

nerg

o

Volg

a

Cen

ter

Sout

h

MO

ESK

Nor

thw

est


Equity Market


104

Kubanenergo DCF valuation Figure 262: Kubanenergo DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 462 527 587 730 907 1,113 1,305 1,182 1,260 1,324 1,392 1,464 - % growth, y-o-y -11% 14% 11% 24% 24% 23% 17% -9% 7% 5% 5% 5% - distribution revenues 448 588 610 776 936 1,113 1,305 1,182 1,260 1,324 1,392 1,464 - connection fee proceeds 89 - - - - - - - - - - - - other 3 - - - - - - - - - - -EBITDA 72 81 78 143 236 360 482 293 302 302 303 303 - % growth -46% 13% -4% 83% 65% 52% 34% -39% 3% 0% 0% 0% - % margin 16% 15% 13% 20% 26% 32% 37% 25% 24% 23% 22% 21%Operating income (EBIT) 37 42 32 96 185 305 424 232 237 234 231 228 - % growth -64% 14% -23% 196% 94% 65% 39% -45% 2% -1% -1% -1% - % margin 8% 8% 6% 13% 20% 27% 32% 20% 19% 18% 17% 16%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 7 8 6 19 37 61 85 46 47 47 46 46 NOPAT 29 34 26 76 148 244 339 186 190 187 185 182 Depreciation and amortization 35 39 46 48 51 55 58 61 64 68 72 75 - % growth 11% 13% 17% 4% 7% 7% 6% 6% 6% 5% 5% 5%Changes in WC -189 -15 -24 -5 11 26 32 -70 -1 0 1 3 Operating Cash Flows 253 88 96 129 188 273 365 317 255 255 255 254 CAPEX 73 277 117 124 118 112 115 118 121 125 128 75 - CAPEX/D&A 2.1x 7.1x 2.6x 2.6x 2.3x 2.0x 2.0x 1.9x 1.9x 1.8x 1.8x 1.0x - % of sales 16% 53% 20% 17% 13% 10% 9% 10% 10% 9% 9% 5%Unlevered FCF 180 -189 -22 5 70 162 250 199 134 130 127 179 Discount rate (WACC) 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%Discount factor 1.0 0.9 0.8 0.6 0.5 0.5 0.4 0.3 0.3 0.2 0.2 0.2 Present value of FCF 180 -174 -17 3 38 73 95 64 36 29 24 28 Assumed perpetual growth rate 0%Terminal year cash flow 179Terminal value 932 PV of terminal value 147 Sum of PV of FCF 200 Total EV 347 Net debt, 2009* (45)Fair equity value 393 # of shares: common 77.3Fair value per share $5.1Implied EV/RAB 0.33Implied 2010E EV/EBITDA 4.3Implied 2010E EV/S 0.7Source: Alfa Research * Net debt estimate includes expected cash proceeds from the ongoing additional share issue

Figure 263: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 4%Debt rate implied 10%Statutory tax rate 20%After-tax cost of debt 8% Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: IFRS standards 2%Transparency and disclosure 2%Presence of large institutional investor 1%Payment discipline in the region 1%Regulatory risk 3%Liquidity 2%Adjusted equity risk premium 18%Cost of equity 24%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 19.2%Source: Alfa Research

Equity Market


105

Kubanenergo condensed financials

Figure 264: Kubanenergo condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 517 462 527 587 730 907 1,113 1,305 1,182 1,260 1,324 1,392 1,464 Electricity distribution 407 384 527 587 730 907 1,113 1,305 1,182 1,260 1,324 1,392 1,464 Connection fees 106 76 - - - - - - - - - - - Other 3 2 - - - - - - - - - - -Operating expenses 416 425 485 555 635 722 807 881 950 1,022 1,089 1,161 1,236 Raw materials 15 13 14 16 17 18 19 21 21 23 24 25 26 Personnel costs 46 50 53 57 61 67 71 76 79 83 87 91 95 Payroll taxes 12 12 13 14 15 16 17 18 19 20 21 22 23 Federal Grid charge 49 59 88 117 146 170 206 243 280 320 353 388 425 Electricity losses purchased 173 169 186 208 244 285 316 337 354 370 388 408 428 Depreciation 31 35 39 46 48 51 55 58 61 64 68 72 75 Other expenses 89 88 91 98 105 114 122 129 135 142 149 156 163Operating income (EBIT) 101 37 42 32 96 185 305 424 232 237 234 231 228EBITDA 132 72 81 78 143 236 360 482 293 302 302 303 303Interest expense 28 29 45 - - - - - - - - - -Other operating expenses -31 -63 - - - - - - - - - - -Pre-tax income (EBT) 104 71 -3 32 96 185 305 424 232 237 234 231 228Profit tax 20 14 -1 6 19 37 61 85 46 47 47 46 46 Income before minority interest 84 57 -3 26 76 148 244 339 186 190 187 185 182Minority interest: share of net result 0 0 0 0 0 0 0 0 0 0 0 0 0Net income 84 57 -3 26 76 148 244 339 186 190 187 185 182Margins, % EBITDA margin 25.6% 15.5% 15.4% 13.3% 19.6% 26.1% 32.3% 36.9% 24.8% 23.9% 22.8% 21.7% 20.7%Operating margin 19.5% 8.0% 8.0% 5.5% 13.1% 20.4% 27.4% 32.5% 19.6% 18.8% 17.7% 16.6% 15.6%Pre-tax margin 20.1% 15.5% -0.6% 5.5% 13.1% 20.4% 27.4% 32.5% 19.6% 18.8% 17.7% 16.6% 15.6%Net margin 16.2% 12.4% -0.5% 4.4% 10.5% 16.3% 21.9% 26.0% 15.7% 15.1% 14.2% 13.3% 12.4% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 32 208 164 132 15 18 22 102 256 342 424 504 579 Accounts receivable 171 157 182 196 252 312 383 450 407 434 456 480 504 Inventories 48 51 59 65 77 88 99 108 117 126 134 143 153 Other current assets - 9 9 8 8 8 8 8 8 8 8 8 8 Total current assets 251 425 414 401 352 427 513 668 789 910 1,023 1,135 1,245 PPE 541 619 863 879 955 1,022 1,079 1,136 1,193 1,250 1,306 1,363 1,420 Long-term financial investments 4 4 4 4 4 4 4 4 4 4 4 4 4 Other non-current assets 6 6 7 7 9 11 14 16 15 16 17 18 18 Total non-current assets 551 629 874 890 968 1,037 1,097 1,156 1,212 1,269 1,327 1,385 1,443 Total assets 802 1,054 1,288 1,291 1,320 1,465 1,610 1,825 2,000 2,180 2,350 2,520 2,688 Current financial debt 32 68 - - 51 44 21 - - - - - -Accounts payable 175 361 410 443 515 576 632 676 712 749 779 811 841 Other current liabilities 1 1 1 1 1 1 1 1 1 1 1 1 1 Total current liabilities 208 429 411 443 567 621 653 676 713 750 780 811 842 Non-current debt 231 343 346 324 153 133 62 - - - - - -Deferred tax liabilities 5 5 5 5 5 5 5 5 5 5 5 5 5 Total non-current liabilities 236 348 351 329 158 138 67 5 5 5 5 5 5 Total liabilities 444 777 762 772 725 759 721 681 718 755 785 816 847 Share capital 61 59 258 241 241 241 241 241 241 241 241 241 241 Additional paid-in capital 282 274 329 308 308 308 308 308 308 308 308 308 308 Retained earnings 15 -57 -60 -31 45 156 340 594 733 875 1,016 1,155 1,291 Total shareholders equity 358 277 526 518 595 706 889 1,143 1,282 1,425 1,565 1,704 1,841 Total liabilities and shareholders equity 802 1,054 1,288 1,291 1,320 1,465 1,610 1,825 2,000 2,180 2,350 2,520 2,688 Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity - 309 97 96 129 188 273 365 317 255 255 255 254 CF from investing activity -429 -73 -277 -117 -124 -118 -112 -115 -118 -121 -125 -128 -132 CF from financing activity 463 -58 135 -1 -122 -66 -158 -170 -45 -48 -48 -47 -46 Cash flow for the period 35 179 -46 -23 -117 4 4 80 154 86 83 79 76XR effect -3 -2 -0 1 - -0 - - - - - - -Cash at the beginning of the year - 31 210 154 132 15 18 22 102 256 342 424 504 Cash at the end of the year 32 208 164 132 15 18 22 102 256 342 424 504 579 Source: Alfa Research

Equity Market


106

Tyumenenergo (not listed) Address: Tel: E-mail: Website: CEO CFO

4 Universitetskaya st.,

Surgut 628412, Russia

+7 (3462) 77 63 50

[email protected]

http://www.te.ru

Eugeny Kryuchkov

Tatyana Petrova

Figure 265: Financial data 2009 2010E 2011E 2012E 2013E 2014E 2015ERevenue, $ mln 1,137 1,347 1,647 1,975 2,253 2,442 2,636EBITDA, $ mln 315 351 496 668 807 807 806 Net Income, $ mln 157 133 272 412 518 512 506Operating margin, % 15.8% 15.5% 21.0% 26.1% 28.7% 26.2% 24.0%EBITDA margin, % 27.7% 26.0% 30.1% 33.8% 35.8% 33.0% 30.6%Net margin, % 13.8% 9.9% 16.5% 20.8% 23.0% 21.0% 19.2%Net debt/EBITDA 0.8 1.2 0.6 0.0 -0.4 -0.8 -1.2Source: Company data, Alfa Research

Far East DisCo

Tyumenenergo

Far East DisCo

Tyumenenergo

Equity Market


107

Figure 266: Shareholder breakdown Figure 267: Key financial figures

MRSK Holding100%

$mln

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%



Figure 268: Electricity transmission and losses Figure 269: Grid length breakdown, km ths.GWH

01020304050607080

2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%


23,203

14,7076,995

0

10,000

20,000

30,000

40,000

50,000

60,000




Figure 270: Transformer capacity breakdown, MVA Figure 271: Distribution tariff evolution

2,032

23,312 1,080

0

5,000

10,000

15,000

20,000

25,000

30,000



0

100

200

300

400

500

600

700

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

-5%

0%

5%

10%

15%

20%

25%RUB/MWh


Equity Market


108

Figure 272: Distribution tariff vs. inflation Figure 273: Revenue breakdown, RUB mln

-5%

0%

5%

10%

15%

20%

25%

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E


0

20,000

40,000

60,000

80,000

100,000

2011 2012 2013 2014 2015

OPEX RAB Depr. Return


Equity Market


109

Tyumenenergo DCF valuation

Figure 274: Tyumenenergo DCF model 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 1,137 1,347 1,647 1,975 2,253 2,442 2,636 2,868 3,075 3,248 3,433 3,623 - % growth, y-o-y 0% 18% 22% 20% 14% 8% 8% 9% 7% 6% 6% 6% - distribution revenues 1,232 1,502 1,709 2,098 2,326 2,442 2,636 2,868 3,075 3,248 3,433 3,623 - connection fee proceeds 72 - - - - - - - - - - - - other 22 - - - - - - - - - - -EBITDA 315 351 496 668 807 807 806 850 859 859 858 857 - % growth 41% 11% 41% 35% 21% 0% 0% 6% 1% 0% 0% 0% - % margin 28% 26% 30% 34% 36% 33% 31% 30% 28% 26% 25% 24%Operating income (EBIT) 180 209 346 514 648 640 632 670 671 664 655 646 - % growth 51% 16% 66% 49% 26% -1% -1% 6% 0% -1% -1% -1% - % margin 16% 15% 21% 26% 29% 26% 24% 23% 22% 20% 19% 18%Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%Taxes 36 42 69 103 130 128 126 134 134 133 131 129 NOPAT 144 167 277 412 518 512 506 536 537 531 524 517 Depreciation and amortization 135 142 150 153 160 166 173 180 187 195 203 210 - % growth 30% 5% 5% 2% 4% 4% 4% 4% 4% 4% 4% 4%Changes in WC -92 7 18 23 17 -7 -7 1 -6 -6 -7 -7 Operating Cash Flows 371 302 408 542 661 685 686 716 730 732 733 734 CAPEX 192 426 302 226 232 239 246 253 260 268 275 283 - CAPEX/D&A 1.4x 3.0x 2.0x 1.5x 1.5x 1.4x 1.4x 1.4x 1.4x 1.4x 1.4x 1.3x - % of sales 17% 32% 18% 11% 10% 10% 9% 9% 8% 8% 8% 8%Unlevered FCF 179 -124 106 316 428 446 440 463 470 464 458 451 Discount rate (WACC) 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21%Discount factor 1.0 0.9 0.8 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2 0.1 Present value of FCF 179 -113 80 196 219 189 154 134 112 91 75 61 Assumed perpetual growth rate 0% Terminal year cash flow 451 Terminal value 2,143 PV of terminal value 288 Sum of PV of FCF 1,197 Total EV 1,485 Net Debt, 2009 252 Fair equity value 1,233 # of shares: common 43,117 Fair value per share $0.029 Implied EV/RAB 0.38 Implied 2010E EV/EBITDA 4.2 Implied 2010E EV/S 1.1 Source: Alfa Research

Figure 275: WACC calculation Cost of debt Risk-free rate 6%Corporate debt spread 3%Debt rate implied 9%Statutory tax rate 20%After-tax cost of debt 7.2%Cost of equity Risk-free rate 6%Base equity risk premium 7%Company-specific adjustments: 14%IFRS standards 2%Transparency and Disclosure 2%Presence of large institutional investor 2%Payment discipline in the region 0%Regulatory risk 3%Liquidity 5%Adjusted equity risk premium 21%Cost of equity 27%Share of equity: E/(D+E) 70%Share of debt: D/(D+E) 30%WACC 21.1%Source: Alfa Research

Equity Market


110

Tyumenenergo condensed financials

Figure 276: Tyumenenergo condensed financial statements, $ mln Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenues 1,137 1,137 1,347 1,647 1,975 2,253 2,442 2,636 2,868 3,075 3,248 3,433 3,623 Electricity distribution 1,090 1,056 1,347 1,647 1,975 2,253 2,442 2,636 2,868 3,075 3,248 3,433 3,623 Connection fees 21 62 - - - - - - - - - - - Other 26 19 - - - - - - - - - - -Operating expenses 1,018 957 1,139 1,300 1,460 1,605 1,801 2,003 2,198 2,404 2,584 2,777 2,977 Raw materials 16 11 12 12 13 14 15 16 16 17 18 19 20 Personnel costs 112 128 139 147 155 167 178 188 197 207 217 227 238 Payroll taxes 19 22 23 25 26 28 30 32 33 35 37 38 40 Federal Grid charge 270 240 361 471 575 647 776 917 1,060 1,213 1,338 1,472 1,610 Electricity losses purchased 234 130 160 176 202 228 249 267 281 294 309 324 341 Depreciation 181 273 296 313 330 355 379 401 421 441 462 484 507 Other expenses 185 154 148 156 160 167 174 182 189 197 204 213 221Operating income (EBIT) 119 180 209 346 514 648 640 632 670 671 664 655 646EBITDA 223 315 351 496 668 807 807 806 850 859 859 858 857Interest income 1 - - - - - - - - - - - -Interest expense 10 34 42 6 - - - - - - - - -Other operating expenses -23 -51 - - - - - - - - - - -Pre-tax income (EBT) 134 197 167 340 514 648 640 632 670 671 664 655 646Profit tax 48 39 33 68 103 130 128 126 134 134 133 131 129 Income before minority interest 86 157 133 272 412 518 512 506 536 537 531 524 517Minority interest: share of net result 0 0 0 0 0 0 0 0 0 0 0 0 0Net income 86 157 133 272 412 518 512 506 536 537 531 524 517Margins, % EBITDA margin 19.6% 27.7% 26.0% 30.1% 33.8% 35.8% 33.0% 30.6% 29.6% 27.9% 26.4% 25.0% 23.6%Operating margin 10.5% 15.8% 15.5% 21.0% 26.1% 28.7% 26.2% 24.0% 23.4% 21.8% 20.4% 19.1% 17.8%Pre-tax margin 11.8% 17.3% 12.4% 20.7% 26.1% 28.7% 26.2% 24.0% 23.4% 21.8% 20.4% 19.1% 17.8%Net margin 7.6% 13.8% 9.9% 16.5% 20.8% 23.0% 21.0% 19.2% 18.7% 17.5% 16.3% 15.3% 14.3% Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECash and cash equivalents 92 129 27 70 39 322 639 952 1,280 1,615 1,946 2,272 2,594 Accounts receivable 298 194 215 253 314 358 388 419 455 488 516 545 575 Inventories 57 67 68 76 89 98 111 125 137 151 163 175 188 Other current assets 26 23 23 22 22 22 22 22 22 22 22 22 22 Total current assets 473 413 333 421 464 799 1,160 1,517 1,895 2,276 2,646 3,014 3,379 PPE 2,459 2,583 2,889 2,856 2,929 3,002 3,074 3,147 3,220 3,292 3,365 3,438 3,510 Long-term financial investments 13 11 11 10 10 10 10 10 10 10 10 10 10 Other non-current assets 3 4 5 6 7 8 9 10 11 11 12 13 13 Total non-current assets 2,475 2,598 2,905 2,872 2,946 3,020 3,093 3,167 3,240 3,314 3,387 3,460 3,534 Total assets 2,949 3,011 3,238 3,293 3,410 3,819 4,253 4,684 5,135 5,590 6,033 6,475 6,913 Current financial debt 54 - 14 - 4 - - - - - - - -Accounts payable 252 247 262 292 342 378 428 479 528 580 625 674 724 Other current liabilities 0 1 1 1 1 1 1 1 1 1 1 1 1 Total current liabilities 307 249 277 293 347 380 429 480 529 581 627 675 725 Non-current debt 261 381 426 360 12 - - - - - - - -Deferred tax liabilities 36 38 39 36 36 36 36 36 36 36 36 36 36 Total non-current liabilities 297 420 465 396 48 36 36 36 36 36 36 36 36 Total liabilities 604 668 742 689 395 416 466 517 566 618 663 712 762 Share capital 93 91 91 86 86 86 86 86 86 86 86 86 86 Additional paid-in capital 1,989 1,938 1,954 1,831 1,831 1,831 1,831 1,831 1,831 1,831 1,831 1,831 1,831 Retained earnings 264 314 451 686 1,098 1,486 1,871 2,250 2,652 3,055 3,453 3,846 4,234 Total shareholders equity 2,345 2,343 2,496 2,603 3,015 3,403 3,787 4,167 4,569 4,972 5,370 5,763 6,151 Total liabilities and shareholders equity 2,949 3,011 3,238 3,293 3,410 3,819 4,253 4,684 5,135 5,590 6,033 6,475 6,913 Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ECF from operating activity - 418 310 410 542 661 685 686 716 730 732 733 734 CF from investing activity -429 -192 -426 -302 -226 -232 -239 -246 -253 -260 -268 -275 -283 CF from financing activity 529 -186 13 -62 -346 -146 -129 -127 -135 -135 -133 -132 -130 Cash flow for the period 100 40 -102 46 -30 282 317 313 328 335 331 326 321 XR effect -8 - - -1 - - - - - - - - -Cash at the beginning of the year - 89 130 25 70 39 322 639 952 1,280 1,615 1,946 2,272 Cash at the end of the year 92 129 27 70 39 322 639 952 1,280 1,615 1,946 2,272 2,594 Source: Alfa Research

Contact Information Alfa Bank (Moscow) 12 Akad. Sakharov Prospect, Moscow, Russia 107078

Head of Equities Michael Pijiolis Telephone (+7 495) 795-3712

Research Department Telephone (+7 495) 795-3676 Head of Research Peter Szopo Oil & Gas Pavel Sorokin, Alexander Bespalov Macroeconomics Natalia Orlova, Ph.D., Dmitry Dolgin Banking Leyla Sharifullina Telecoms, Technology, Internet, Media Elena Mills Utilities Alexander Kornilov, Ph.D., Elina Kulieva, Ph.D., Fedor Kornachev Metals & Mining Barry Ehrlich, CFA, Maxim Semenovykh, Sergei Krivokhizhin, Ph.D. Consumer Goods, Retail, Real Estate Elena Mills, Vitaly Kupeev Agriculture, Industrials, Logistics Georgy Ivanin Russian Product Angelika Henkel, Ph.D., Vladimir Dorogov, CFA Editorial David Spencer, Heather Dean Translation Anna Sholomitskaya, Elena Elovskaya Production Aleksei Balashov

Equity Sales & Trading Telephone (+7 495) 223-5500, 223-5522 Facsimile (+7 495) 745-7897 International Isai Pochtar, Michael Kotov, Roland Glasfors, Dmitry Ryzhkov,

Victoria Duben Domestic Institutional Dmitry Soloviev, Dmitry Demchenko, Mikhail Babaev,

Ivan Shehavtsov Alfa-Direct Sales Team (+7 495) 795-3680 Sergey Rybakov, Valeriy Kremnev, Evgeniy Batelman

Alfa Capital (Kiev) 77-a Chervonoarmiyska St.(6th floor) Kiev, Ukraine 03150 Research Department

Telephone (+380 44) 490-1600 Facsimile (+380 44) 490-1601 Analysts Denis Shauruk, Oleh Yuzefovych

Equity Sales & Trading Sales Trading Sergey Grigorian, Denis Dolmatov Telephone (+380 44) 490-1600

Alfa Capital Markets (London) 1 Angel Court, 14th Floor, London, EC2R 7HJ Telephone (office) (+44 20) 7588-8500 Facsimile (office) (+44 20) 7382-4170 Telephone (Sales & Sales Trading) (+44 20) 7382-4175 Sales Julia Dawson (+44 20) 7382-4174 Sales Trading Douglas Babic (+44 20) 7382-4178

Alforma Capital Markets (New York) 1270 Avenue of the Americas, New York, NY 10020 Telephones (+1 212) 421-7500 Facsimile (+1 212) 421-8633 Sales Robert Kaplan Sales Trading Yan Gloukhovsky Fixed Income Sales Jeffrey Weichsel

Copyright Alfa Bank, 2010. All rights reserved.

IMPORTANT INFORMATION

The contents of this document have been prepared by Alexander Kornilov, a Senior Analyst at Open Joint Stock Company Alfa Bank ("Alfa Bank"), as Investment Research within the meaning of Article 24 of Commission Directive 2006/73/EC implementing the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). Alfa Capital Markets ("ACM") is distributing this document to its clients in the EEA and accepts no responsibility towards any other classes of recipient. Alfa Bank and ACM have in place appropriate conflicts of interest policies and procedures aimed at ensuring the objectivity of the information contained in this document. The information contained in this document is provided for information purposes only and is not a marketing communication, investment advice or personal recommendation within the meaning of MiFID. The information must not be used or considered as an offer or solicitation of an offer to sell or to buy or subscribe for any securities or financial instruments. In the UK, this document does not constitute a Financial Promotion within the meaning of section 21 of the Financial Services and Markets Act 2000 (as amended). ACM is regulated by the Financial Services Authority (“FSA”) with FSA registration number 416251, for the conduct of UK investment business and is the trading name of the UK branch of Alfa Capital Holdings (Cyprus) Limited (“ACC”), which is authorized by the Cyprus Securities and Exchange Commission under license number CIF 025/04. This document is not for distribution to retail clients as defined by MiFID and may not be communicated to such persons. This document is not for distribution or use by any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation or which would subject Alfa Bank, ACC , ACM or any other group entity to authorization, licensing or other registration requirements under applicable laws. The information contained in this document is the exclusive property of Alfa Bank. Unauthorized duplication, replication or dissemination of this document, in whole or in part, without the express written consent of Alfa Bank is strictly prohibited. Although the information in this document has been obtained from, and is based on, sources Alfa Bank believes to be reliable, no representation or warranty, express or implied, is made by Alfa Bank, ACM or the authors. ACM and its officers and employees do not accept any responsibility as to the accurateness or completeness of any information herein or as to whether any material facts have been omitted. All information stated herein is subject to change without notice. ACM makes no warranty or representation that any securities referred to herein are suitable for all recipients and any recipients considering investment decisions should seek appropriate independent advice. Nothing in this document constitutes tax, legal or accounting advice. Alfa Bank, ACC and their associated companies, officers, directors or employees (excluding any financial analysts or other personnel involved in the production of research), from time to time, may deal in, hold or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to the securities, financial instruments and companies mentioned in this email, or may have been, or may be represented on the board of such companies. If such circumstances arise, ACM, Alfa Bank, ACC and their associated companies have in place appropriate conflicts of interest policies and procedures to ensure that investment research remains independent and objective. A summary of ACC's conflicts of interests policy (which also covers ACM), containing details relevant to investment research, is available upon request from ACC or ACM. ACC and ACM have arranged for Alfa Bank and other relevant group entities involved in the production of research to implement equivalent policies. Alfa Bank is incorporated, focused and based in the Russian Federation and is not affiliated with US-based Alfa Insurance.

Documents

MRSK Initiation RAB Roll-Out Offe