rao ues of russia: towards economy of growth through reform of energy sector presented by a. b....
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RAO UES of Russia: Towards Economy Of Growth
Through Reform Of Energy Sector
Presented by A. B. ChubaisChairman of the Board,
RAO UES of Russia
Brunswick UBS«Russia: Investing into Economy of Growth»
September 28, 2004
2
RAO UES of Russia: Growth Dynamics
RAO UES of Russia provides for approximately 70% of power generation and consumption in Russia
Source: RAO UES of Russia
Nationwide energyconsumption growthin Russia
Increase in power
generation by power
plants comprising the
RAO UES of Russia
holding
- Optimistic scenario:1290 bln kWt.h towards 2020 (on average, 2,76% a year beginning from 1998 )
- Moderate scenario: 1110 bln kWt.h towards 2020 (on average, 1,54% a year beginning from 1998)
Source: Energy strategy of Russia
Forecast for further growth
of energy consumption in Russia
-2
-1
0
1
2
3
4
1999 2000 2001 2002 2003 2004
%
3
RAO UES of Russia Group: Financial Showing For The Past Years (IAS)
Mln$
-5
0
5
10
15
20
25
1999 2000 2001 2002 2003
-15
-10
-5
10
15
20
25
0
5
1999 2000 2001 2002 2003
EBITDA
Revenues
Income (loss) from operations
EBITDA margin
Operating margin
%
8,015
- 0,87
0,4
20,14
2,2
4,2
5,06
- 11
20,1
10,9
4
Corporate Center Reform Management
Center
Business Unit
1
Business Unit
2
Business Unit
«Grids»
Business Unit
«Hydro Generation»
Business Unit
«Service»
Management Board
The new organizational structure of RAO UES of Russia must stimulate the reform progress in the electric power sector of Russia
SO-CDU Hydro WGCs(4),Hydro Power Stationsunder construction
Thermal WGCs(3), TGCs (8), CorrespondingRegionalEnergos
Thermal WGCs(3), TGCs (6),CorrespondingRegional Energos
Repair andService Companies
Federal Grid Сompany,IDCs,Export-import,Foreign assets
Improvement of Management:New Corporate Configuration of RAO UES
time is pressing
5
Bln Roubles
time is pressing
Profit before taxation: Results of 2003; Forecast and dynamics for 2004
Transition to a new management system based on Key Performance Indicators (KPI).
Increase in motivation and personal responsibility of the company management
(including the system of KPI-based bonuses and RAO UES share options).
2003 actual 2004 planned(initial business plans of subsidiary companies)
23.96 25.47
2004 planned(approved by the RAO
UES Management Board on Sept 20, 2004)
38.34
(prior to establishment of business units)
(updated 3 months into functioning of
business units)
New Corporate Configuration of RAO UES: Growth in Efficiency
Planned effect from introduction of
modern management techniques:
12,87
6
Georgia: about 20% of generating plants and 35% of distribution facilities have been purchased or assumed under trust management;
Armenia: Assets comprising about 85% of that country’s power generating facilities have been purchased or assumed under trust management;
Kirghizia, Tadjikistan:
Talks are unfolding about purchasing assets (completion of energy facilities).
Kazakhstan: Consummation of a deal on purchase of a share in a large power plant.
Purchase of Energy Assets in Other Countries
time is pressing
7
«Lesser Energy Business»:Results and Perspectives
time is pressing
JSC «RKS» Established in May 2003
Sales volumefor the first yearof operation: 14 billion roubles
Net loss: 117 million roubles
Facts Perspectives
Concentration of the core business in 14 cities of Russia.
Gradual expansion of core business geography
(up to 30 cities). Increase in sales volume
up to $1 billion in 2005.
Chief objective: break-even business plan for 2005,
generation of net profit starting from 2006.
8
Growth and Investment Factors in RAO UES: Pros and Cons
Slow pace of reformReform as the key
factor of a competitiveenergy market
High potentialof capitalization increasedue to undervaluation of
company stocks
High-capacity andever-growing
consumption marketCross funding
Risks associatedwith imperfect
legislationon company restructuring
+ -
9
++
Establishment of new industry units
Wholesale GenerationCompanies (WGC)
Territorial GenerationCompanies (TGC)
Establishment of Wholesale Generation Companies started: - Charter capital of «WGC-5» JSC comprises 29 407 170 459 roubles;
- Initially, 100% of company shares remain in the ownership of RAO UES of Russia.
- Shares are paid for by material assets and money (4 228 964 180 roubles).
Establishment of Territorial Generation Companies started: - RAO UES of Russia establishes a 100% owned subsidiary joint-stock company (TGC) - Pays for 50%+1 shares of the new company’s charter capital. - Unpaid shares pass into the ownership of the TGC. - Shareholders of “Energo” joint-stock companies, except for RAO UES of Russia obtain the right of purchasing 50% - 1 shares at par value.
Charter capital of «TGC-9» JSC: 4 200 000 roubles (generating assets of«Permenergo» and «Sverdlovskenergo» to be leased to the concern). Charter capital of «TGC-14»: 3 100 000 roubles (generating assets of «Buryatenergo» and «Chitaenergo» to be leased to the concern).
Energy Sector Reform:Latest events
10
+
Creation and development of a competitive energy market
Reform ofregional energy systems
Establishment of new industry units: Interregional Distribution Companies (IDC)
Exchange floor of the trading system administrator (ATS):
- Started operation on November 1, 2003.- Entered the Top 10 list of world’s largest energy exchanges.- Unites over 80 participant companies- Expected sales volume for 2004 – around $850M.
- Functional division was initiated in 46 energy enterprises («Energos»). - Shareholders approved of the reform program in 32 energy systems. - Three new «Energo»-based companies completed state registration.
Establishment of Interregional Distribution Companies started: - IDCs will be established as 100% owned subsidiary concerns of RAO UES of Russia.- Charter capitals of the IDCs will be paid for by shares of distribution grid companies, assigned at the time of restructuring the regional energy systems. - For transition period the IDC shares will be passed under trust management of the Federal Grid Company.
Energy Sector Reform:Latest events +
11
0
20
40
60
80
100
120
140
160
180
No
vem
be
r
Dec
emb
er
Jan
ua
ry
Feb
ruar
y
Mar
ch
Ap
ril
May
Jun
e
July
Au
gu
st
Mln
KW
t/h
100
200
300
400
500
600
Ro
ub
les/MW
thFree tradevolume
Free marketprices
Regulated marketprices
522 1327 2616 43833781 3580
493 490,85508,8 498,93
393,59
431,43
477,79 481,44
276,94
264,25
251,95
3987 3844
494,40
3605
517,55
4217
491,47
* Forecasted volumes
200333,7NEPOOL (USA) 10
(2004)45ATS (Russia)* 9
(2004)56 EEX (Germany)* 8
(2004)62AESO (Canada)* 7
(2004)67GME (Italy)* 6
2002104NYISO (USA) 5
2003118Nord Pool (Scandinavia) 4
2003119PJM (USA) 3
(2004)184NEM (Australia)* 2
2003229OMEL (Spain) 1
#Mln
MWthTotal
(forecast) for year
Spot Market
Free Market of Energy World Top 10 Exchange Floors
Source: ATS
Energy Market:A Positive Trend +
12
RAO UES of Russia: Potential for Capitalization Increase
Source: RAO UES of Russia based on IBES, Nelson, JCF estimates
EV/EBITDA (2004 Forecast) Mcap/kW (Beginning of September of 2004)
RAO UES Discount in relation to foreign companies’
EV/EBITDA average value
– from 43% to 62%
RAO UES capitalization per 1 KWt ofinstalled capacity
is several times lower than that of foreign energy
companies
+
0
1
2
3
4
5
6
7
8 7,5
2,9
5,96,5 6,6
0
116
538
160
473
940
100
200
300
400
500
600
700
800
900
1000
RAO UES
CEMIG
CEZ
ENDESA
E.ON
RAO UES
CEZENDESA
E.ON
CEMIG
13
-
+
Crossfunding
Risks associatedwith imperfect
reform legislation
Slowpace
of reform
Elimination ofcross funding
within several years
Elimination of conflictbetween corporate
and legislative norms
Quality of reformstill preferred over
pace of reform
Making it legalby creating
a system of action grants.
Amending the legislation(Tax Code, Law on Joint-stock
Companies, other legislative acts).
Previous decisionson energy system reform and
interregional framework of new companiesare not to be reviewed.
Removing the «Cons»
14
New Initiative of RAO UES: Concept of «Managed Expansion» of the Energy Market
Proposals Measures
• Transformation of the federal wholesale energy market (FOREM) into a system of bilateral agreements.
• Transfer of the entire regional power generation system to the FOREM
• Gradual reduction of the total contractual supply volumes through governmental decisions (within 3 to 5 years).
• Employment of bilateral agreements for protection of selected consumer groups
Withholding from immediate transition to the target model of market and its substitution with managed expansion of the energy market.
• Controlling energy price upsurge risks.
• Smooth accommodation of consumers and producers to market conditions.
• Retaining control over energy supply to the two most vulnerable consumer groups: major energy-intensive industrial plants and the residential sector.
Effects
15
Thank you for your attention