Ukrainian Power Generation

Publication Date	March 2007
Publisher	Concorde Capital
Product Type	Report
Pages	32
ISBN Number	not applicable
Product Code	CNC00060

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Summary

Spurred by impressive advances in Russian electricity sector, the market is aggressively valuing Ukrainian generation. With uncertainty surrounding sector reforms, EV/Capacity is being used as a measuring yardstick to price GenCos. Though we still don't see strong reasons for regulatory reform anytime soon, increasing export options point toward higher load and maybe higher margins sector-wide in the mid-term. We relax our conservative valuations and upgrade the sector.

Content

1. Investment Case
- Investors eye energy appreciation prize
- EV/Capacity oriented
- Valuation revision
2. 52 weeks: +200%
- Excess demand pulled prices up
- Praying for liquidity
- Market can't hardly wait for future improvements
- A new discount equilibrium?
- Early spring thaw melted traditional discount to OGKs
- Why the discount holds
- 1. Need for reform
- Russia: Urgent problem
- Ukraine: At least a 3-year lag
- 2. Stock promotion
- Russia: RAO UES and OGKs see benefits from stock appreciation
- Ukraine: Poor corporate governance and lack of independence
- 3. Privatization
- Russia: Clear privatization schedule
- Ukraine: Only count on small stakes to be privatized
- Exports promise further discount reductions
- 1. Larger capacity utilization
- 2. Export reform: Profitability booster?
- The more progress in exports, the lower the discount to OGKs
3. Solving the multiples valuation puzzle
- EV/EBITDA: Not very telling
- Case study: Margins decreased in 2006
- Probably undervalued by EV/S
- EV/Capacity: Definitely undervalued
4. DCF: Grounded solutions
- DCF model passes quality control checks
- Conclusions:
- Base-case scenario: Downside as expected
- Best-case scenario: Outlining the ceiling
5. Valuation summary
6. Company profiles
- 6.1 Centrenergo
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE chart
  - BUSINESS OVERVIEW
  - MARKET INFORMATION table
  - STOCK OWNERSHIP table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Electricity Production - chart
- 6.2 Dniproenergo
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE chart
  - BUSINESS OVERVIEW
  - MARKET INFORMATION table
  - STOCK OWNERSHIP table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Electricity Production - chart
- 6.3 Donbassenergo
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE chart
  - BUSINESS OVERVIEW
  - MARKET INFORMATION table
  - STOCK OWNERSHIP table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Electricity Production - chart
- 6.4 Zakhidenergo
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE chart
  - BUSINESS OVERVIEW
  - MARKET INFORMATION table
  - STOCK OWNERSHIP table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Electricity Production - chart
7. Appendices
Appendix 1: Peer comparison
- Output and financials
Appendix 2: Key drivers for export growth
- Lack of capacity in Russia
- Growing demand in the west
- UCTE integration
Appendix 3: Gas-fueled capacity - If it's not loaded, it doesn't count
8. Analyst Certification
CHARTS
- Market
- Relative performance
- GenCos vs. OGKs indices
- Trading history, Monthly data
- Monthly free float turnover, Shares
- Stock indices (MCap-weighted)
- GenCos discount to OGKs by EV/Capacity
- Pure generation companies: EV/EBITDA 2007E
- Pure generation companies: EBITDA margins 2006
- EV/Sales 2007E
- EV/Sales vs. EBITDA margins, 2007E
- EV/Capacity, USD/kW
- EV/Utilized Capacity 2006, USD/kW
- EV/Capacity vs EBITDA(07E)/Capacity
- Model revision summary: base-case scenario - CEEN
- Model revision summary: base-case scenario - DNEN
- Model revision summary: base-case scenario - DOEN
- Model revision summary: base-case scenario - ZAEN
- Model assumptions that justify current GenCo prices
- Russian regions with an energy-deficit last winter
- Summary map: potential export winners
TABLES
- Target price revision, USD
- Capacity and output
- Financial summary, USD mln
- Market ratios (07E)
- Shareholders
- Valuation summary, USD
- 2007 Multiples: GenCos
- OGKs
- Capacity utilization rates of power producers
- Average wholesale tariffs, USD/MWh
- EBITDA margins
- Valuation by EBITDA/Capacity (benchmarking to lower 95% regression interval)
- Key assumptions
- DCF vs. the market, USD
- DCF valuation at the best-case scenario
- Valuation summary, USD
- Implied 12M upside summary
- Centrenergo - Income Statement Summary
- Centrenergo - Balance Sheet Summary
- Centrenergo - Quarterly Analysis
- Centrenergo - Base-case DCF model output
- Centrenergo - Sensitivity analysis
- Dniproenergo - Income Statement Summary
- Dniproenergo - Balance Sheet Summary
- Dniproenergo - Quarterly Analysis
- Dniproenergo - Base-case DCF model output
- Dniproenergo - Sensivity analysis
- Donbassenergo - Income Statement Summary
- Donbassenergo - Balance Sheet Summary
- Donbassenergo - Quarterly Analysis
- Donbassenergo - Base-case DCF model output
- Donbassenergo - Sensivity analysis
- Zakhidenergo - Income Statement Summary
- Zakhidenergo - Balance Sheet Summary
- Zakhidenergo - Quarterly Analysis
- Zakhidenergo - Base-case DCF model output
- Zakhidenergo - Sensivity analysis
- Per MWh financial ranking (2006E, USD)
- Utilization rates of installed generation capacity
- Market multiples, 2007E
- EV/Capacity, USD/kW