Ukrainian Thermal Energy Generation

Publication Date	May 2008
Publisher	Concorde Capital
Product Type	Report
Pages	47
ISBN Number	not applicable
Product Code	CNC00018

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Summary

The five publicly traded thermal power generation companies account for 1/3 of electricity production in Ukraine. Thermal generation will carry all the country's power demand growth: the only alternative, nuclear power plants, are close to full capacity load.

The profitability of Ukrainian thermal power generation is one of the lowest in the world, but we expect improvement with demand for thermal electricity increasing in the next couple of years. Five listed generators are controlled by state - privatization, expected in 2009-2010, would be a catalyst for the stocks.

We see three main drivers in the wings that are poised to push GenCos' EBITDA up by more than tenfold in the next decade: privatization (most probable in 2010), a sharp rise in demand for thermal electricity (after 2010) and wholesale electricity market liberalization (2010-1012). We forecast EBITDA margins will start accelerating in 2011 and approach 24-30% by 2016.

To widen the set of tools to value Thermal power generation stocks, we employ DCF modeling, valuation by comparable deals in Russia and an asset-based approach. With inherent drawbacks in each of the methods, we do not rely on a single approach.

Content

1. Investment thesis
- Investment summary
- Closing in on mid to long-term value drivers
- Alternative investment to Russian OGKs
- Gas-fired power units idled again
- Privatization in 2008 is highly unlikely
- We recommend BUY on all GenCo stocks
- Our top picks
- GenCos summary - table
2. Stock market
- GenCos: short-term OGK leapfrogs
- Russian market restructuring takes wind out of OGKs
- Daily multiples relationship: GenCos vs OGKs - chart
- Breaking the psychological threshold
- EV/Capacity, USD/kW - chart
- GenCos premium/discount to OGKs - chart
- Stock market monitor
- Centerenergo. Stock performance, Spread, %, Trading volumes, USD mln chart
- Dniproenergo Stock performance, Spread, %, Trading volumes, USD mln chart
- Donbasenergo Stock performance, Spread, %, Trading volumes, USD mln chart
- Zakhidenergo Stock performance, Spread, %, Trading volumes, USD mln chart
3. L-T outlook: Energy balance is beneficial for TPPs
- Supply: no alternative to TPPs after 2010
- Tariffs and capacity load, December 2007 chart
- Forecast of available nuclear capacity, GW - chart
- Capacity and load forecasts by type of producer - chart
- CapEx needed to up production
- NERC initiative
- GenCo CapEx roundup: Only Vostokenergo has a clear plan
- Case study: Modernization at Vostokenergo
- Production forecasts
- Capacity load factor by GenCos - chart
- Energy deficit + Market reform = long-term surge in bottom line
- Wholesale market liberalization schedule approved by Cabinet
- Aggregate EBITDA of four GenCos - chart
4. S-T outlook: Over-regulation will persist
- Production: return to market rules
- DNEN and CEEN grew faster in 2007
- Electricity market 2007: production total, production by coal-fired units, capacity load factor, 2007 - table
- Electricity market 1Q08: production total, production by coal-fired units, capacity load factor, 2007 - table
- Gas-fired power units will be mothballed
- DOEN and ZAEN will outrun the pack in 2008
- Gas and energy coal prices in Ukraine - chart
- Fuel costs of power units, USD/MWh - chart
- Production forecasts, Centreenergo, Dniproenergo, Donbasenergo, Zahidenergo, Kyivenergo, Vostokenergo, 2008 - table
5. Financials: costs will boost profits
- 2007: Growth in top line, minor changes in bottom line
- Financial results of GenCos, 2007 - table
- 1Q08: Top line is booming, profitability falling
- Financial results of GenCos, 1Q08 - table
- Time series analysis: profitability is steadily decreasing
- Yoy changes in aggregate costs and tariffs - chart
- Aggregate EBITDA margin - chart
6. Corporate events
- 2008 privatization is hardly possible
- Conflict between President and Prime Minister
- Distribution of privatization proceeds: the key sticking point
- 2010 looks more realistic
- Dniproenergo: DTEK seems to have lost its chance
7. Valuation
7.1 Valuation methods
- Peer valuation underestimates GenCos' value
- Valuation by modeling GenCos operations is subject to uncertainties
- Asset base can be a good approximation of long-term value potential
7.2 Peer valuation
- Market multiples
- Peer valuation summary, Developed market peers - table
- Peer valuation summary, Emerging market peers - table
- Peer valuation summary, Russian peers - table
- Relationship between EBITDA/Capacity and EV/Capacity - chart
- Regression-implied GenCo prices - table
- Comparable deals: Russian OGKs
- OGK privatization multiples - table
- Implied upsides by OGK deals - table
7.3 DCF valuation
- Operating model assumptions
- Average tariff, USD/MWh - chart
- Average capacity load (coal units) - chart
- Net revenue, USD mln - chart
- Coal (USD/mt) and gas prices - chart
- Fuel efficiency - chart
- Fuel costs, USD/MWh - chart
- Gross margins - chart
- DCF valuation summary
- Implied 12M prices - table
7.4 Asset base valuation
- Replacement value (RV) of fixed assets
- Russian coal-fired power unit construction pipeline - table
- Depreciated RV
- Fixed asset accounting on GenCos balance sheet - table
- Estimation of net asset base, USD mln - table
7.5 Valuation summary
- Valuation summary, Centrenergo, USD - chart
- Valuation summary, Dniproenergo, USD - chart
- Valuation summary, Donbasenergo, USD - chart
- Valuation summary, Zakhidenergo, USD - chart
8. Company profiles
- 8.1 Centrenergo
  - BUSINESS OVERVIEW
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE - chart
  - MARKET INFORMATION - table
  - STOCK OWNERSHIP - table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Power plants location (circles for CEEN) - chart
  - Financial summary and forecast, USD mln: 2005 - 2016E
  - DCF output, 2008E - 2016E, UAH mln
  - Sensitivity, USD per share
- 8.2 Dniproenergo
  - BUSINESS OVERVIEW
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE - chart
  - MARKET INFORMATION - table
  - STOCK OWNERSHIP - table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Power plants location (circles for CEEN) - chart
  - Financial summary and forecast, USD mln: 2005 - 2016E
  - DCF output, 2008E - 2016E, UAH mln
  - Sensitivity, USD per share
- 8.3 Donbasenergo
  - BUSINESS OVERVIEW
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE - chart
  - MARKET INFORMATION - table
  - STOCK OWNERSHIP - table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Power plants location (circles for CEEN) - chart
  - Financial summary and forecast, USD mln: 2005 - 2016E
  - DCF output, 2008E - 2016E, UAH mln
  - Sensitivity, USD per share
- 8.4 Zakhidenergo
  - BUSINESS OVERVIEW
  - INVESTMENT CASE
  - SHARE PRICE PERFORMANCE - chart
  - MARKET INFORMATION - table
  - STOCK OWNERSHIP - table
  - MARKET MULTIPLES - table
  - KEY RATIOS - table
  - Power plants location (circles for CEEN) - chart
  - Financial summary and forecast, USD mln: 2005 - 2016E
  - DCF output, 2008E - 2016E, UAH mln
  - Sensitivity, USD per share
9. Appendices
Appendix 1: Power demand drivers: consumption, grid losses & exports
- Decrease in grid losses limited demand growth
- Structure of total demand, TWh - chart
- Electricity losses in grids, % of input - chart
- Growth rates: Production vs consumption - chart
- Internal consumption: key demand driver
- Structure of internal consumption, TWh - chart
- Structure of Ukrainian exports, TWh - chart
- Export: less to the east
- Export to UCTE
- Export to CIS
Appendix 2: Why have OGK prices dropped?
- YTD performance, May 26, 2008 - table
- Overoptimism
- OGKs' market EV/Capacity vs. EV/Capacity of acquisition deals - chart
- Anticipated market overhang
- Case study: RAO UES restructuring
10. Analyst certification
- 11. GenCos target history