Valuation of Ukrainian Thermal Power Generation

The five publicly traded thermal power generation companies account for 2/5 of electricity production in Ukraine. Thermal generation will carry all the country's power demand growth in the future as the alternative, nuclear power plants, are already close to full capacity load.

In this report, we revise our valuation approach for thermal power generation companies (GenCos). We set aside DCF modeling (which is sensitive to mid-term assumptions that are highly uncertain in the current market) and valuation by Russian peers. We apply an economic profit model instead.

Due to mid-term uncertainties related to the tariff policy and GenCos' profitability, we believe an economic profit model is a more appropriate valuation instrument:

Fair value = Invested capital + NPV of future economic profits

We discuss 9M08 electricity production in Ukraine and revise our forecasts for 2008 and 2009.