Ukrainian Gas Distribution

Publication Date	February 2008
Publisher	Concorde Capital
Product Type	Report
Pages	43
ISBN Number	not applicable
Product Code	CNC00025

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Summary

Heightened chances to see an overhaul of key regulations in the sector lead us to reclassify Gas Distribution companies as the next "it" investment opportunity. The entrance of strategic Russian investors over the last two years reached a critical mass that can force reform; the first signs of improvement could be visible as early as 2008.

Russians move in

We see conclusive signals that Gazprom has secured positions in a good third of the Ukrainian GasCos, though it has not officially confirmed this yet. Over the last two years, five other domestic gas distributors were locked up by another Russian player, GazEKS, which is related to Viktor Vekselberg. We believe the sizable Russian presence in the sector will trigger regulatory improvements.

Accelerating M&A activity to be main catalyst

Though illiquid, the market reacted positively to the sector's acquisitive action in 2007. Incitement from further takeover deals and the anticipation of regulatory improvements are likely to mature the GasCo industry over 2008-2009.

Regulatory improvements to unlock value in short-term

The industry's main value restrictions to date, low profitability and a lack of long-term network operation agreements, are expected to be removed in 2008. Up to a 45% increase in tariffs and toughening financial control by the state will force most gas distribution companies to start reporting positive profits already this year. The signing of network concession agreements, which have been extensively lobbied for by new strategic investors, should bring more positives.

Tariff reform is a long-term value driver

Shifting tariffs from cost-based to asset-based calculation, similar to the transition underway in the electricity distribution sector, will unveil value in gas distribution companies in the long run. Benchmarking to companies with RAB pricing (Ukrainian electricity distributors and Czech gas distributors) promises a xx to xx potential capitalization increase in the mid to long-term.

Content

1. EXECUTIVE SUMMARY
- Investment case
2. STOCK MARKET
- Stock market monitor
- Embryonic market on the verge of improving liquidity
3. OWNERSHIP STRUCTURE: RUSSIANS GAIN A FOOTHOLD
- Changes in ownership map: Russians in
- Russia sets the game rules in the sector
4. REGULATORY IMPROVEMENTS AHEAD
- 45% tariff adjustment in 2008 expected
- Fundamental sector reforms
5. FINANCIAL RESULTS
- Reported profits surge
- Debt revision
6. VALUATION
- Peer valuation
- Asset-based valuation
7. COMPANY PROFILES
7.1 Donetskoblgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.2 Khmelnitskgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.3 Kyivoblgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.4 Lvivgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.5 Iv.-Frankivskgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.6 Kirovohradgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.7 Dnipropetrovskgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.8 Odesagaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.9 Zhytomyrgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
7.10 Kharkivgaz
- Investment case
- Business overview
- Revenue structure
- Key financials
- Market information
- Stock ownership
- Corporate governance
- Share price performance
- Market multiples
APPENDIX: M&A monitor
CHARTS
SECTOR PERFORMANCE 12M
- Khmelnitskgaz. Stock performance Spread, %. Trading volumes, USD ths
- Kyivoblgaz. Stock performance Spread, %. Trading volumes, USD ths
- Donetskoblgaz. Stock performance Spread, %. Trading volumes, USD ths
- Ivano-Frankivskgaz. Stock performance Spread, %. Trading volumes, USD ths
- Lvivgaz. Stock performance Spread, %. Trading volumes, USD ths
- Kirovohradgaz. Stock performance Spread, %. Trading volumes, USD ths
- Comparative Markets (all data in USD mln)
- GasCo bid prices, 12M change
- Map of GasCos control by group, spring 2007
- Map of GasCos control by group, end 2007
- EBITDA margins 2007E: Russian vs Ukrainian GasCos
- Distribution tariff benchmark by countries, USD/ ths km
- GasCos revenue and cost structure*, USD mln
- Age breakdown of Ukrainian gas distribution network, number of years
- Gas network expansion pipeline
- Aggregate net income of state-controlled Oblenergos, USD mln
TABLES
- SECTOR PERFORMANCE 12M
- Khmelnitskgaz. Stock performance Spread, %. Trading volumes, USD ths
- Kyivoblgaz
- MARKET INFORMATION*
- STOCK MARKET DATA
- FINANCIAL RESULTS, 9M07 USD mln
- Valuation summary, USD
- GasCo stock universe on the PFTS
- M&A candidates
- Aggregate gas distribution network ownership
- P&L forecasts
- Net debt adjustment as of October 1, 2007, USD mln
- Russian peers: net debt adjustment, USD mln
- Peer valuation: Russian comparables
- Czech peers
- Ukrainian electricity companies
- RAB-based valuation
- . Stock performance Spread, %. Trading volumes, USD ths
- Donetskoblgaz. Stock performance Spread, %. Trading volumes, USD ths
- Ivano-Frankivskgaz. Stock performance Spread, %. Trading volumes, USD ths
- Lvivgaz. Stock performance Spread, %. Trading volumes, USD ths
- Kirovohradgaz. Stock performance Spread, %. Trading volumes, USD ths
- Comparative Markets (all data in USD mln)
- GasCo bid prices, 12M change
- Map of GasCos control by group, spring 2007
- Map of GasCos control by group, end 2007
- EBITDA margins 2007E: Russian vs Ukrainian GasCos
- Distribution tariff benchmark by countries, USD/ ths km
- GasCos revenue and cost structure*, USD mln
- Age breakdown of Ukrainian gas distribution network, number of years
- Gas network expansion pipeline
- Aggregate net income of state-controlled Oblenergos, USD mln