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RAO UES Reform: Investments, Market, Structural Transformation

RAO UES Reform: Investments, Market, Structural Transformation. UBS Conference Moscow September 13, 2006. DISCLAIMER.

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RAO UES Reform: Investments, Market, Structural Transformation

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  1. RAO UES Reform: Investments, Market, Structural Transformation UBS Conference Moscow September 13, 2006

  2. DISCLAIMER This document is being presented to you solely for your information and may not be reproduced, further distributed to any other person, or published, in whole or in part, for any purpose. This document has been prepared by RAO UES (the Company) and comprises the written materials/slides that have been prepared solely for use at a presentation concerning the Company. The securities of the [Company and the] Company's subsidiaries have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States except in reliance on an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933. This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any shares in the Company or the Company's subsidiaries, nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment whatsoever. This document is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of Section 21 of the Financial Services and Markets Act 2000 of the United Kingdom («FSMA»). To the extent that this document does constitute an inducement to engage in any investment activity, it is directed only at (i) persons outside the United Kingdom; or (ii) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) of the United Kingdom (the «Financial Promotion Order»); or (iii) persons who fall within Articles 49(2)(a) to (d) («high net worth companies etc.») of the Financial Promotion Order; and (iv) any other persons to whom this document for the purposes of Section 21 of FSMA can otherwise lawfully be made (all such persons together being referred to as «relevant persons»), and must not be acted on or relied upon by persons other than relevant persons. Any invitation or inducement to engage in any investment activity included within this document is available only to relevant persons and will be engaged in only with relevant persons. Anyone other than a relevant person must not rely on this document.

  3. RussianFederation Minority Shareholders of the Parent Company 52% 48% RAO UES Central Dispatch High Voltage Grids + Grid Service 32 FederalPower Plants 73 Regional Energos Generation Transmission &Distribution Grids Sales RAO UES: Pre-reform Structure

  4. Monopolies Competitive Power Generation Private shareholders Government TerritorialGenCos (14) System operator FGC (Transmission) Wholesale GenCos (6) Competitivemarket IDC Holding (Distribution) sales North- West Ural and Volga Siberia Central Hydro GenCo (1) services FGC – Federal Grid Company ATS – Administrator of Trading System IDC – Inter-regional Distribution Company RAO UESTarget Structure

  5. will prevent future deficit Deficit will already develop in 2007 by 2010 deficit will reach: In the European zone – 18,7GW In Siberia – 2 GW In Far East – 0,8GW Capacity balance 2006-2010:Two options Source: RAO UES of Russia estimates Commissioning new capacity With current capacity -21,5 Capacity needs dynamic(GW) Available capacity (GW) Capacity deficit (GW)

  6. The only right answer Is to launch a large-scale long-term investment program What should be done? =

  7. Approach to Investment Sources ! ! Large-scale investments should be attracted during the final phase of the reform Investment Investments: Approach and Requirements Reform Concept Competitive sectors of the industry (primarily thermal generation) Privateinvestments Monopoly sectors of the industry Investments fromstate budget

  8. 10000 9796 8000 6000 5062 thsd MW 4000 3288 2059 2000 1279 0 2006 2007 2008 2009 2010 Investment New Power Construction Plan Investment Needs Capacity Commissioning Plan 25 21,6 19 18,6 20 15,5 15 Bn $ 10 6,8 5 0 2006 2007 2008 2009 2010 Investment Plan for 2006-2010: $81,5 billion (the largest investment program in Russia) In 2006-2010 commissioning capacity will reach 21,500 MW (for reference, in 2001-2005 commissioned capacity amounted to 7,000 MW) It is planned to commission about 38,000 MW in 2011-2015

  9. $ bn 0,67 0,8 0,09 3,48 4 FGC System Operator Hydro GenCo 3 3 $ bn 1,56 2 1 0,045 0 2006 2007 2008 2009 Investment Investment in the Monopoly Sectors:Federal Budget Allocation starting from 2007

  10. Investment RAB System: Incentive for Investments in Distribution Networks Regulatory Asset Base (RAB) Cost-plus No mechanisms to regulate the return on investments Market-based ROI with allowance for industry risk No mechanisms to regulate the reliability of services Economic incentives and responsibility for reliable provision of services to consumers Short-term setting (1 year) Such risks are not acceptable for strategic investors 5-year setting Tariff is indexed only for inflation Tariff indexation based on factors that are beyond the company control • Transition to the RAB system provides incentives for: • growth of the debt for the long-term modernization and development projects • growth of capitalization of distribution grids companies The RAB System is planed to be introduced in Russia in 2008 The Regulatory Asset Base (RAB) system operates in more than 20 countries, including UK, Germany, Sweden, Canada, etc.

  11. Private placement Public placement Thermal generation is the most important investment target 2/3 of electricity generation in Russia Investment Investments in Competitive Sectors: Basic Mechanisms Direct private investments in local projects Additional issue of sharesin WGCs and TGCs Investments Guarantee Mechanism Up to 460billion roubles (>$17,5billion) * * - 2006-2010

  12. RAO UES of RussiaMarket capitalization dynamics Investment Approve of the priority generating capacity projects 31,715 Positive outcome of the meeting with President Putin on the investments in power sector $ bn Decision on the maximum tariff growth in 2007 – 10%. Government approve investment program for 2006-2010 Statement of the Ministry of industry and power on the free access of private investments into thermal generation BoD decision on the pilot projects for additional shares issues of WGC/TGC 11,853

  13. Investment Undervaluation of Generation Assets: Comparative Analysis Source: RAO UES of Russia estimates, company data 2000 1917 ** 1500 1095 * EV/IC (August 2006) 1000 590 500 331 283 277 276 268 239 217 0 TGC-5 WGC-2 WGC-3 RAO UESof Russia WGC-4 WGC-5 TGC-6 TGC-3 (Mosenergo) Companiesinemergingmarkets Companiesindevelopedmarkets *- Weighted average value for 10 companies from Brazil, the Czech Republic, China, India, Malaysia, and South Korea ** - Weighted average value for 11 companiesfrom Spain, Finland, France, Germany, Italy, the United Kingdom, and the USA

  14. Investment Undervaluation of Distribution Grid Assets: Comparative Analysis Source: RAO UES of Russia estimates, company data 30000 28849 25000 20000 EV/length (August 2006, weighted average) 15000 10000 4829 4699 5000 0 Russia Emerging Developed markets markets

  15. Regulated Bilateral (Vesting) Contracts Starting from Sep.1, 2006 • One year long • Long- run (starting from 2007) Mandatory and voluntary liberalization of power market Competitive Markets • Spot market (no price cap) • Balancing market • New rules of the retail markets (wholesale competitive prices included into retail prices) + Ancillary Services Market • Suppliers selected on a competitive basis + Capacity Market • Bilateral contracts • Auction held by System Operator Markets Power Market Liberalization Competitive Market Model (launched on Sep. 1, 2006) Projected for 2007

  16. 2006 2007 2008 … Annual consumption – 2006 Annual consumption – 2007 Markets Sources to extend liberalization New generation and consumption + X% 5-9% (next slide) X% Annually from 2008: Mandatory liberalization –at least 5% of the 2007annual consumption Voluntaryliberalization –at least 5% of the 2007 annual consumption. 52007+ [5-15%]2008 5% 5% 5% 11-16% 5% X% X% Annual consumption – 2007 95% 90% around 75% (including new generation andnew consumption) All new capacity and consumption commissioned after 2007go to the free market Mandatory salesunder regulated contracts Voluntary liberalization (less electricity supplied under regulated contracts subject to a purchaser’s decision) Liberalised purchase of deltas (see next slide) Mandatory liberalization Retrading (see next slide)

  17. Markets Sources to further extend liberalization Regulated contracts– financial contracts (not physical!) De facto liberalization of the market (based on the results from first 13 days in September): Purchase at spot prices of delta between day-ahead consumption and annual projections ~5% - 9%of total daily consumption Producers retrade regulated contracts’ energy at competitive spot prices – 11 - 16 %of total daily production TOTAL: Trading energy volumes at competitive spot market prices: 16 - 25% Efficient plants Perform RCon their own + sell electric power over RC to “expensive” plants based on the market price price «Expensive» plants It is more profitable to buy based on the market price than generate on their own in order to meet RC obligations Market price + volume Demand, supply and competitive price are formed by full production and consumption volumes Efficient allocation of resources

  18. First reorganization: pro-rata spin-off (2006 - 2007) Second reorganization: pro-rata unbundling (2007 - mid-2008) RAO UESShareholders Meeting (November 30, 2006) RAO UESShareholders Meeting (2008) • Spin-off of two generation companies • (WGC-5 and TGC-5) with pro-rata distribution of shares • Reorganization of RAO UES of Russia throughunbundling • Pro-rata distribution of the company assetsamong shareholders • Transfer of functions to the Government and • infrastructural power industry entities Structural Transformation Restructuring of RAO UES of Russia: Two Steps in the Final Phase 2 1 As a result of reorganization, shareholders of RAO UES will own WGC,TGC, FGC and IDC shares in proportion to the amount of their shares in RAO UES

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