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Formation of Interregional Distribution Grid Company JSC IDGC of the Center December 20,2007
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1 Strategy of cost evaluation of IDGC/DGC and main proposals
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2 Evaluation Strategy
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3 Main propositions of DCF evaluation * Plan of organic growth ** On the basis of average historical exceeding of the tariff growth over inflation. *
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4 Calculation of tariffs according to the method of the investment capital profitability (RAB) It is supposed that from 2010 to 2012 Expenses+ strategy of tariff regulation on transfer of e/energy through distribution grids will be replaced by the method of profitability of the invested capital ( RAB –return on Regulatory Asset Base). The essence of RAB strategy is guarantee of full return of the means invested into the assets of the company during the fixed period that corresponds to the terms of validity of the assets and reception of the stable income the level of which is defined by the regulator that must conform to the risk profile of DGC and guarantee attractiveness of the branch for the investors. Operational expenses include all the field costs of the company except for amortization of the fixed assets, intangible assets. Return on the capital base must guarantee reproduction of the assets that are effectively used at transfer of electric energy through DGC’s grids. Profit of the capital base is defined by the norm of profitability (regulatory WACC) fixed by the regulator the stake of which will be fixed for the long-term period of regulation equal to all DGC. = + + Necessary gross return by RAB method Operational expenses Return on the capital base Profit of the capital base Capital base x WACC (regulatory)
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5 Calculation of the capital base for tariff calculation by RAB method = + + Regulatory capital base (as of the beginning of 2010) Initial capital as of the beginning of 2010 Cost of capital investments for 2H2007-2009. Circulating capital as of the beginning of 2010 For the purpose of correct prognosis of indicators of the operational activity of the distribution grid companies after switch to the system of regulation of their tariffs on the basis of RAB method, calculation of the regulator capital base for the moment of the planned introduction of new rules of tariff design (beginning of 2010) was realised. The initial capital is defined as the cost of the fixed assets that are on the balance of the company as of June 30,2007 and that were re-estimated according to Russian Accounting Standards for the end of 2009. Capital investments for 2H2007-2009 from business plans of the companies Circulating capital is defined on the basis of the existing circulation factors and their correspondence to average branch indicators during the accounting period. In the following years of the regulation period the regulatory capital base is calculated by the following way: = + - Regulatory capital base Regulatory capital base of the previous year Investments on the level of amortization of the previous year Change of the circulating capital + Amortization
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6 The initial capital used for defining of the regulatory capital base as of the beginning of 2010 is defined as the full cost of asset replacement with regard of their physical depreciation: The initial capital is defined proceeding from the current legislation concerning estimation of cost of the fixed assets for the purpose of book keeping Only the industrial assets are included into initial base of the invested capital (OL, substations, transformer substations), non-profile assets are not considered at calculation of the capital base The investments that were realised at the expense of payment for technical connection are not included into the capital base in order to avoid double calculation. Full cost of replacement is defined as cost of production or construction under the current conditions of the similar new object that by its functional characteristics is as much as possible similar to the estimated object. Physical depreciation is price decrease due to depreciation, dilapidation and aging, and also deterioration of properties that cannot be eliminated at the expense of the current service. Calculation of the capital base for tariff calculation by RAB method
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7 Discount rate and regulatory norm of profitability Cost of the owned capital Risk-free rate (nominal)5.21% Market premium5.50% Beta (unlevered)0.87 Corrected Beta ratio0.60 Country risk0.01 Specific risk for the reformation period0.00% Final cost of the owned capital of the company10.95% Premium for small-cap2.28% – 6.27% Debt capital cost Cost of debt funds (before taxation)10.32% Tax profit rate24.00% Cost of debt funds (after taxation)7.84% Structure of the capital Target correspondence of debt to owned capital61.00% WACC for discounting11.18% – 13.67% Regulatory WACC before taxation9.78% Regulatory WACC after taxation12.86% Calculation of WACC rates
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8 Macroeconomic assumptions for model building The main cost items are predicted on the basis of price indexes in the industry of the RF. Wage expenses are predicted in accordance with the pay indexes Prognosis of electric energy losses in physical terms is based on linear variation of the given indicator during the horizon period and achievement of the target indicator by 2015 Prognosis of electric energy losses in percent to net supply for 2015 is provided by JSC UES FGC Calculation of flat cost is based on the following assumptions: Macroeconomic assumptions Indicators 6 months of 2007 20082009201020112012201320142015 Inflation in the RF,CPI4,50%8,00%7,60%7,10%6,50%6,00%5,50%4,50%4,00% Cumulative inflation index108,00%116,20%124,50%132,50%140,50%148,20%154,90%161,10%167,50% Price index in the industry of the RF, PPI 4,90%9,00%8,00%7,00%6,50%5,50%5,00%4,00%3,50% Pay index in the RF10,10%13,00%12,00%11,00%13,00%9,00%8,00%7,00% Exchange rate ruble/ US dollar (average annual) 26,5027,2028,2029,0029,1030,0430,8531,3931,79 Inflation in the USA, CPI1,80%2,50% Source: documents adopted by the Evaluation Committee under the Board of Directors of JSC RAO UES of Russia
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9 Review of indicators of DGC that are included in the zone of responsibility of JSC IDGC of the Center
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10 IDGC of the Center Length of OL in DGC, km Geographical position of IDGC Refusals of connection, МВА Investment requirements of DGC, billion rubles Depreciation of the fixed assets, % Data: Business plans of DGC Summed installed capacity of TCP and Sb, MVA Belgorodenergo, 7.3 Bryanskenergo 1.9 Voronezhenergo, 2.9 Kostromaenergo, 1.4 Kurskenergo, 2.8 Lipetskenergo, 4.7 Orelenergo 1.4 Smolenskenergo, 2.7 Tambovenergo 1.3 Twerenergo, 1.8 Yarenergo, 2.6 40,00% 47,50% 55,00% 62,50% 0150300450
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11 Length 367.7 thous.km.* Power 1 318,8 thous. c.u.* Productive supply 27 958,2 Mio.kWh ** Proceeds 15 820,6 mln.rbl. ** * Data as of the end of the 1 st half of 2007 ** for the 1 st half of 2007. IDGC of the Center
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12 Investment program of DGC for 2Н2007-2010, mln rbl. Amount of losses at transfer of e/e in 2006, % Correlation – transfer of e/e (mln kW*hour)/ length of OL (km) in 2006. IDGC of the Center Productive supply and losses of e/e in DGC in 2006, mln. kWhour Data: DGC Business plans
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13 Results of evaluation
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14 *On the basis of the assumption that all DGC will take resolutions on reorganisation of the companies in the form of connection to the corresponding IDGC, without consideration of the stake of the existing IDGC. Stake of RAO UES – 50.23% Stake of DGC at technical connection to IDGC of the Center*
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15 Calculated ratios of conversion/exchange
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16 Appendices
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17 IDGC of the Center OL 110-150 kV, km OL 35 kV, kmOL 1-20 kV, kmOL 0,4 kV, km Rate of OL110-150 kV, % Rate of OL 35 kV, % Rate of OL 1-20 kV, % Rate of OL 0,4 kV, % JSC Belgorodenergo1 6452 45017 45415 3338% 10%11% JSC Bryanskenergo1 7511 75512 33310 4818%6%7% JSC Voronezhenergo3 1053 68520 45223 05915%12% 16% JSC Kostromaenergo1 7702 54911 4979 0148% 7%6% JSC Kurskenergo1 9092 82415 00713 7359% JSC Lipetskenergo1 5172 31111 70610 3397%8%7% JSC Orelenergo1 3611 86412 87711 7126% 8% JSC Smolenskenergo2 5613 77019 12012 11812% 11%8% JSC Tambovenergo1 8763 15511 89611 8039%10%7%8% JSC Twerenergo2 7203 98826 31717 32113% 15%12% JSC Yarenergo1 0302 08412 02410 3965%7% Total21 24530 435170 683145 311100% Productive supply of e/e (with regard of losses) in 2006, mln kW*hour Productive supply of e/e (with regard of losses) for the 1 st half of 2007, mln kW*hour Losses in 2006, mln kW*hour Amount of losses in 2006, % Proceeds in 2006, thous.rbl. Proceeds for the 1 st half of 2007, thous. rbl. Tariffs on transfer of e/e in 2006, rbl/MW*hour JSC Belgorodenergo9 580,45 006,4795,47,7%4 962 756,73 328 613,4480,2 JSC Bryanskenergo3 767,51 920,7206,85,2%1 527 536,01 389 297,9400,0 JSC Voronezhenergo7 289,13 636,3871,410,7%2 756 784,11 620 382,7372,8 JSC Kostromaenergo2 485,01 271,4508,617,0%1 664 313,8995 249,7640,6 JSC Kurskenergo5 152,02 556,0580,010,1%2 398 718,01 216 634,4460,9 JSC Lipetskenergo6 973,63 475,1661,58,7%2 524 778,51 520 684,2333,5 JSC Orelenergo2 248,81 075,8357,413,7%1 085 440,0732 802,0473,7 JSC Smolenskenergo3 265,51 623,1719,718,1%2 316 465,91 203 321,6660,2 JSC Tambovenergo3 038,11 527,6253,87,7%1 423 596,0737 977,0463,9 JSC Twerenergo4 500,72 292,6812,815,3%2 378 545,01 370 221,3514,6 JSC Yarenergo5 743,43 573,2470,87,6%2 872 758,81 705 374,3481,8 Total54 044,127 958,26 238,225 911 692,615 820 558,5 Length of OL by classes of voltage, km Economic indicators of work of DGC for 2006 and 1 st half of 2007 * *Preliminary data for the 1 st half of 2007 Source: Business plans of DGC
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18 Technological connection- refusals in connection for 2006 – 1 st half of 2007. Refused connection to DGC, (2006 ), kW Refused connection to DGC (1 st half of 2007 ), kW JSC IDGC of the Center JSC Belgorodenergo00 JSC Bryanskenergo01 287 JSC Voronezhenergo1680 JSC Kostromaenergo00 JSC Kurskenergo00 JSC Lipetskenergo12 35816 360 JSC Orelenergo29 00010 983 JSC Smolenskenergo00 JSC Tambovenergo00 JSC Twerenergo6 9362 046 JSC Yarenergo00 Total48 46330 676 Source: data of UES FGC
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19 System of standard units According to the System of standard units for distribution of the general tariff proceeds by classes of voltage adopted by Decree N 25/3 of the Energy Commission of the RF as of May 12, 2000 as appendix to the Strategy of calculation of the amount of payment for the services on transfer of electric energy: Amount of the overhead power transmission lines (OPTL) and cable power transmission lines (CPTL) is defined in standard units depending from length, voltage,design and material of the supports *: PTLVoltage, kVAmount of chains on the supportMaterial of the supports Amount of standard units for 100 km of OL right-of-way OPTL110-1501wood180 Metal160 ferroconcrete130 2metal270 ferroconcrete180 351wood170 metal140 ferroconcrete120 2metal180 ferroconcrete150 1-201wood160 Wood on ferroconcrete stubs140 ferroconcrete, metal110 0,41260 220 150 CPTL1102300 20-35470 3-10350 Up to 1 kV270 Amount of substations, transformer substations (TS), complex transformer substations (CTS),etc. *: NameMeasurement unitAmount of standard units for 1 measurement unit 110-150 kV35 kV1-20 kV SubstationSB10575- Power transformer (one- or three-phase) or reactor or booster transformer Equipment unit7,82,11,0 One-transformer TSB, CTSBTSB, CTSB--2,3 Two-transformer TSB, CTSBTSB, CTSB--3,0 One-transformer substation 34/0,4 kVSB-3,5- * Extracts on certain kinds of equipment are presented
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