Investor presentation 29 02 2012


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  • In summary, we have delivered a good set of results for the 6 months 2011 and remain the largest electricity transmission company in the world The fact that we have accessed the debt markets repeatedly and quite recently is testament to our business profile and regulatory framework In addition, we believe that the macro environment in Russia is positive and that will have a positive effect on electricity volumes Finally, we have committed ourselves to a rigorous programme of efficiency savings and plan to carry that through; tangible benefits have already been accomplished
  • Revenue, EBITDA and Profit for the period – see comments to slide 4 CAPEX – represent cash spent on purchase of PPE and intangible assets per Cash-flow statetment
  • We would like to rationalise our capital structure and use our credit headroom to efficiently finance capex; to that effect we have a target leverage of Total Debt/EBITDA of 2.5-3.0x We have been very successful in accessing the local bond market and have RUB 130 bn of debt, with a low average cost of debt when compared with other Russian corporates
  • Revenue Main revenue stream are transmission fees that have increased by 28% for the 1H2011 Drop in electricity sales by 45% happened in Nurenrgo and MGTES Operating expenses Depreciation increase between 2009 and 2010 was caused by the revaluation of PPE recorded as at 31 December. However no such revaluation happened in the 1H2011 and only moderate 5% increase in D&A took place. There has been a significant reduction in purchased electricity costs , which explained by changes OREM rules ( see below original comments from ДВКР): Это связано с изменением правил оптового рынка в 2011 году. В частности, с изменением объемов покупки мощности – раньше покупалась мощность по балансу 2008 года (базовый объем мощности) с учетом фактического коэффициента резервирования, с 01.01.2011 года - по балансу текущего года с учетом планового коэффициента резервирования. По объему потерь электрической энергии существенных изменений не было. При этом, 100% электрической энергии и мощности покупается по свободным (нерегулируемым) ценам. Personnel expenses: 2009-2010 change: The Group's employee benefits expenses and payroll taxes expenses increased by RUB 4,210 million, or 26.5%, to RUB 20,114 milli on for the year ended 31 December 2010, from RUB 15,904 million for the year ended 31 December 2009, primarily as a result of an increase in the average number of employees by 12% and an increase in the average salaries due to indexation of remuneration based on inflation and other factors. 1H2010 - 1H2011change: Average number of employees increased by 6%, RAR payroll and related taxes increase by 23 %, IFRS related adjustments ( accrual of unused vacation, employee pension scheme, share option scheme and capitalisation of payroll costs in PPE) increased by 914% mainly related to accrual of share option scheme of 880 RR mln Other expenses changed by -17% due to : - Change in doubtful debtors allowance by -104% ( last year was accrual of provision of 2 987 mln, current period (– 124) accrual of provision - increase in other expenses by 26%
  • It is once again evident that there has been a significant increase in revenues Finance income has dropped due to decrease from interest income from bank promissory notes and deposits Payroll costs have increased due to: increase in average number of employees by 6%, increase in average salaries and in payroll tax rate from 26% to 34% and introduction of share option scheme Purchased electricity- There have been a reduction in purchased electricity costs , which explained by changes in OREM rules During 1H2010 there was an accrual of specific impairment of intangible assets and advances on PPE, this period no such expenses –thus increase in EBITDA by 1,030 mln. As a result, EBITDA has increased by 42%
  • Net cash used in investing activities apart from purchase of PPE and intangible assets includes CF related to investments in and redemption of promissory notes, bank deposits and interest received Net cash used in financing activities includes only interest paid Free cash flow bridge Reconciliation adjustments of 1,051 mln represents adjustments to EBITDA for non-cash items (loss on disposal of PPE, share result of associate, reversal of bad debt provision, share option scheme expense) and adjustment to add back finance income to bring EBITDA to operating CF before WC changes and profit tax paid. WC changes represent net change in WC balances Increase in accounts receivable and inventories has been compensated by increase in accounts payable. Profit tax paid for the 1H2011 - 8,084 RR mln Capex includes purchases of PPE and intangible assets FCF ( free cashflow) represents net cash outflow (deficit) after operating cashflows and cash investments in PPE and intangible assets. This deficit as well as interest payment has been financed by net redemption of investments in promissory notes and bank deposits. Therefore net increase in cash and cash equivalent was 2,894 mln at the end of 1H2011.
  • Investor presentation 29 02 2012

    1. 1. Investor PresentationFebruary 2012
    2. 2. The Russian Power Sector Generation Transmission Distribution Supply Electricity and Heat High Voltage Grids Low Voltage Grids Electricity Trading Production Nuclear Power Hydro Power END CONSUMER Federal Grid Holding IDGC Plants Plants Company (MRSK) Rosatom RusHydro Thermal Power Plants TGKs OGKs Local IDGCs(Produce Heat and (Produce (MRSKs) Electricity) Electricity) Share in 50– 6–7% 25–35% 4–8% Tariff (1) 60%Source Company data (1) Company estimates 2
    3. 3. Why is Federal Grid a Good Investment Opportunity? Scale of Business Growth Prospects  Largest publicly traded electricity transmission  Anticipated electricity demand 2010 – 2020 CAGR company in the World (1) with over 120,000 km of of 2.4% transmission lines with total capacity of over  System upgrade focused on improving efficiency and 300,000 MVA reliability of the transmission network; development  Leading Russian blue chip company and the largest of smart grid model Russian utility company by market capitalization  Unique natural monopoly position in Russia’s high- voltage electricity transmission market, operating in 73 out of 83 Russian regions Supportive Regulatory Regime Strong Financials  Business regulation based on 5-year Regulatory  Track record of substantial growth (2009 – 2010 Asset Base (RAB) model revenue increased by 29%)  Guaranteed return on new invested capital  Rigorous programme of efficiency savings 11% in 2010 – 2012 and 10% in 2013 – 2014 (c. RUR 2.6 Bn of savings in 2010(2))  Low leverage and ability to obtain one of the lowest debt interest rates among Russian companies  Investment grade credit ratings (S&P - BBB/Stable; Moody’s - Baa2/Stable)Source Company data; IFRS financials; Energy Forecasting Agency(2) By length of transmission lines and transformer capacity(3) Under RAS according to cost cutting programm 3
    4. 4. Commitment to the Best in Class Corporate GovernanceComposition of the Board of Directors Board of Directors consists of 11 members Independent Members of the Board of Directors Ernesto Ferlenghi, Chairman of the Board of Directors  Elected the Chairman of the Board of Directors on 1 August 2011  First ever foreign Chairman of a Russian State-owned company  Member of the Board of Directors since 2008 Non-independent:  Head of the Representative Office of Eni Russia and CIS 7 directors  Graduated from the Tor Vergata University of Rome Igor Khvalin, Deputy Chairman  Member of the Board of Directors since 2010 Independent:  General Director of Volga Engineering Group 4 directors  Member of the Board of Directors of MRSK Holding Rashid Shapirov, Director  Member of the Board of Directors since 2008  Deputy General Director of KFK-Consult Kirill Levin, Director  Member of the Board of Directors since 2010  Deputy Chairman of the Management Board of Russian Agricultural Bank There are 11 persons in the Company’s Board of Directors, 4 of them are independent directors (at least 6 members of the Board of Directors must be representatives of Russian state authorities) On 16 December 2010 Federal Grid Company’s Board of Directors approved a new dividend policy  Dividends equal to at least 10% of net income (based on Russian Accounting Standards) supported by cash flow  In 2011 the Company made its first dividend payments to shareholders since 2008Source Company data 4
    5. 5. Company DevelopmentFederal Grid Company History – Key MilestonesIncorporated in 2002 2008 2009 2010 2011June 2008 February 2009 January 2010 March 2011• Federal Grid shares listed • Inclusion of Federal Grid in • Change from “cost plus” to • LSE listing on RTS and MICEX MSCI Russia and MSCI RAB regulation Emerging Markets Indices April 2011August 2008 December 2010 • Approval of RUB 125 Bn• RTS and MICEX include • New dividend policy bond placement program FSK in their indices May 2011 • Deal with InterRAOShareholder Structure Share InformationAs of January 2012 As of 27 January 2012  Number of shares outstanding: 1,255,948 MM (1)  Share price (MICEX)  Current: RUR 0.34  12 month low: RUR 0.21  12 month high: RUR 0.48  Market Cap: RUR 427 Bn  Free Float: 20.52%  Approved plan for the privatization of an additional 4.11% stake owned by the governmentSource Company data; Bloomberg(1) Other shareholders include Gazprom, Norilsk Nickel and other 5
    6. 6. RAB RegulationPermitted Revenue Calculation Formula Required RAB ____________ Net Working Gross = Year’s Expenses + RAB · [rRAB ] + + CAPEX · [rCAPEX ] + CAPEX Return + Capital · [rCAPEX ] + Adjustments Revenue Payback Period  Include operating  RAB = Initial  The payback  CAPEX =  Cumulative sum  If net working  Adjustments are expenses, cost base of invested period on initial Cumulative sum of investments capital is more made based on of services, etc. capital at the capital equals to investments from made from the than 8% of changes in beginning of the 21 years the beginning of beginning of the previous years’ amount/quality of  Operating costs year the regulatory regulatory period revenue, WC = services reduction - 2% period divided by the 8% of revenue is provided,  rRAB = existing payback period used; if less than changes in capital return  rCAPEX = Return of 35 years 4%, WC = 4% of legislation, etc. on new revenue is used  Both are set by investments (set the regulator by regulator)RAB Return CalculationJanuary 2010 September 2010 April 2011• Switched to 3-year RAB regulation • Regulation period prolonged to 5 years • Tariff growth for 2011 has been smoothed out to 5%; Other potential changes discussed 2010 2011 2012 2013 2014Return on initial invested capital 3.9% 5.2% 6.5% 7.8% 9.1%Return on new invested capital 11% 11% 11% 10% 10%Source Company data 6
    7. 7. Key Investment Projects Capacity provision of Kalininskaya Electricity supply of East Siberia NPP generating unit #4 (1,000 MW) Pacific Ocean oil pipeline Start Date: 2009 Start Date: 2011 Due Date: 2012 Due Date: 2016 Underground cabling in Moscow, Construction of Zeyskaya HPP — St. Petersburg Russian-Chinese border Start Date: 2011 transmission line Due Date: 2015 Start Date: 2010 Due Date: 2013 Infrastructure for Sochi Olympic Games 2014 Infrastructure for APEC summit in Start Date: 2008 Vladivostok in 2012 Due Date: 2012 Start Date: 2008 Due Date: 2011 Transition from overhead lines to Capacity provision of cable and construction of Skolkovo Boguchanskaya HPP start-up Construction of electricity supply 220 KV substation complex (1,000 MW) facilities on Elginskoye coal deposit Start Date: 2010 Start Date: 2012 Start Date: 2011 Due Date: 2012 Due Date: 2014 Due Date: 2013Source Company Data 7
    8. 8. Update on Key Investment Projects Sochi Olympic Games 2014 APEC Summit in Vladivostok in 2012  Purpose: to support infrastructure and provide electricity for the 2014  Purpose: to support infrastructure and provide electricity for the APEC Winter Olympics in Sochi Summit scheduled to take place in the Russian Far East city of  Scope: Vladivostok in 2012  10 substations with overall capacity of  New capacity and grids are aimed at strengthening existing 1,762 MVA infrastructure in Vladivostok as well as providing electricity  15 new grids with the total length of 320 km, including to Russkiy island (where the APEC Summit will take place) 105 km of cable lines (10 – 110 kV)  Vladivostok’s Airport will also be supported by the newly  Work finished by 2010: built electricity infrastructure  5 substations (782 MVA)  Scope:  2 grids (29.4 km)  Overall 8 sub-projects including over 160 km of new electric  Work plan for 2011: grids and substation capacity with overall capacity in excess  5 substations (700 MVA) of 420 MVA   Work status as of September 2011: 5 grids (119.3 km)   2 sub-projects are commissioned Project is on track and should be finished by the end of 2012   4 sub-projects are finished and being tested Construction is aimed at reducing environmental impact and preserving the natural landscape by using substations of compact  2 remaining sub-projects are scheduled to be finished by configurations and other innovative solutions the end of 2011Source Company data 8
    9. 9. Financial Performance (IFRS) Revenue EBITDA adj. (1) and Margin RUR MM RUR MM % 29% 90,000 : 59% % 100% 150,000 Growt h: wt h th: 42 Gro 67,717 Grow 113,330 % Growth: 26 45,459 75% 100,000 87,580 60,000 42,619 32,019 71,217 63.9% 56,565 59.8% 56.6% 50% 50,000 30,000 48.7% 25% 0 0 0% 2009 2010 1H2010 1H2011 2009 2010 1H2010 1H2011 EBITDA Margin CAPEX Profit for the period adj. (1) and Margin RUR MM RUR MM % 6% % 0% wt h: 5 40,000 : 63 h: 8 22,810 40% G ro 141,800 wt h Gr owt 150,000 Gro 27,910 th : 34% 30% 90,934 Grow 17,160 12,692 32.0% 100,000 69,581 20,000 24.6% 22.4% 20% 51,994 50,000 19.6% 10% 0 0% 0 2009 2010 1H2010 1H2011 2009 2010 1H2010 1H2011 Net Income MarginSource Company IFRS financials(2) Adjusted for non-specific impairment provision of PP&E, impairment of available-for-sale investments and associates, loss on dilution of share in associates, revaluation loss on PP&E, loss on re-measurement of assets held-for sale, gain on sale available-for-sale investments 9
    10. 10. Operational Overview Total Transformer Capacity Electricity Transmission Thousand MVA Bn kWh 350 600 328.5 487 467 306 311 17.5 400 300 239 246 311 200 0 250 0 2009 2010 1H2011 2009 2010 1H2010 1H2011 In Operations To be Commissioned by the end of 2011 Transmission Grid Length Thousand km 130 125.5 121.1 121.7 3.2 120 110 122.3 100 0 2009 2010 1H2011 In Operations To be Commissioned by the end of 2011Source Company data 10
    11. 11. Capital Structure Federal Grid Ratings Credit Portfolio S&P Same as Sovereign: BBB Outlook Stable Bond issue RUR MM Interest Rate, % Maturity/Put date Moody’s One Notch Below Sovereign: Baa2 Series 6 10,000 7.15 26 September 2013 Outlook Stable Series 7 5,000 7.50 27 October 2015 Series 8 10,000 7.15 26 September 2013 Debt Profile Evolution RUR MM Series 9 5,000 7.99 24 October 2017 Series 10 10,000 7.75 24 September 2015 57,497 58,367 Series 11 10,000 7.99 24 October 2017 60,000 Series 13 10,000 8.50 22 June 2021 50,000 Series 15 10,000 8.75 23 October 2014 40,000 50,000 50,815 Series 18 15,000 8,50 09 June 2014 30,000 20,000 13,545 Series 19 20,000 7.95 18 July 2018 10,000 6,000 Credit line RUR MM Maturity date 7,545 7,497 7,552 0 Gazprombank 15,000 October 2014 2009 2010 1H2011 Gazprombank 10,000 November 2014 ST Debt LT Debt Total 130,000 Key Ratios  Average debt maturity of 4.8 years 2009 2010  Weighted average cost of debt financing is 8.3% Debt/Capital 2% 6% Total Equity/Total Assets 0.82x 0.81x Credit Potential Adjusted EBITDA (1) (RUR MM) 42,619 67,717 Total Debt/Adjusted EBITDA (2) 0.32x 0.85x Total amount of untapped credit lines: RUR 111.5 BnSource Company data; IFRS financials; Bond portfolio structure and Credit potential shown as of 27 January 2012(2) Adjusted for reversal of impairment provision of PP&E, loss on re-measurement of assets held-for sale, revaluation loss on PP&E and impairment of available-for-sale investments and associates 11
    12. 12. Recent Developments RAB Regulation  28 December 2010: Federal Tariff Service (FTS) approved RAB tariffs for the five year period (2010 - 2014)  13 April 2011: FTS adjusted the tariffs for 2-4Q2011 - 2014 to redistribute gross revenues of regulated businesses between years within a single regulatory period Investment Program  16 December 2010: Board of Directors of Federal Grid approved RUR 952.4 Bn investment program for 2010 - 2014 Bond Offerings  Federal Grid Company successfully issued bonds totaling RUR 55 Bn in 2011  Average interest rate: 8.35%  Average maturity: 5.4 years  Total demand on average exceeded the nominal volume being issued by 2.5 times Dividends  Federal Grid made the decision to pay out a dividend on the Company’s common stock for the year 2010 in the amount of 10% of net income (by RAS), excluding financial results from re-valuation of securities and build-up of unfunded provisions Listing  28 March 2011: Federal Grid successfully listed its GDRs on the Main Market of the London Stock Exchange Option Program  8 February 2011: Board of Directors approved the Company’s option program Assets Transfer  All generating assets held by Federal Grid and its subsidiaries were transferred to INTER RAO UES in exchange for its shares  As a result of the deal Federal Grid holds a 19.95% stake in INTER RAO UESSource Company data 12
    13. 13. Revenue and Cost Structure Revenue Structure Cost Structure RUR MM RUR MM 2% wt h: 1 : 29 % Gro wth G ro 6% h: 2 Gr owt Growth: 3% Transmission Fees Electricity Sales D&A Personnel Expenses (2) Other Revenues Purchased Electricity (1) Repair and Maintenance Other (3)Source Company IFRS financials(2) Federal Grid purchases electricity to cover electricity transmission losses in its grid(3) Including payroll taxes(4) Includes change in allowance for doubtful debtors and other items 13
    14. 14. Change in EBITDARUR MM 13,44055,000 (+42%) 14,652 719 45,459 1,140 1,03045,000 (931) (277) (2,893)35,000 32,01925,00015,000 EBITDA Revenue Finance Personnel Purchased Repair and Impairments Other EBITDA 1H2010 Increase Income Expenses Electricity Maintenance 1H2011Source Company IFRS financials 14
    15. 15. Free Cash FlowRUR MM 13,573  Cash and cash equivalents at the beginning of the period 36,275  Net cash generated by operating activities (31,279)  Net cash used in investing activities (2,102)  Net cash used in financing activities 2,894  Net increase in cash and cash equivalents 16,467  Cash and cash equivalents at the end of the period 50,000 45,459 36,275 (1,051) (49) (8,084) 0 (50,000) (69,581) (2,102) (35,408) (100,000) EBITDA Reconciliation Changes in Profit tax Operating CF Capex Interest paid FCF 1H2011 adjustments WCSource Company IFRS financials 15
    16. 16. Tariff Calculation (1) Step 1 Established RAB x Rate of return = Amount of return Step 2 Established RAB x Period of return = RAB amortization Step 3 Amount of RAB Operating Total Required return + amortization + Expenses + Taxes = Gross Revenue Declared Total Required Calculated Step 4 Gross Revenue ÷ Network = Tariff CapacitySource Company Data(2) Simplified for illustrative purposes 16
    17. 17. Prospects for Energy Bridge Development in Russia Export/import to/from Norway Export/import to/from Finland West-East Energy St. Petersburg Moscow Bridge UES of North-West UES of Center UES of East UES of Siberia UES of UES of Urals UES of South Volga Export to China Center-Urals Energy Bridge Integration of Siberia and East energy systems Export/import Export to to/from Tomsk Azerbaijan Integration ofExport to Kazakhstan Export to and Georgia Urals and Siberia Turkey Export to Mongolia Export energy systems China to South Korea Existing export/import Under construction Услуги 17
    18. 18. IR ContactsContacts for Institutional Investors and Analysts Head of Investor  Tel: +7 495 710 9064  Investor Relations  Tel: +7 495 710 9541 Relations  Mob: +7 916 041 8053 Nadezhda Sukhova  Fax: +7 495 710 9641 Alexander Duzhinov  Fax: +7 495 710 9641  E-mail:  E-mail: Investor Relations  Tel: +7 495 710 9333 ext.2275  Investor Relations  Tel: +7 495 710 9333 ext.2926 Egor Toropov  Fax: +7 495 710 9641 Vladimir Baklanov  Fax: +7 495 710 9641  E-mail:  E-mail: 18
    19. 19. DisclaimerThe materials comprising this Presentation have been prepared by the Company solely for use by the Company’smanagement at investor meetings with a limited number of institutional investors who have agreed to attend suchmeetings and to be subject to obligations to maintain the confidentiality of this Presentation.This Presentation does not constitute or form part of and should not be construed as, an offer to sell or issueor the solicitation of an offer to buy or acquire securities of the Company or any of its subsidiaries in any jurisdiction or aninducement to enter into investment activity. No part of this Presentation, nor the fact of its distribution, should form thebasis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. ThisPresentation does not constitute a recommendation regarding the securities of the Company.This Presentation is not directed at, or intended for distribution to or use by, any person or entity that is a citizenor resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability oruse would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.The forward-looking statements in this Presentation are based upon various assumptions, many of which are based, inturn, upon further assumptions, including without limitation, management’s examination of historical operating trends,data contained in the Company’s records and other data available from third parties. These assumptions are inherentlysubject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond its controland it may not achieve or accomplish these expectations, beliefs or projections. In addition, important factors that, in theview of the Company, could cause actual results to differ materially from those discussed in the forward-lookingstatements include the achievement of the anticipated levels of profitability, growth, cost and its recent acquisitions, thetimely development of new projects, the impact of competitive pricing, the ability to obtain necessary regulatory approvals,and the impact of general business and global economic conditions. Past performance should not be taken as anindication or guarantee of future results, and no representation or warranty, express or implied, is made regarding futureperformance. 19