Federal Grid Company: strategic opportunities for European investors Ernesto Ferlenghi, Chairman of the Board of Directors

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1 LISTED STANDARD DEPOSITARY RECEIPTS Federal Grid Company: strategic opportunities for European investors Ernesto Ferlenghi, Chairman of the Board of Directors The second Russian-European Economic Forum Investments in modern Russia. IPO, shares and bonds 3 October 2012, Milan

2 Federal Grid: Backbone of Russia s National Electric Energy Infrastructure MES North West MES West Siberia MES Center MES South MES East INNOVATIONS AND ENERGY EFFICIENCY MES Volga MES Urals MES Siberia LONG-TERM DEVELOPMENT Objective: providing for the prospect of reliable and safe UNEG functioning and upgrading the quality of electric energy transmission STABILITY AND RELIABILITY Objective: providing for stable electric energy saving and the systemic reliability of the grid across all of Russia Volume of transmitted energy more than 50% of total electric energy consumption, given that the share in the final tariff is less than 7%; The number of corporate clients that use services related to electric energy transmission via the UNEG companies. Objective: Russia s economic growth via the longterm development of technological infrastructure Resolving key national tasks, including: the 2014 Sochi Olympic Games, the ESPO pipeline, the APEC Summit, the provision of power generated by NPPs and federal target programs; Switching over to long-term planning and tariff regulation (since 2010); Stimulating regional development by creating necessary infrastructure. Planned investment into R&D until 2014 RUR17.9 billion; An innovative development program till 2020; Implementing automated management systems and energy resource recording systems. Federal Grid guarantees Russia s energy stability 2

3 Company Development Federal Grid Company History Key Milestones Incorporated in June 2008 Federal Grid shares listed on RTS and MICEX February 2009 Inclusion of Federal Grid in MSCI Russia and MSCI Emerging Markets Indices January 2010 Change from cost plus to RAB regulation March 2011 LSE listing August 2008 RTS and MICEX include Federal Grid Company in their indices December 2010 New dividend policy April 2011 Approval of RUB 125 bn bond placement program May 2011 Deal with INTER RAO Shareholder Structure As of September 2012 Share Information As of September 2012 Others/Free Float (1) 20.45% Source Company data; Bloomberg (1) Other shareholders include Gazprom, Norilsk Nickel and other Government of Russia 79.55% Number of shares outstanding: 1,255,948 MM Share price (MICEX) Current: RUR month low: RUR month high: RUR 0.40 Market Cap: RUR 273 bn Free Float: 20.45% Approved plan for the privatization of an additional 4.11% stake owned by the government 3

4 Corporate Governance Practice Federal Grid s corporate governance practice is built upon the FSFM s Code of Corporate Conduct and Federal Grid s Corporate Governance Code, and is based on transparency, accountability, fairness and responsibility principles Best Disclosure & Transparency Practice General Meeting of Shareholders Chairman of the BoD 29 BoD meetings held in 2011 HR and Remuneration Committee (4) March 2011 the Company s DRs are listed on LSE; Financial statements are disclosed in compliance with the European Directives and LSE rules; Entered the IR Magazine s Top 5 large cap public companies; Membership in the UK Investor Relations Society; Blue chip Company on the Russian stock market Board of Directors 11 members, including 4 independent directors Chairman of the Management Board Management Board Operative management of Federal Grid is carried out by the Chairman of the Management Board and the Management Board that reports to the General Meeting of shareholders and the Company s BoD Audit Committee (4) Strategy Committee (4) Investment Committee (13) 4

5 Electric Grid Complex Management: Federal Grid & Holding MRSK On 10 July 2012, an agreement providing for the transfer of powers of a sole executive body of IDGC Holding (Holding MRSK) to Federal Grid was signed Unified Policy in the sphere of: Grid management engineering policy; Electric energy transmission; Technological connections; The development and implementation of investment programs; Financial and economic activities; Tariff formation switching all grids managed by Federal Grid to RAB regulation; Implementation of R&D, modernization and innovative development; Backbone and distribution grid functioning; Agreeing on terms for putting new facilities into operation to maximize the efficient functioning of both companies infrastructures. Key indicators Length of electric energy transmission lines with 35 kv and higher voltage, thousand km Overhead and cable electric energy transmission lines with 4-20 kv voltage, thousand km Sub-stations with 110 kv and higher voltage Sub-stations with 35 kv and lower voltage , , ,024 5

6 Providing for the Long-term Development of Federal Grid In 2010, Federal Grid developed a set of long-term programs to upgrade the efficiency of the Company s investment activities and operations, as well as UNEG energy safety Federal Grid engineering policy Investment program for Federal Grid innovative development program until 2020 Fixed assets renovation program for Program to support and stimulate the development of domestic manufacturers of equipment, materials and technologies Repair program for Cost management program for R&D program for Long-term borrowing program until 2014 To implement these programs, it is necessary to develop long-term programs in the electric energy sector and other industries: the electrotechnical sector, the construction industry, design, science and education, the service sector, electric equipment repair and the engineering industry 6

7 Key Investment Projects Construction of power supply facilities for the Purle-Samotlor pipeline Commissioning period 2017 Construction of power supply facilities for the Zapolyarye-Purle pipeline Commissioning period 2016 Provision of power (1,170MW) generated by Power Unit No1 of the Leningradskaya NPP-2 Provision of power (450 MW) for the Urengoyskaya SDPP Commissioning period 2012 Commissioning period 2014 Provision of power (1,000MW) generated by Power Unit No4 of the Kalininskaya NPP Construction of power supply facilities for the Vankor oil field Commissioning period Commissioning period 2012 Transfer of HVL to cable lines and the construction of the 220 kv sub-station for the Skolkovo Innovations Center Construction of the 220kV Neryungrinskaya SDPP-Nizhny Kuranakh-Tommot Maya transmission line with the 220kV Tommot SS and the 220kV Maya SS Commissioning period 2015 Commissioning period 2012 Construction of power supply facilities in the Elginskoye Coal Field Construction of infrastructure to supply power for the 2014 Sochi Winter Olympics Commissioning period Commissioning period Construction of infrastructure to supply power to the 2012 APEC Summit in Vladivostok Commissioning period Provision of power (1,150MW) generated by Power Unit No1 of the Novovoronezhskaya NPP-2, Commissioning period 2013 Provision of power (1,000MW) for the start-up system of the Boguchanskaya HPP Commissioning period Power supply facilities for the ESPO pipeline Commissioning period Construction of the 500kV electricity transmission line from the Zeyskaya HPP to the Russian-Chinese border, Commissioning period Electricity transmission lines (220 kv, 330 kv, 500к kv and 750 kv) Electricity transmission lines and sub-stations 7

8 Smart Grid New Quality of Russian Energy Industry Smart Grid is a brand-new grids setup based on new principles and technologies related to electric energy transmission and transformation, which allows for: Generation and alternative sources of energy Transmission lines Consumers Microturbines and accumulators Integrating all types of generation (including small generators) and all types of consumers (from households to large industries) for the situational management of demand for their services and active participation in energy system operation Changing real-time parameters and grid topology, in accordance with current mode conditions, eliminating the causes and development of emergencies Securing further of market opportunities for the infrastructure through the mutual provision of a broad range of services for market and infrastructure participants Smart grid element Smart Grid Minimizing losses, developing self-diagnosis and self-recovery systems by observing reliability conditions and electric energy quality Integrating the electric grid and information infrastructure to create an all-mode management system with full-scale information support Industrial facilities Energy transmission and storage (High-Capacity Storage Batteries) 8 8

9 Smart Grid: Pilot Projects in the Northwest and East Smart Grid Northwest St. Petersburg Northwest Moscow Center Volga Urals South East Smart Grid East Siberia Khabarovsk Vladivostok Pilot projects in the Northwest are focused on: Ensuring required reliability of energy supply to urban consumers Building efficient grids Providing electricity exchange Pilot projects in East provide for: High-quality energy supply for natural resources deposits Additional efficient capacity Reliable electric energy supply in the southern part of the Primorye territory 9

10 Prospects for Energy Bridge Development in Russia Export/import to/from Finland Export/import to/ from Norway Moscow West-East Energy Bridge Integration of Siberia and East energy systems St. Petersburg UES of Northwest Export to Turkey UES of Center UES of South UES of Volga UES of Urals UES of Siberia UES of East Export to China Center-Urals Energy Bridge Export to Azerbaijan and Georgia Tomsk Export/import to/from Kazakhstan Услуги Integration of Urals and Siberia energy systems Export to China Export to Mongolia Export to South Korea Existing export/import Building connections 10

11 Introduction of RAB Regulation: Transforming the Approach to Financing RAB regulation Starting 1 January 2010, Federal Grid functions with tariffs were based on Regulatory Asset Base (RAB) regulation; Tariff for electric energy transmission includes: a return on invested capital, according to leading international practice based on the RAB method; Regulatory stimuli to upgrade operating efficiency during the regulatory period were established; Accurate planning of investment for the long-term period based on forming financing sources; Optimizing capital structure through an increased debt position and decreased debt cost; Enhanced the investment and financial attractiveness of the Company via balanced tariff and investment solutions and cost reduction. RAB regulation: approach evolution January 2010 Switched to the 3-year RAB regulation September 2010 Regulation period lengthened to 5 years April tariff growth smoothed out at 5% May 2012 Federal Tariff Service approved tariffs for Starting 1 July 2012 * Starting 1 July 2013* Starting 1 July 2014* Return on initial invested capital 3.9% 5.2% 6.5% 7.8% 10% Return on newly invested capital 11% 11% 11% 10% 10% Tariff growth 51.1% 32.9% (1) for 1Q, 26.4% for 2-4Q 11% 9.4% 9.4% Source: Company data, information provided by the Federal Tariff Service (1) Approved by the Federal Tariff Service 12 May 2012, 11

12 Capital Structure Federal Grid Ratings S&P Outlook Moody s Outlook Debt Profile Evolution RUR MM 160, ,000 80,000 40, , , ,778 13,545 50,000 6,000 7,545 7,497 2, ST Debt LT Debt Same as Sovereign: BBB Stable One Notch Below Sovereign: Baa2 Stable Credit portfolio (as of October 2012) Bond issue RUR million Interest rate, % Series 6 10, September 2013 Series 7 5, October 2015 Series 8 10, September 2013 Series 9 5, October 2017 Series 10 10, September 2015 Series 11 10, October 2017 Series 12 10, April 2016 Series 13 10, June 2021 Series 15 10, October 2014 Series 18 15, June 2014 Series 19 20, July 2018 Series 22 10, (2) July 2022 Maturity/put option date Series 25 15, October 2016 Credit line RUR million Maturity date Gazprombank 15,000 October 2014 Gazprombank 10,000 November 2014 Key Ratios Gazprombank 10,000 TOTAL 175,000 June 2017 Debt/Capital 6% 15% Total Equity/Total Assets 0.83x 0.77x Adjusted EBITDA (1) (RUR MM) 67,717 83,760 Weighted average debt maturity: 4 years; Weighted average cost of ruble-denominated debt financing: 8.4%; 100% of the credit portfolio is unsecured debt. Total Debt/Adjusted EBITDA (1) 0.85x 1.59x Source Company data; IFRS financials (1) Adjusted for gain on disposal of available-for-sale investments and investments in associates, loss on re-measurement of assets held for sale, non-specific impairment of PPE, impairment of available-for-sale investments, loss on dilution of share in associates. (2) The coupon rate for the first year is 9,00%, following coupons are determined by the formula (CPI-100%)+2,5%. 12 Credit potential (as of September 2012) Total amount of undrawn credit lines: RUB billion

13 Endesa Federal Grid RWE EDF Energy Int. Power E-ON Enel Iberdrola National Grid Federal Grid Endesa E-ON Int. Power Iberdrola Enel RWE EDF Energy National Grid Debt Profile Compares Favourably with International Peers... Net Debt / EBITDA, 2011 Total Debt / (Total Debt + Equity), x 2.2x 2.7x 3.1x 3.2x 3.6x 4.2x 80% 60% 40% 35% 43% 44% 50% 55% 56% 61% 72% x 1.0x 20% 13% 0.0 0% Credit Rating Comparison Company Moody s S&P Fitch Sovereign (Russia) Baa1 (Stable) BBB (Stable) BBB (Stable) Federal Grid Baa2 (Stable) BBB (Stable) - Source Company IFRS financials, Bloomberg Note: Peers revenue is generated from both electricity production and transmission, whereas Federal Grid s is only from transmission 13

14 RUR Bonds and RUR Eurobonds Current Yields NDF 14

15 Strategic Priorities Federal Grid is a reliable, efficient and fast-growing company striving to become an innovative leader in Russian power sector, while focused on enhancing shareholder and investor well-being Reliability Providing optimal technical status of equipment; Implementation of electric energy loss reduction program; Using innovative technologies during the implementation of production programs. Safety Implementation of new technologies and environmental risk management; Using high safety standards in operations. Efficiency Development and innovations Corporate governance and shareholder value Using energy efficient technologies; RAB regulation; Implementation of the cost optimization program; Enhancing the internal control and the IT systems balanced Investment program, approved by the Government and Federal Grid s Board of Directors; Implementation of the Smart Grid and other innovative technologies. Complies with international corporate governance practice; Formation of the optimal capital structure; Increase in the Company s market value; Approved a dividend policy that provides for dividend payments from the Company s net profit. 15

16 Thank you! 16