Akenerji BUY. DisCo deal: Vertical integration and a major step on M&A road AKENR.IS/AKENR TI UTILITIES. 15 July 2008

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1 Equity Research-TURKEY Akenerji BUY AKENR.IS/AKENR TI UTILITIES 15 July 2008 DisCo deal: Vertical integration and a major step on M&A road Akernerji-CEZ consortium submitted the highest bid for Sakarya Electricity DisCo, which we see as a solid step for vertical integration and partnership talks with CEZ. Following superb 1Q08 results and hike in electricity tariffs, our TP stands at TRY15.10 for Akenerji and maintain our BUY rating. Profitability not a one-off show: Thanks to restructuring and higher electricity prices, Akenerji raised its earnings by 6.5 folds to TRY34 mn in 1Q08 and its EBITDA margin soared to 23%. Coupled with higher than expected tariff hikes (22% vs our expectation of 10%), we revise up 2008E earnings to TRY71 mn from TRY17 mn and EBITDA margin to 22% from 12%. Further boost in profitability is likely to come in 2010 when hydroplants will be operational and thus our EBITDA margin for 2010 stands at 36%. Joining forces with CEZ: For Sakarya DisCo, Akenerji submitted the highest bid of $600 mn with a consortium with CEZ. We find the price tag favorable compared to CEE deal multiples and welcome vertical integration. Moreover, we see it as a solid step for partnership with CEZ. Should there be equity stake acquisition in AKENR, the deal multiple is likely to be in a range of $0.60 mn (Verbund deal) and $2.00 mn (Ankara Elektrik deal of ZOREN) per MWhr, closer to the higher end. Yet, we would like to caution that a JV with CEZ might disappoint investors who bet on tender call. BUY maintained: Our revised target price of TRY15.10 offers 28% upside for Akenerji. With restructuring and M&A prospects, we believe Akenerji is well poised to capitalize on attractive electricity sector in Turkey (liberalization, tight supply, high demand, rising tariffs). Price: TRY11.80 Target: TRY15.10 MCap: $626 mn Total Return: 28% Price Data (as of 14 July 08) # of outstanding shares (mn) 65 Free Float Ratio (%) 25% 12-m Stock Price Range (TRY) m Average Daily Turnover ($ mn) 2.5 TRY/$ Exchange Rate 1.21 ISE National 100 Index 35,826 Investment Highlights Tight supply vs high consumption in power market Liberalization story Rising electricity prices Stock Triggers Partnership with CEZ Electricity distribution tenders Nuclear power plant tender Price Performance 1-m 3-m 2007 Absolute 5% 20% 12% Relative 13% 40% 74% F 2009F 2010F Sales (TRYmn) EBITDA (TRYmn) EBIT (TRYmn) Net income (TRYmn) EPS reported (TRY) DPS (TRY) P/E (x) P/BV (x) EV/EBITDA (x) Net debt/equity (%) /05 05/05 09/05 01/06 Price (TRY) 05/06 09/06 01/07 05/07 09/07 01/08 05/08 Relative Price (TRY) Div. yield (%) Bige IREN, Sales bige.iren@ykyatirim.com.tr Elvin AKBULUT, Research elvin.akbulut@ykyatirim.com.tr

2 Outlook & Valuation 2008 to mark the turnaround clearly but more to follow from 2010 With the rising electricity prices and restructuring almost complete, we expect turnaround for Akenerji to be visible as of this year and peak in 2012 when the hydropower plants will be fully operational. For 2008 we expect revenues to rise by 26% yoy to TRY546 mn mainly on the back of higher electricity prices (+28% on average thanks to shifting more of generation to DUY market). In our model, generation declines in 2008 parallel to sale and shut-down of natural gas power plants although the company rises capacity utilization to benefit from the favourable pricing. For 2009, on the other hand, our revenue growth estimate remains at 3% despite estimated 17% rise in average prices since steam sales will more than halve with the sale of 3 power plants and generation will slightly decline. It is 2010 when we see a significant jump in revenues (+21%) thanks to new hydropowerplants and our revenue estimate istry678 mn. Staying on the conservative side, our price increase estimate for Akenerji declines to 9% to take into account possible new power plants becoming operational. Key Financial Estimates for Akenerji TRY mn Gross Profit Gross Margin E 2009E 2010E 40% 30% 20% 10% 0% -10% TRY mn EBIT EBIT Margin E 2009E 2010E 30% 20% 10% 0% -10% -20% TRY mn EBITDA EBITDA Margin E 2009E 2010E 40% 30% 20% 10% 0% -10% TRY mn Net Income Net Profit Margin E 2009E 2010E 30% 20% 10% 0% -10% -20% Source: Company & Yapi Kredi Yatirim Estimates Profitability will also follow a significant uptrend based on our assumptions: 1) closure/sale of small power plants will increase efficiency 2) rise in natural gas prices will lag that of electricity prices 3) hydropower plants will bring down the costs with low operating cost of 3cents/ MWhr. Accordingly, we expect EBITDA to turn to positive in 2008 and almost triple to TRY119 mn compared to 2007 EBITDA adjusted for one-off provision. According to our 1

3 model, the second massive wave of profitability will begin in 2010 with Uluabat and Akocak hydropower plants becoming fully operational. As a result, we expect EBITDA margin to surge to 36% in 2010 from 22% in Considering that listed operators Ayen and Aksu (with hydropower plants accounting more than 50% of their capacity) posted EBITDA margins of 66% to 80% levels, we believe that estimating 40% levels is not actually bullish for Akenerji. DCF Model for Akenerji $ mn 08F 09F 10F 11F 12F 13F 14F 15F 16F 17F EBITDA Tax on EBIT Capex Chng. in NWC Free Cash Flow PV of FCF Key Estimates 08F 09F 10F 11F 12F 13F 14F 15F 16F 17F Revenues Electricity Sales Electricity (MWhr) 2,799 2,715 3,075 3,267 3,431 3,583 3,618 3,655 3,691 3,728 Avrg price ($/MWhr) Steam Revenues EBIT Depreciation EBITDA Margins: EBIT 14% 15% 27% 31% 32% 30% 28% 26% 24% 22% EBITDA 22% 26% 36% 40% 40% 38% 37% 34% 32% 30% DCF Valuation Terminal Growth Rate 2.00% Cost of Capital (WACC) 10.06% Risk Free Rate 7.75% (+) PV of FCFs 502 (+) PV of Terminal Value 342 (-) Net Debt as of end 1Q08 63 Fair Value 780 Source: Yapi Kredi Yatirim Estimates Since the company plans to finance 70% of its upcoming projects via debt (mostly FX denominated), we raise financial expenses in tandem while we maintain net other income almost stable. However, we would like to highlight that the company hedges 50-55% of its FX obligations, thus the company is less prone to FX shocks at times of weaker TRY. As a result, our net income estimate for 2008 is TRY71 mn vs net loss of TRY40 mn in We expect net income to double to TRY144 mn in 2010 with higher electricity sales and rising profitability. Between , we pencil in only a slight increase in electricity prices in expectation of new capacity additions in the overall market but the revenue growth continues with 2

4 hydropower plants in full operation. We also estimate convergence of TEDAS prices with DUY prices by 2015, the projected time for full liberalization in our view, and then a gradual decline parallel to increased competition and higher capacity. With these assumptions we reach a fair value of $780 mn from our DCF. Based on future capacity of Akenerji (811 MW), implied EV by our DCF analysis indicates $1.04/MW for Akenerji. Meanwhile, Zorlu Enerji s offer for Ankara Elektrik implied $3.6/MW, which we adjust to $2/MW taking into account the planned CAPEX and renewed capacity. On the other hand, Verbund-Sabanci Holding deal for Enerjisa indicates $0.60/MW based on existing and planned capacity at the time but the JV took place back in early 2007 when electricity prices were 40% below the current levels and automatic pricing system was not on the table. Nevertheless, we assign 80% weight to Enerjisa deal to be on the conservative side. Latest Deal Multiples & Implied EV for Akenerji (Imp.) EV Future Capacity (MW) Deal Multiple ($/MW) Enerjisa 653 1, Ankara Elektrik Akenerji Source: Yapi Kredi Yatirim Estimates With a blended analysis of DCF and deal multiple, we come up with a target price of TRY Considering 28% upside for the stock and favorable catalysts like possible M&A with CEZ, growth prospects and potential increase in electricity prices, we maintain our BUY recommendation for Akenerji. Akenerji s Valuation Akenerji DCF ($ mn, 50% weight) 780 Deal Multiple ($ mn, 50% weight) 651 Fair Value ($ mn) M Target Mcap ($ mn) 788 Target Price (TRY/Share) Current Price (TRY/share) 11.8 Upside Potential 28% Source: Yapi Kredi Yatirim Estimates 3

5 Power Capacity Now and Upcoming Doubling and diversifying capacity Currently, Akenerji has 11 natural gas (NG) power plants with an installed capacity of 496MW and steam capacity of 1,029 tons in the fast growing Turkish electricity market as Izmir Plant with 45MW capacity was transferred at $12.5 mn to the direct client Baticim at the end 1Q08. Parallel to restructuring for higher efficiency and cost-control, the company has inactivated 6 power plants with a capacity of 69MW and now the active capacity stands at 428MW. Akenerji will sell 2 more plants with a capacity of 70MW during this year to its direct clients Akal and Akkim, which are also its sister companies. Therefore, active capacity will fall down to 358MW at the end of Yet, the upcoming new capacity will more than compensate the rationing in natural gas power plants, which have suffered much from the rising natural gas tariffs. Installed Capacity Projection of Akenerji Plants 05A 06A 07F 08F 09F 10F 11F 12F Thermal (MW) Bozuyuk Izmir-Kemalpasa Cerkezkoy Yalova tbs Yalova-Akal tbs Alapli ia. ia. ia. ia. ia. Bursa-Gursu ia. ia. ia. ia. ia. ia. Izmir-Baticim 45 ia. ia. s Usak 16 ia. ia. ia. ia. ia. ia. ia. Denizli 16 ia. ia. ia. ia. ia. ia. ia. Corlu 11 ia. ia. ia. ia. ia. ia. ia. Orhangazi 5 ia. ia. ia. ia. ia. ia. ia. Hydropower (MW) Ulubat (Canakkale) Akocak (Araklı) Feke 1 (Adana) Feke 2 (Adana) Burç (Adiyaman) 0 28 Himmetli (Adana) 0 24 Gökkaya (Adana) 0 30 Saimbeyli (Adana) Bulam (Adiyaman) Wind (MW) Balikesir Total Active (MW) Total Inactive (MW) Total Inst. (MW) Source: Company & Yapi Kredi Yatirim Estimates i.a= inactive, tbs=to-be-sold, s=sold 4

6 Akenerji will almost double its installed capacity to 814MW by 2012 with investments in 9 hydropower plants of 373MW and 1 wind power plants of 15MW. Accordingly, non-thermal plants will account for 50% of the installed capacity and we estimate total generation from non-thermal to reach around 30%. Location of Akenerji s Power Plants Source: Company Of the new power plants, 62% of Uluabat, 55% of Akocak and 1.8% of Balikesir power plants were completed at the end of The first two will become operational in mid-2009 and the wind power plant will kick off in For the remaining projects, we expect them to be fully operational by We foresee a CAPEX of around $370 mn for these power plants during period. NG Prices & Sensitivity Cost of hydro & NG Until DUY market Akenerji suffered much from rising natural gas prices, booking consecutive losses in the last 3 years in IFRS financials. BOTAS (State Petroleum Pipeline Corp), which regulates NG prices after approval from Ministry of Energy, has kept the NG prices constant last year and raised them by 14% ytd this year. Thanks to closure of smaller, inefficient plants and higher electricity prices, the negative impact of higher NG prices on Akenerji has been limited. Moreover, with the hydropower plants in operation as of mid-2008, Akenerji s vulnerability to NG prices will decline. At every 1% increase in our NG assumption ceteris paribus, we estimate the company s EBITDA to fall by 2% and EBITDA margin by 57 bps for 2008 while hydropower plants will provide a cushion starting from mid-2009 and in the decline in EBITDA falls down to 1% and related margin contracts by 46 bps in the same scenario. 5

7 Electricity Prices DUY & Official Tariffs Electricity prices are on the rise and now more discernible Akenerji sells electricity to its corporate clients at a slight discount to the official TEDAS tariffs and also to semi-liberal DUY market, where major buyer is TEDAS (State DisCo) itself. Finally electricity prices have started to reflect supply-demand dynamics or at least the cost basis. TEDAS prices up by ~40% ytd: After a 4-year freeze on prices, the government raised TEDAS prices (residential tariff by 15% and industrial tariff by 10%) as of January , which reflected as 19% and 12% on the final prices, respectively, due to adjustments on other fees and taxes. More importantly, the automatic pricing system took effect on July 1, resulting in further 21% increase in residential and 22% in industrial tariffs. Accordingly, ytd increase in TEDAS prices for industrials, which determines Akenerji s billing of corporate clients, reached 37%. The automatic pricing system monitors cost of electricity based on fuel cost, personnel cost, FX and inflation as well as the extra cost of energy bought from the DUY market. The price adjustments will take place on the first day of every 4 months (i.e. April 1, July 1, October 1 and April 1). We see launch of automatic pricing a very significant stage of liberalization as the prices will no longer be adjusted on ad-hoc basis by the government and thus will be clearer and more predictable. We expect full liberalization after the completion of electricity distribution tenders and end of transitory period foreseen in the tender specifications. To be on the conservative side, we do not reflect any further hike for October while we foresee further 8% and 5% in 2009 and 2010 respectively. TEDAS vs DUY prices DUY TEDAS Jan 2006 March 2006 May-06 July-06 September-06 November-06 Jan 2007 March 2007 May-07 July-07 September-07 November-07 Jan 2008 March 2008 May-08 July-08 Source: TEDAS, TEIAS & Yapi Kredi Yatirim DUY prices outpaces TEDAS price by 25%: Lunched as a clearinghouse system, DUY market started to act like a spot market, reflecting the supply-demand dynamics in real-time basis. The DUY prices have skyrocketed to TRY200/MWh as of early July parallel to increased usage of air-conditions in the summer time and probable decline in generation by 6

8 hydropower plants. As a result, daily DUY prices rose by 37% year to date and by 15% on 12-month average. The price differential between DUY and TEDAS continue in favour of DUY prices, which are currently 25% higher than the regulated price. We expect strong DUY prices to continue into 3 rd quarter while we may see some relative easing in the last quarter with the end of summer and rising rain. For 2008 and 2009, we incorporate 25% and 20% increase in average DUY prices to account for tight supply and ration our growth estimate to 10% in Electricity Tariff Projections Per MWHr E 2009E 2010E Akenerji TRY/MWhr % Change 7% 13% 28% 17% 9% Akenerji $/MWhr % Change 0% 25% 33% 16% 9% TEDAS TRY/MWhr % Change 0 0% -1% 24% 8% 5% TEDAS $/MWhr % Change -6% 9% 30% 7% 5% DUY TRY/MWhr n.a % Change n.a. n.a. 24% 25% 20% 10% DUY $/MWhr n.a % Change n.a. 36% 30% 19% 10% Source: TEDAS, TEIAS & Yapi Kredi Yatirim Estimates Given the attractive DUY prices, Akenerji has raised the share of DUY sales in total generation to 75%-80% from 60% last year. Accordingly, we estimate Akenerji s average electricity sales price to rise by 28% in 2008 and increase by 17% and 9% in the next two years as we expect some additional capacity to come on stream and ease the tightness in supply. 7

9 M&A Negotiations & Privatizations Partnership negotiations with CEZ continue Aspiring growth through fuel diversification in electricity generation and support its operations with vertical expansion into electricity distribution, Akenerji continues partnership talks with Czech energy giant CEZ, which started back in November CEZ is state-owned electricity producer in Czech Republic with leading position in Central European power markets. Vertically integrated from mining to generation, distribution and supply, the company owns power plants in Poland and Bulgaria with a total capacity of 14,392MW and is in distribution business in Bulgaria and Romania. CEZ aims to be the leader in power markets in Central and Southeastern Europe. Highlighting that the partnership could be either equity participation or JV, both companies had signalled finalization of talks by the end of 1H08. Although the unofficial deadline has passed, we believe strong coordination has already started with formation of a consortium called Akcez to bid for distribution tenders. When the consortium was formed, the company representatives reiterated that the negotiations were still going on separately from the consortium. Latest Deals However, we are more inclined to think that CEZ could prefer teaming up with Akenerji in new projects rather than paying an upfront amount for the natural gas power plants which are quite small for its size. Akkok Group s aggressive target of reaching 3000MW capacity from circa 350MW and formation of a new subsidiary called Akka to facilitate project financing also support a JV in our view. Company Seller Buyer Deal Type Date Deal Price Impl. EV Capacity (MW) $/MW ($ mn) ($ mn) Existing Future Existing Future Enerjisa SAHOL Verbund JV Mar , Ankara Elektrik Privatization ZOREN Acquisition Mar * *EV adjusted for required CAPEX for renovation Source: Company data & Yapi Kredi Yatirim Should CEZ acquire equity stake in Akenerji, we expect the price tag to be in a range of latest deal multiples of $0.60/Mwhr (Sabanci Holding-Verbund deal for Enerjisa) and $2.00/MWhr (Zorlu Energy s acquisition of Ankara Elektrik taking into account the upcoming investment and capacity increase). Yet, we would like to caution that a JV with CEZ might disappoint investors who bet on tender call. Moreover, exemption from call tender is also technically possible given Akenerji s actual free float is 25%. We would like to highlight that we favor any strong partnership with a viable partner for Akenerji. Becoming vertically integrated too Akcez (consortium of Akenerji (45%), CEZ (50%) and Akkok Holding (5%)) made into the final negotiations in Baskent (Ankara) electricity distribution tender and submitted the 8

10 highest bid of $600 mn in Sakarya tender. The Sakarya DisCo multiple corresponds to $455/subscriber and $120/MWhr based on 2006 TEDAS figures vs $430/subsc and $139/MWhr for Baskent. The pricing also looks favourable with average CEE deal multiples of 326/subscriber ($505/subscriber) and 78/MWh distributed ($121/MWhr). Sakarya region is in the industrialized Marmara region with industrial subscribers accounting for almost half of 5,000 GWhr consumption as of The region s loss-theft ratio is also reasonable with 10.1% compared to Turkey s average of 15%. Technical, Tender and Financial Details of Baskent and Sakarya Regions Technical Details Baskent Sakarya # of cities 7 4 Major cities Ankara, Zonguldak, Kirikkale Kocaeli, Bolu, Zonguldak # of subscribers 2,847,668 1,318,521 Consumed (GWH) 8,837 4,995 Theft-loss (%) 9.6% 10.1% Consumption Breakdown 36.4% residential, 23.7% indust., 17.5% commerc. 43.8% ind, 26.7% resid., 15.4% commerc. Tender Details Baskent Sakarya Bidding Deadline 10-Jun Jun-08 Tender Date 1-Jul-08 1-Jul-08 Bidders 1) Hema Industry 2) Akcez (AKENR-CEZ consortium) 3) SAHOL (49%) Verbund (49%) Enerjisa (2%) consortium 4) DOHOL, Saray Carpet, Kantur-Akdas consortium 5) Park Holding (Parent of CYTAS and PRKTE). 1) Alsim Alarko 2) Akcez 3) SAHOL Verbund Enerjisa 4) UDDA (Unitim, DOHOL, Dogus Holding and Anadolu Endustri Holding (YAZIC s subsidiary) 5) Park Holding. Highest Bidder Sabanci Holding-Verbund-Enerjisa Akcez Highest Bid ($mn) $/Subscriber $/MWhr Financials (TRYmn) Sakarya Revenues 636 Costs 630 Energy 547 Personnel 67 Other 10 Non-operating 6 Billed/Collected 95% Source: TEDAS & Yapi Kredi Yatirim The transfer of the distribution region to the consortium depends on approvals from the Tender Commission, Competition Board and Privatization Higher Board, which we expect to be completed by 4Q08. We find both the price tag and the location favourable for Akenerji given that it has NG power plants located in the Marmara region where Sakarya is, heralding possible synergies. Since the latest financial figures and the investment plans of Akcez are not disclosed yet, we do not reflect any value from this acquisition on Akenerji valuation. 9

11 Upcoming distribution and nuclear tenders on Akenerji s radar Akenerji and CEZ are also eyeing other distribution tenders to be held on September 15 for Meram and Aras regions located in the Central and Eastern Anatolia respectively. These are relatively smaller compared to the above-mentioned regions and Aras has significantly higher loss/theft ratio. Details for Aras and Meram DisCos Technical Details Aras Meram # of cities 7 6 Major cities Erzurum, Agri, Kars Konya, Nigde, Nevsehir # of subscribers 691,346 1,408,703 Consumed (GWH) 1,409 4,830 Theft-loss (%) 29.4% 7.8% Consumption Breakdown 46% residential, 20.3% state offices, 13% commercial 23.4% residential, 23.1% agricultural irrigation, 9.9% commercial. Tender Details Application Deadline 18-Jul Jul-08 Bidding Deadline 15-Sep Sep-08 Tender Date t-b-a t-b-a Source: TEDAS & Yapi Kredi Yatirim The Privatization Administration plans to complete privatization of all the other remaining TEDAS subsidiaries, 15 distribution regions, by the end of We see this timetable quite aggressive but depending on the success of Meram-Aras regions, the tender process is likely to speed up. We expect Akenerji to team up with CEZ again in the upcoming distribution tenders and to focus more on regions where its existing and upcoming plants are located, namely Marmara region and South Eastern Anatolia as seen in the map on page 5. Map of electricity distribution regions Source: Company 10

12 Properties of Electricity Distribution Regions TEDAS Distribution Company Region # Theft-Loss Ratio (%) # of subscibers Consumption (Mwhr) Dicle ,772 4,763,081 Vangolu , ,966 Aras ,346 1,408,703 Coruh ,510 1,875,268 Firat ,235 1,913,075 Camlibel ,867 1,763,146 Toroslar ,516,365 11,577,353 Meram ,449,915 4,830,047 Baskent ,847,668 8,836,777 Akdeniz ,338,249 4,499,105 Gediz* ,241,653 11,608,841 Uludag ,156,032 7,201,260 Trakya ,268 3,575,211 Ayedas (Ist. Anatolia) ,911,150 6,971,968 Sakarya ,318,521 4,995,212 Osmangazi ,211,819 4,010,446 Bogazici (Ist. Europe) ,607,318 15,864,198 Menderes ,387,814 4,695,084 Goksu ,407 2,768,142 Yesilirmak ,419,577 3,404,900 * Transferred to private sector Source: TEDAS2006 Statistics Apart from distribution tenders, both Akenerji and CEZ are interested in nuclear power plant tender scheduled for September 24 but they have not bought the specifications. The plant will have at least 1,200MW capacity and will be located in Mersin Akkuyu in the coastal area of Southern Turkey. Moreover, with the legislation of the changes to the Electricity Market Law, privatization of generation assets will kick off starting from thermal plants. We expect Akenerji and Cez to show interest in larger assets. Higher bid prices are also likely to reflect favourably on Akenerji s stock prices in our view. 11

13 1Q08 Overview Amazing turnaround in bottomline in 1Q08 Akenerji reported TRY34 mn net profit in 1Q08, raising its earnings by 6.5 folds thanks to higher electricity prices. The tax financials had also signaled significant growth in the bottomline with PBT of TRY52.5 mn. The deviation from the tax financials mainly stemmed from the lack of extraordinary gains in tax financials, which we attribute to sale of one of the power plant to Baticim. Key Financials for 1Q08 Realizations 2008/ / / /03 TRY mn TRY mn Chg. $ mn $ mn Net Profit % Fin. Exp % EBITDA % Operating Pr n.m Gross Profit n.m Net Sales % Margins NPM %22.5 %4.8 EBITDA M. %22.9 %7.0 OPM %17.6 -%5.6 GPM %21.5 -%1.0 Mar 08 Mar 07 Mar 08 Mar-07 Net Debt Source: Company The company raised its topline by 34%, which is mainly driven by high DUY prices and rise in electricity tariffs as well as higher electricity generation. Regulated electricity tariffs were raised by 12% for industrials at the beginning of the year while daytime DUY prices are around 27% higher compared to 1Q07 on average. Electricity Prices DUY (Daily) TEDAS (Industrial) DUY/TEDAS 1Q08 1Q07 % Change 1Q08 1Q07 % Change 1Q08 1Q07 TRY/Mwhr % % 27% 12% $/MWhr % % Source: TEIAS, TEDAS & Yapi Kredi Yatirim Of the 12 natural gas power plants, 7 have been active in 1Q08. With the capacity utilization rising to 85% from 76% in 1Q07, Akenerji s net generation was also up by 12% yoy and majority of it was sold on the DUY market. 12

14 Akenerji: Electricity & Steam Generation (1Q08 vs 1Q07) Generation (Gwhr) CUR steam ('000 tons) Power Plants 1Q08 1Q07 % Change 1Q08 1Q07 1Q08 1Q07 % Change Bozoyuk % 95% 84% % Izmir Kemalpasa % 80% 89% 0 0 Cerkezkoy % 87% 82% % Yalova-Aksa % 87% 44% 1,445 1,606-10% Yalova-Akal % 92% 94% % Alapli % 71% 42% % Izmir Baticim % 59% 30% 0 0 Total 2,381 2,117 12% 85% 76% 2,531 2,605-3% Source: Company As a result, higher electricity prices more than compensated the rise in natural gas costs in 1Q08 and gross margin soared to 21.5% from a negative 1% in 1Q07. The company also constrained OPEX to sales ratio at 4% and recorded EBIT margin of 18%. The EBITDA soared to TRY35 mn during the period from TRY8 mn a year back with the EBITDA margin reaching 23% in 1Q08 from 7% in 1Q07. Although Akenerji holds net short FX position of TRY101 mn (up from TRY68 mn as of end- 2007), it hedges 50% of its FX denominated liabilities as of 1Q08 and the company booked net FX gain of TRY11 mn, Separately, net debt rose to TRY82 mn ($63 mn) as of end-march from TRY68 mn ($58 mn) parallel to speed-up in hydropower plant investments for which the CAPEX reached TRY74 mn ($62 mn) including advance payments from TRY17 mn ($12 mn) a year back. Akenerji expects new HPP capacity to become operative in phases starting from mid

15 BALANCE SHEET In TRY mn, IFRS F 2009F 2010F Cash and liquid assets Inventories Accounts receivable Other current assets Total current assets Fixed assets Financial Assets Other non-current assets Total non-current assets Total assets ,103 Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total non-current liabilities Minority interest Total shareholders' equity Total liabilities and equity ,103 INCOME STATEMENT In TRY mn, IFRS F 2009F 2010F Total revenues COGS Gross profit Opex EBITDA Depreciation Operating income Financial Expense Net other exp/inc Pre-tax income Tax Minority interest/other Net income RATIOS F 2009F 2010F Sales Growth 8% 4% 21% 3% 21% EBITDA Growth n.m. n.m. n.m. 22% 71% Net Profit Growth n.m. n.m. n.m. 1% 99% Gross Profit Margin -7% 3% 18% 20% 32% EBITDA Margin 0% -1% 22% 26% 36% Net Profit Margin -14% -9% 13% 13% 21% Source: Company, Yapi Kredi Yatirim estimates 14

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