Zorlu Enerji. Bloomberg: ZOREN TI OUTPERFORM. Reuters: ZOREN IS. Diversified & Profitable Generation Portfolio. Equity / Mid Cap.

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1 Equity / Mid Cap. / Utilities Zorlu Enerji Bloomberg: ZOREN TI Reuters: ZOREN IS Diversified & Profitable Generation Portfolio We maintain our OUTPERFORM recommendation while revising our price target from TL1.48 to TL1.50, after reflecting: i) the announcement of 3Q13 financials, (ii) the contribution of additional geothermal capacity in 2013, and iii) the contribution of Alasehir geothermal power plant. Robust growth story with a diversified portfolio in terms of fuel type and geography. Zorlu Enerji has an aggressive goal to reach an installed capacity of 1.2GW (stake adjusted) by 2015 and 1.5GW (stake adjusted) by The company currently has an installed capacity of 877MW, of which 56.4MW is located in Pakistan and the rest in Turkey. It has ongoing natural gas power plant investments in Israel. Zorlu Enerji recently closed the financing of 30MW Alasehir geothermal power plant with an investment cost of US$130mn. In line with its growth strategy, the financing of 124MW Sami Soydam HEPP with an investment cost of US$240mn is expected to be closed by the beginning of On top of these, the 110MW extension of Rotor WPP to 245MW and 100MW Solad NGPP investment in Israel are on the agenda. We haven't included these projects in our target price calculation since the financing has not been secured yet. We believe that having a diversified portfolio in terms of fuel type and location provides an advantageous position for Zorlu Enerji over its peers; however, the company is exposed to political and regulatory risks in the regions of operation. Consolidated EBITDA is expected to more than double by We expect to see the full impact of high margin Zorlu Dogal with its 80MW additional geothermal capacity in 2014 financials. In addition, the Jhampir wind power plant in Pakistan became operational by the end of July 13. The above mentioned additional capacities are expected to boost Zorlu Enerji s EBITDA to TL246mn in Despite high initial investment costs, renewable energy generates higher margins than thermal power plants due to lower operating costs. New renewable capacity will minimize the impact of the changes in natural gas prices on company s profitability. High leverage and F-X exposure create a hunchback. Zorlu Enerji carries a net debt position of TL2.1bn and a short FX position of TL1.46bn as of September 13 due to its heavy investment program. Its FX position is not hedged, while TL is the major operational currency. Thus, capacity investments abroad may provide a natural hedge against the fluctuations in TL. On the other hand, we believe going forward the investment pipeline may necessitate a capital increase, given the level of leverage. Moreover, possible delays in the liberalization of the electricity and natural gas markets, delays or cost overruns at the heavy investment program and narrowing spread between NG and electricity prices can be listed as other major risk factors of our valuation. Company Update OUTPERFORM Upside Potential 16% Stock Data TL US$ Price at Month Target Price Mcap (mn) Float Mcap (mn) No. of Shares Outstanding 500 mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data TL BIST ,748 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TL US$ Relative to BIST Price / Relative Price TL 02/12/2013 Relative 0.5 ZOREN Relative to BIST /12 06/12 11/12 04/13 09/ Week Range (Close TL) Asli Ozata Kumbaraci akumbaraci@isyatirim.com.tr Please refer to important disclaimer at the end of this report. 1

2 Summary of Key Financials (TL mn) Income Statement (TL mn) 2011A* 2012A* 2013E 2014E 2015E Revenues EBITDA Depreciation & Amortisation EBIT (44) (52) (18) Other income (expense), net (1) Financial expenses, net (470) (147) (273) (137) (173) Minority Interests (65) (17) Income before tax (515) 606 (273) Taxation on Income 10 (10) 71 (2) (2) Net income (407) 589 (202) Cash Flow Statement (TL mn) Net Income (407) 589 (202) Depreciation & Amortisation Indemnity Provisions Change in Working Capital 316 (10) (155) (44) (1) Cash Flow from Operations (25) 654 (227) Capital Expenditure 412 (361) Free Cash Flow (437) 1,015 (542) (77) 41 Rights Issue Dividends Paid Other Cash Inflow (Outflow ) (114) (546) (167) (71) (177) Change in net cash (551) 470 (709) (148) (135) Net Cash (1,915) (1,446) (2,155) (2,303) (2,438) Balance Sheet (TL mn) Tangible Fixed Assets 2,465 2,030 2,218 2,271 2,246 Other Long Term Assets 286 2,235 2,596 2,576 2,600 Intangibles Goodw ill Long-term financial assets Inventories Trade receivables Cash & equivalents Other current assets Total assets 3,410 4,984 5,393 5,449 5,468 Long-term debt 1,493 1,775 2,335 2,191 2,092 Other long-term liabilities 1,083 1,140 1,169 1, Short-term debt ,253 1,544 1,760 Trade payables Total Debt 2,097 2,667 3,588 3,735 3,852 Other short-term liabilities Total liabilities 3,541 4,406 5,006 5,044 5,046 Minority Interest Total equity (135) Paid-in capital Total liabilities & equity 3,410 4,984 5,393 5,449 5,468 Ratios ROE (%) ROIC (%) Invested Capital 2,507 4,031 2,137 2,234 2,210 Net debt/ebitda (x) Net debt/equity (%) Capex/Sales (%) Capex/Depreciation (x) EBITDA Margin EBIT Margin Net Margin Valuation Metrics EV/Sales (x) 5.3x 5.8x 4.6x 3.6x 3.4x EV/EBITDA (x) 103.1x 136.9x 25.1x 11.3x 10.1x EV/IC (x) 0.9x 0.8x 1.3x 1.2x 1.3x P/E (x) n.a 0.9x n.a 33.9x 39.9x FCF yield (%) -71% 199% -84% -12% 6% Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% *based on average Mcap during the year Company Overview Zorlu Enerji is one of the leading IPPs in the domestic market w ith 877MW installed capacity. The company is also active in electricity trading. Shareholder Structure Foreign Ownership (%) % 32.0% Zorlu Holding A.S. Free Float 4.8% 45.7% Korteks Mensucat Sanayi ve Ticaret A.S. Other Companies of Zorlu Group 08/07 12/07 18/07 24/07 30/07 05/08 13/08 19/08 23/08 29/08 05/09 11/09 17/09 23/09 27/09 Foreign Share (%) 3M Average 2

3 Valuation We have slightly revised our target price for Zorlu Enerji to TL1.50/share from TL1.48/share while maintaining our OUTPERFORM rating. We value the company based on sum of the parts analysis, which includes DCF based target valuations for its domestic operations and its Israel and Pakistan operations. The SOTP valuation offers 16% upside potential, above 5% upside we calculate for the benchmark index. Figure 1: Zorlu Enerji s SOTP Valuation Zorlu Enerji Net Asset Value ($mn) Domestic Operations * Equity Value, ** Consolidated Figure 2: SWOT Analysis Target Value Stake Participated EV Zorlu Enerji Elektrik % 126 Rotor Wind Farm % 237 ZDUAS % 624 Zorlu Jeotermal % 105 International Operations Dorad Energy- Israel* % 150 Ashdod* 48 42% 20 Ramat* % 48 Jhampir- Pakistan % 107 Net Cash / (Debt)-3Q13** Target Mcap (US$ mn) 375 3

4 Domestic Operations Natural Gas based Power Plants The current installed capacity of the four natural gas based power plants is 427.6MW of electricity and 269 tons/hr of steam. Recall that the company management applied to EMRA to cancel the generation license of its 50.3MW NGPP in September due to its inefficient generation. Thus, we excluded it from the portfolio in We believe that NGPPs provide an advantage for the company in bilateral agreements due to their favorable configuration. They can be activated or halted depending on the market conditions. This means that if the spot prices are low, the company can easily halt its production and can purchase electricity from the system instead of producing and sell it to its customers at higher prices. We use a US$ denominated DCF model to value Zorlu Enerji s domestic natural gas fired power plants and reach a target value of US$126mn based on the following assumptions: Electricity Generation: We assume that the company will generate 1.4bn kwh of electricity with a CUR of 38% and sell a total of 2.5bn of electricity including electricity trading activities in The Ministry of Energy and Natural Resources announced that no price hike either in electricity tariffs or natural gas prices will be applied till the end of the year. Thus, natural gas price increased by 12% YoY on average in 2013, exceeding 5% YoY increase in electricity tariffs, which had a negative impact on margins of natural gas fired power plants. Therefore, the company prefers to trade, instead of generating electricity at high cost. Steam Generation: Zorlu Enerji generated 604K tons and 531K tons of steam through its cogeneration power plants in 2012 and 9M13. We kept the steam generation assumptions constant through our forecast horizon, which will bring an additional revenue of US$12mn p.a. Customer Breakdown: We believe that the company will place greater importance on bilateral agreements due to its favorable configuration, as a natural gas based power plant functioning in a liberalized electricity market. We forecast 81% of the total generation to be sold via bilateral agreements and the rest (19%) through the spot market. We kept this ratio constant throughout our forecast period. Electricity and Natural Gas Price: We anticipate an electricity price of US$0.0923/kWh for bilateral agreements after the discount on our TEDAS electricity tariff projections. Our spot electricity price estimate stands at US$0.0907/kWh. We expect natural gas price to be constant at US$0.39/m3. Opex: We project a constant operating expenses of US$0.027/kWh for the next 10 years. CAPEX: We foresee that the company will spend a maintenance capex of US$5mn in 2015 and WACC: We use a risk free rate of 6.5%, with 5.5% equity risk premium and 0.808x stock beta and 1% of terminal growth. Also we use the debt ratio on the consolidated BS. Figure 3: DCF Summary of Zorlu Enerji Existing NGPPs US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales EBITDA EBITDA margin -1% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 6.1% 6.1% 6.0% 6.1% 7.8% 8.1% 8.4% 8.6% 8.9% 9.2% 9.5% PV of DCF Sum of DCF 61 Terminal Grow th 1% Terminal Value 49 Total 126 Zorlu Enerji's share 126 4

5 Rotor Wind Power Generation Rotor Enerji in which Zorlu Enerji through its subsidiary Zorlu Wind Power Electricity Generation currently has a 96.73% stake, has a generation license for a wind power plant with an installed capacity of 135MW. The company decided to acquire the rest 3.27% stake at Rotor Electricity Generation for TL9.8mn. The share transfer will be done after getting the necessary approvals. Rotor Enerji has two more licenses with a total capacity of 110MW. We didn't include these investments in our valuation since the financing has not been completed yet. We use a US$ denominated DCF model and reached a target value of US$245mn and its contribution to Zorlu Enerji is computed as US$237mn based on the following assumptions: Electricity Generation: We estimate that the company will operate with a CUR of 30% and sell 0.33bn kwh of electricity per annum. We kept this assumption constant for the rest of our forecast period. Carbon Credits: We pencil in an additional revenue of US$1mn p.a for the company related to carbon emission trading. Customer Breakdown: We forecast that the company will sell 81% of its sales volume by bilateral agreements and the rest via spot market for our forecast horizon. Electricity Price: We foresee an electricity price of US$0.0923/kWh for bilateral agreements and US$0.0907/kWh for spot market and left it unchanged through out our forecast horizon. Operating Expenses: We project a constant operating expenses of US$0.02/kWh for our forecast period. CAPEX: We anticipate a maintenance expense of US$5mn in 2015 and WACC: We take risk free rate of 6.5% with 5.5% equity risk premium and 0.808x stock beta. We change our WACC calculation based on the changes of debt/equity ratio in the upcoming years. Figure 4: DCF Summary of Rotor Enerji US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales EBITDA EBITDA margin 77% 77% 77% 77% 77% 77% 77% 77% 77% 77% 77% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 8.7% 8.9% 9.1% 9.3% 9.6% 10.0% 10.3% 10.7% 10.9% 10.9% 10.9% PV of DCF Sum of DCF 134 Terminal Grow th 1% Terminal Value 82 Total 245 Zorlu Enerji's share 237 5

6 Zorlu Dogal Electricity Generation Zorlu Enerji had acquired Ankara Dogal Electricity Generation from the PA in March 2008 for US$510mn and changed the name to Zorlu Dogal Electricity Generation. Zorlu Enerji financed the deal via injecting US$40mn equity, while the remaining US$470mn was financed through long term financing. Later in 2009, the company transferred its shares at Zorlu Dogal to Zorlu Holding within its efforts to restructure its balance sheet and reduce its consolidated debt position. Zorlu Dogal Energy Generation currently has a total installed capacity of 207.7MW with seven hydro electric power plants (112.6MW), and one geothermal power plant (15MW with 80MW additional capacity). We use a US$ denominated DCF model and reach a target value of US$624mn based on the following assumptions: Electricity Generation: We estimate that HEPPs in the portfolio to operate at a CUR of 32% while the geothermal power plant s CUR is projected at 75% levels. Recall that the additional 60MW and 20MW geothermal capacity became operational by the end of August and by the end of October. Thus, we expect 0.48bn kwh of total electricity sales volume in 2013, increasing to 0.94bn kwh in 2014, with the full contribution of the additional capacity. In addition, we envisage the assets to be operational until Customer Breakdown: We forecast that 81% of sales volume will be sold via bilateral agreements and the rest through spot market during our forecast horizon. Electricity Price: We anticipate an electricity price of US$0.0923/kWh for bilateral agreements. Our spot electricity price estimates stand at US$0.0907/kWh. Note that, the company will sell the generation from the additional capacity of the geothermal power plant at a guaranteed price of US$0.105/kWh for 10 years, starting in Price guarantees are given by government to support renewable investments. Operating Expenses: We project a constant operating expenses of US$0.022/kWh for our forecast period. CAPEX: Total planned investment cost of the capacity increase is US$220mn, 80% of which is debt financed and US$100mn was spent in the past years. We foresee the remaining US$120mn to be spent in WACC: We take risk free rate of 6.5% with 5.5% equity risk premium and 0.808x stock beta. We change our WACC assumption based on the gearing ratio of the consolidated balance sheet. Figure 5: DCF Summary of Zorlu Dogal Electricity Generation US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2038E Net Sales EBITDA EBITDA margin 73% 75% 75% 75% 75% 75% 75% 75% 75% 75% 74% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 6.1% 6.1% 6.0% 6.1% 7.8% 8.1% 8.4% 8.4% 8.6% 8.6% 10.1% PV of DCF Sum of DCF 624 Zorlu Enerji's share 624 6

7 Zorlu Geothermal Zorlu Enerji recently announced that the financing for Alasehir geothermal power plant which will operate under Zorlu Geothermal (a fully owned subsidiary of Zorlu Enerji) has been completed. Alasehir geothermal power plant currently has a license of 30MW but the company applied to EMRA to increase it to 45MW. The company got a loan up to US$113mn with a maturity of 14 years. It is important to note that there is an additional 45MW geothermal potential in Alasehir, which is included in the company s 2020 capacity target. The initial 45MW is estimated to be operational by 2H15. We use a US$ denominated DCF model and reach a target value of US$105mn based on the following assumptions: Electricity Generation: The geothermal power plant s CUR is projected at 78% levels. Thus, we expect 0.14bn kwh of total electricity sales volume in 2015, increasing to 0.30bn kwh in 2016, with the full contribution of the additional capacity. Electricity Price: We anticipate the company will sell the generation from the additional capacity of the geothermal power plant at a guaranteed price of US$0.105/kWh for 10 years, starting in Price guarantees are given by government to support renewable investments. Operating Expenses: We project a constant operating expenses of US$0.02/kWh for our forecast period. CAPEX: Total planned investment cost of the capacity increase is US$130mn, 90% of which is debt financed. We foresee US$90mn and US$40mn to be spent in 2014 and 2015, respectively. WACC: We take risk free rate of 6.5% with 5.5% equity risk premium and 0.808x stock beta. We change our WACC calculation based on the changes of debt/equity ratio in the upcoming years. Figure 6: DCF Summary of Zorlu Geothermal US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales EBITDA EBITDA margin 0% 0% 80% 80% 80% 80% 80% 80% 80% 80% 80% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 8.3% 8.3% 8.3% 8.4% 8.5% 8.7% 8.9% 9.0% 9.3% 9.5% 9.8% PV of DCF Sum of DCF -9 Terminal Grow th 1% Terminal Value 101 Total 105 Zorlu Enerji's share 105 7

8 International Operations Jhampir - Pakistan Zorlu Enerji signed a letter of intent with Pakistan Alternative Development Board to establish a wind power plant in Pakistan in Pakistan government offers purchase guarantees and bears the currency and interest rate risks as well to attract new investments. The initial project foresees a generation capacity of 56.4MW with an option to expand up to 300MW. The initial capacity of 56.4MW came on stream as of July 13. We use a US$ denominated DCF model and reach a target value of US$107mn based on the following assumptions: Electricity Generation: The power plant is estimated to have an actual production capacity of 0.15bn kwh of electricity with a CUR of 32%. We estimate the power plant to be operational until Electricity Price: Based on the company guidance, for the first 10 years, electricity prices will be elevated at US$0.15/kWh, yet it will drop to US$0.075/kWh going forward. Operating Expenses: We project a constant operating expenses of US$0.02/kWh in dollar terms for our forecast horizon. CAPEX: Total investment cost of the project is US$150mn. The company has already spent a total of US$105.4mn and the remaining US$44.6mn will be spend in WACC: We take risk free rate of 10% with 7.5% equity risk premium and 0.808x stock beta. We change our WACC calculation based on the changes of debt-to equity ratio in the upcoming years. Figure 7: DCF Summary of Jhampir WPP US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales EBITDA EBITDA margin 86% 86% 86% 86% 86% 86% 86% 86% 86% 86% 86% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 9.9% 10.4% 11.1% 11.8% 12.8% 13.6% 16.1% 16.1% 16.1% 16.1% 16.1% PV of DCF Sum of DCF 107 Zorlu Enerji's share 107 8

9 DORAD Energy Israel Zorlu Enerji is one of the first companies that entered the private energy sector in Israel. The company is participated in Dorad Energy with a 25% stake. The other shareholders of Dorad Energy are U.Dori Group (18.75%), Ellat Ashkelon Infrastructure Services (37.5%), and Edelkom Ltd. (18.75%). Dorad Energy is currently working on the construction of a natural gas based power plant with a total capacity of 840MW, that is expected to be operational in It will be the largest private power plant in Israel, making up 6% of Israel s current installed capacity of 13,750MW. We use a US$ denominated DCF model and reached a target value of US$602mn and its contribution to Zorlu Enerji s share is calculated as US$150mn with the following assumptions: Electricity Generation: The power plant is estimated to become operational in 2014 with an actual production capacity of 6.7bn kwh of electricity. Albeit, according to the agreement between the company and the national grid, the power plant will be only active at peak hours and sell only 3bn kwh of electricity. Electricity Price: We project the electricity price to be around US$0.12/kWh through our projection period. Natural Gas Prices: According to the agreement between Dorad Energy and Delek Group & Noble Energy, we estimate a natural gas price of US$0.044/kWh for our forecast horizon. Operating Expenses: We project a constant operating expenses of US$0.015/kWh during CAPEX: Total investment cost of the project is US$1.2bn, of which 80% is debt financed. The investment had started back in 2011, we assume the company to spent US$450mn to complete the project in We project a maintenance capex of US$49.5mn in WACC: We take risk free rate of 5.12% with 6.5% equity risk premium (high equity risk premium due to political risk), cost of debt of 6% and 0.808x stock beta. We change our WACC calculation based on the changes of debt-to-equity ratio in the upcoming years. Figure 8: DCF Summary of Dorad Energy US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales EBITDA EBITDA margin 0% 47% 47% 47% 47% 47% 47% 47% 47% 47% 47% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 6.8% 7.0% 7.3% 7.6% 8.1% 8.7% 9.6% 10.3% 10.4% 10.4% 10.4% PV of DCF Sum of DCF 798 Terminal Grow th 1% Terminal Value 627 Estimated Net Debt -893 Total 602 Zorlu Enerji's share 150 9

10 Ashdod Energy Zorlu Energy has partnered with Israeli Edeltech Holding Ltd to construct a co-generation power station with an installed capacity of 55MW. The financing has been closed in August 12 and the project is expected to come on stream by Zorlu Enerji has a 42.15% stake in the partnership. We use a US$ denominated DCF model and reach a target value of US$48mn and its contribution to Zorlu Enerji s share is calculated as US$20mn based on the following assumptions: Electricity Generation: The power plant is estimated to become operational in 2015 with an actual production capacity of 0.36bn kwh of electricity on the basis of 80% CUR. It is important to note that it is a cogeneration and it has a capacity to generate 40 tons/hr of steam. However, we included it to total generation volume. Electricity Price: Based on the company guidance, we project an electricity price of US$0.11/ kwh and we keep it constant in dollar terms in 2015 and onwards. Natural Gas Prices: We anticipate a natural gas price of US$0.065/kWh for the project and maintain constant throughout the forecast period according to the agreement between the company and Delek Group and Noble Energy. Operating Expenses: We project a constant operating expenses of US$0.015/kWh for our forecast horizon. CAPEX: Total investment cost of the project is US$110mn, of which 80% is debt financed. We assume that the company will spend US$45mn in 2013 and US$32mn in WACC: We take risk free rate of 5.12% with 6.5% equity risk premium and 0.808x stock beta. We change our WACC calculation based on the forecasted debt-to equity ratio in the upcoming years. Figure 9: DCF Summary of Ashdod Energy US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales EBITDA EBITDA margin 25% 25% 25% 25% 25% 25% 25% 25% 25% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 6.6% 6.6% 6.6% 6.7% 6.8% 6.9% 7.0% 7.1% 7.3% 7.4% 7.6% PV of DCF Sum of DCF 10 Terminal Grow th 1% Terminal Value 67 Estimated Net Debt -34 Total 48 Zorlu Enerji's share 20 10

11 Ramat Negrev Energy Zorlu Energy has partnered with Israeli Edeltech Holding Ltd to construct a cogeneration power station with an installed capacity of 120MW. The financing has been closed in August 12 and the project is expected to become operational by Zorlu Enerji has a 42.15% stake in the partnership. We use a US$ denominated DCF model and reach a target value of US$115mn and its contribution to Zorlu Enerji s share is calculated as US$48mn based on the following assumptions: Electricity Generation: The power plant is estimated to become operational in 2015 with an actual production capacity of 0.80bn kwh of electricity with a CUR of 80%. This plant is also a cogeneration power plant and it has a capacity to produce 70 tons/hr of steam. We included its impact on the total generation volume. Electricity Price: We assumed an electricity price of US$0.12/kWh and we kept it constant in dollar terms in 2015 and later on. Natural Gas Prices: A natural gas price of US$0.07/kWh is estimated for the project and we kept it the same in dollar terms in forecast period. Operating Expenses: We project a constant operating expenses of US$0.015/kWh for our forecast horizon. CAPEX: Total investment cost of the project is US$235mn, of which 80% is debt financed. We assume that the company will spent US$50mn in 2013 and US$115mn in WACC: We use a risk free rate of 5.12% with 6.5% equity risk premium and 0.808x stock beta. We change our WACC calculation based on the changes of debt/equity ratio in the upcoming years. Figure 10: DCF Summary of Ramat Negrev Energy US$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net Sales EBITDA EBITDA margin 27% 27% 27% 27% 27% 27% 27% 27% 27% (-) Capex (-) Taxes on EBIT (-) Change in WC Free Cash Flow (FCF) WACC 6.7% 6.7% 6.8% 6.9% 7.0% 7.1% 7.2% 7.3% 7.4% 7.6% 7.7% PV of DCF Sum of DCF 12 Terminal Grow th 1% Terminal Value 162 Estimated Net Debt -72 Total 115 Zorlu Enerji's share 48 11

12 Financial Analysis Capacity Zorlu Enerji targets to have an installed capacity of 1.2GW by 2015 and 1.5GW by We project that the company s effective installed capacity to tap to 1.10GW by 2015, once the ongoing investments are completed, a 25% increase over the current effective capacity at 877MW, taking into account participation rates at assets not fully owned by the company. We don't yet include planned investments with a total capacity of 334MW, for which financing have not been closed yet. Figure 11: Zorlu Enerji Installed Capacity by Type , , E 2014E 2015E NG Wind Hydro Geothermal 0 Figure 12: Zorlu Enerji Installed Capacity by Country , , E 2014E 2015E Turkey Israel Pakistan 0 12

13 Generation and Revenues The company s total sales volume reached 2,445mn kwh of electricity (of which 886mn kwh came from trading) in 9M13 compared to 2,257mn kwh of electricity in the same period last year. We estimate that the total sales volume will surge to 3,340mn kwh of electricity in 2013, including the contribution of additional capacity of Zorlu Dogal and Jhampir wind power plant in Pakistan. We foresee that it will increase to 5,282mn kwh of electricity (adjusted for Zorlu Enerji s stake) in 2015 thanks to the completion of investments in Israel and Alasehir geothermal power plant. The company announced revenues of US$240mn in 9M13 thanks to the acquisition of Zorlu Dogal and Jhampir wind power which became operational in 3Q13. We expect the company to post net sales of US$319mn in Figure 13: Zorlu Enerji s Sales Volume ( mn kwh) 6,000 5,000 4,632 5,282 6,000 5,000 4,000 3,000 2,805 3,340 4,000 3,000 2,000 2,000 1,000 1, E 2014E 2015E 0 Existing NGPPs Rotor ZDUAS Dorad Ashdod Ramat Jhampir Alasehir Figure 14: Zorlu Enerji s Revenue Breakdown (US $mn) E 2014E 2015E Existing NGPPs Rotor ZDUAS Jhampir Alasehir 0 * Zorlu Enerji consolidates Dorad, Ashdod and Ramat Negrev via equity pick up method. 13

14 EBITDA Zorlu Enerji recored an EBITDA of TL82mn in 9M13 thanks to the contribution of Zorlu Dogal. The hydroelectric power plants limit the negative impact of the increased natural gas prices. In 2013, natural gas prices increased by 12% YoY while electricity tariffs increased by 5% YoY on average. We expect EBITDA to shoot up to US$58mn in 2013 with an EBITDA margin of 18%, mainly thanks to the contribution of ZDUAS. ZDUAS is expected to be the main contributor to 2013 EBITDA with a share of 54%. It is important to note that the company consolidates Dorad, Ashdod and Ramat via equity method. Thus, we do not see their contribution on EBITDA levels. Figure 15: Zorlu Enerji s EBITDA Breakdown (US$ mn) % 33% 18% 4% E 2014E 2015E 40% 30% 20% 10% 0% -10% Existing NGPPs Rotor ZDUAS Jhampir Alasehir Margin Capital Structure Taking into account the receivables / payables from / to group companies, Zorlu Enerji had a net debt position of TL2.1bn as of September 13. Zorlu still carries TL2,207mn of long term financial debt related to Rosmiks BV, while it booked a same amount of long term receivables from the parent company to be paid due 2026 that will be paid in quarterly installments. In addition, the company carries TL275mn debt related to the loan utilized by Zorlu Dogal, classified under other long term payables. The company had a net FX position of TL1.46bn as of September 13. Thus, its balance sheet is vulnerable to the fluctuations in the foreign currency due to its high FX denominated debt position. We estimate the company s net debt position to stay at around US$1bn at least couple more years due to heavy investment program. Figure 16: Net Debt & Net Debt/EBITDA 2,500 Net Debt Net Debt/EBITDA 2,450 2, ,350 2,300 2,250 2,200 2, ,100 2,050 2, E 2014E 2015E

15 This report has been prepared by İş Yatırım Menkul Değerler A.Ş. (İş Investment) solely for the information of clients of İş Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary. The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of İş Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of İş Investment. ( This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. 15

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