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Formation of Interregional Distribution Grid Company JSC IDGC of the Center. December 20 , 200 7. Strategy of cost evaluation of IDGC/DGC and main proposals. Evaluation Strategy. Date of evaluation – June 30, 2007. Termination of prognostic period. –. 2015. DCF.

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evaluation strategy
Evaluation Strategy

Date of evaluation – June 30, 2007

.

Termination of prognostic period

2015

DCF

100

%

Switch during 2010-2012 to RAB regulation

Main proposals

-

-

-

Restriction of transfer tariff growth in 2010-2014

Payment for connection is taken into account in proceeds, capital

-

,

investments but is not considered in the capital base

,

Calculation is based on the net asset method

.

Expense approach

0

%

Market value

RCN (full replacement cost)

=

t

Physical depreciation

External depreciation

External depreciation is defined as correlation between the existing capital investments

and the required ones.

Expense approach was not used because it is impossible to define the amount of external

Depreciation during absence of the technical audit and detailed information ( load,

transfer volume, etc) on each center of the distribution grid.

,

.

Comparative

approach

Method of similar companies was not applied because the selected companies that render services on

Transfer of electric energy do not possess characteristics necessary for applying the comparative

approach – there is considerable difference in the scale, maturity, level of diversity and

organisation models of their business. The transition method was not applied because the data on

Purchase contracts of distribution grid assets is absent due to the business monopoly.

-

,

0

%

.

main propositions of dcf evaluation
Main propositions of DCF evaluation

Macroeconomic

indicators

Deloitte

Regulation

RAB regulation

Expenses +

Transition period

Fixed assets 1H2007 (re-estimated according to Russian

Accounting Standards) + investments (without payment for

Connection) + circulating capital

Capital base

Electric energy

Business plans of DGC

Growth rates included (Deloitte)*

supply

Volume of losses

Business plans of DGC

By 2015 is to enter the target level

г

Payment of losses

Business plans of DGC

According to day-ahead prices (Deloitte)

Operational expenses

Business plans of DGC

-

Inflation growth rate included

Capital

investments

At the amortization level of the previous year

Business plans of DGC

-

Restriction of

Tariff growth

Business plans of DGC

-

At inflation growth rate of + 4%**

2

H

2007 2008

2009

2010

201

1

2011

2012

2013

2014

2015

*

* Plan of organic growth** On the basis of average historical exceeding of the tariff growth over inflation.

calculation of tariffs according to the method of the investment capital profitability rab

Profit of the capital base

Capital basex WACC (regulatory)

=

+

+

Return on the capital base

Necessary gross returnby RAB method

Operational expenses

Calculation of tariffs according to the method of the investment capital profitability (RAB)

It is supposed that from 2010 to 2012 Expenses+ strategy of tariff regulation on transfer of e/energy through distribution grids will be replaced by the method of profitability of the invested capital ( RAB –return on Regulatory Asset Base).

The essence of RAB strategy is guarantee of full return of the means invested into the assets of the company during the fixed period that corresponds to the terms of validity of the assets and reception of the stable income the level of which is defined by the regulator that must conform to the risk profile of DGC and guarantee attractiveness of the branch for the investors.

Operational expenses include all the field costs of the company except for amortization of the fixed assets, intangible assets.

Return on the capital base must guarantee reproduction of the assets that are effectively used at transfer of electric energy through DGC’s grids.

Profit of the capital baseis defined by the norm of profitability (regulatory WACC) fixed by the regulator the stake of which will be fixed for the long-term period of regulation equal to all DGC.

calculation of the capital base for tariff calculation by rab method
Calculation of the capital base for tariff calculation by RAB method

For the purpose of correct prognosis of indicators of the operational activity of the distribution grid companies after switch to the system of regulation of their tariffs on the basis of RAB method, calculation of the regulator capital base for the moment of the planned introduction of new rules of tariff design (beginning of 2010) was realised.

Regulatory capital base (as of the beginning of 2010)

+

Cost of capital investments for 2H2007-2009.

+

=

Circulating capital as of the beginning of 2010

Initial capital as of the beginning of 2010

Investments on the level of amortization of the previous year

-

+

+

=

Change of the circulating capital

Regulatory capital base of the previous year

Regulatory capital base

Amortization

The initial capital is defined as the cost of the fixed assets that are on the balance of the company as of June 30,2007 and that were re-estimated according to Russian Accounting Standardsfor the end of 2009.

Capital investments for 2H2007-2009from business plans of the companies

Circulating capitalis defined on the basis of the existing circulation factors and their correspondence to average branch indicators during the accounting period.

In the following years of the regulation period the regulatory capital base is calculated by the following way:

slide7

Calculation of the capital base for tariff calculation by RAB method

  • The initial capital used for defining of the regulatory capital baseas ofthe beginning of 2010is defined as the full cost of asset replacement with regard of their physical depreciation:
          • The initial capital is defined proceeding from the current legislation concerning estimation of cost of the fixed assets for the purpose of book keeping
          • Only the industrial assets are included into initial base of the invested capital (OL, substations, transformer substations), non-profile assets are not considered at calculation of the capital base
          • The investments that were realised at the expense of payment for technical connection are not included into the capital base in order to avoid double calculation.
  • Full cost of replacement is defined as cost of production or construction under the current conditions of the similar new object that by its functional characteristics is as much as possible similar to the estimated object.
  • Physical depreciation is price decrease due to depreciation, dilapidation and aging, and also deterioration of properties that cannot be eliminated at the expense of the current service.
slide8

Calculation of WACC rates

Cost of the owned capital

Risk-free rate (nominal)

5.21%

Market premium

5.50%

Beta (unlevered)

0.87

Corrected Beta ratio

0.60

Country risk

0.01

Specific risk for the reformation period

0.00%

Final cost of the owned capital of the company

10.95%

Premium for small-cap

2.28% – 6.27%

Debt capital cost

Cost of debt funds (before taxation)

10.32%

Tax profit rate

24.00%

Cost of debt funds (after taxation)

7.84%

Structure of the capital

Target correspondence of debt to owned capital

61.00%

WACC for discounting

11.18% – 13.67%

Regulatory WACC before taxation

9.78%

Regulatory WACC after taxation

12.86%

Discount rate and regulatory norm of profitability

slide9

6 months of

Indicators

2008

2009

2010

2011

2012

2013

2014

2015

2007

Inflation in the RF,CPI

4,50%

8,00%

7,60%

7,10%

6,50%

6,00%

5,50%

4,50%

4,00%

Cumulative inflation index

108,00%

116,20%

124,50%

132,50%

140,50%

148,20%

154,90%

161,10%

167,50%

Price index in the industry

4,90%

9,00%

8,00%

7,00%

6,50%

5,50%

5,00%

4,00%

3,50%

of the RF, PPI

Pay index in the RF

10,10%

13,00%

12,00%

11,00%

13,00%

9,00%

8,00%

7,00%

7,00%

Exchange rate ruble/ US dollar

26,50

27,20

28,20

29,00

29,10

30,04

30,85

31,39

31,79

(average annual)

Inflation in the USA, CPI

1,80%

2,50%

2,50%

2,50%

2,50%

2,50%

2,50%

2,50%

2,50%

Source: documents adopted by the Evaluation Committee under the Board of Directors of JSC RAO UES of Russia

Macroeconomic assumptions

Macroeconomic assumptions for model building

Calculation of flat cost is based on the following assumptions:

  • The main cost items are predicted on the basis of price indexes in the industry of the RF.
  • Wage expenses are predicted in accordance with the pay indexes
  • Prognosis of electric energy losses in physical terms is based on linear variation of the given indicator during the horizon period and achievement of the target indicator by 2015
  • Prognosis of electric energy losses in percent to net supply for 2015 is provided by JSC UES FGC
slide10
Review of indicators of DGC that are included in the zone of responsibility of JSC IDGC of the Center
idgc of the center
IDGC of the Center

Geographical position of IDGC

Length of OL in DGC, km

Investment requirements of DGC, billion rubles

Summed installed capacity of TCP and Sb, MVA

Depreciation of the fixed assets, %

Twerenergo, 1.8

62,50%

Bryanskenergo 1.9

Orelenergo 1.4

Yarenergo, 2.6

Tambovenergo 1.3

Voronezhenergo, 2.9

Kurskenergo, 2.8

55,00%

Lipetskenergo, 4.7

Kostromaenergo, 1.4

Belgorodenergo, 7.3

47,50%

Smolenskenergo, 2.7

Refusals of connection, МВА

40,00%

0

150

300

450

Data: Business plans of DGC

slide12

IDGC of the Center

Proceeds

15 820,6 mln.rbl. **

Length367.7 thous.km.*

Power

1 318,8 thous. c.u.*

Productive supply27958,2 Mio.kWh **

* Data as of the end of the 1st half of 2007

** for the 1st half of 2007.

slide13

IDGC of the Center

Amount of losses at transfer of e/e in 2006, %

Investment program of DGC for 2Н2007-2010, mln rbl.

Correlation – transfer of e/e (mln kW*hour)/ length of OL (km) in 2006.

Productive supply and losses of e/e in DGC in 2006, mln. kWhour

Data: DGC Business plans

slide15

Stake of DGC at technical connection to IDGC of the Center*

Stake of RAO UES – 50.23%

* On the basis of the assumption that all DGC will take resolutions on reorganisation of the companies in the form of connection to the corresponding IDGC, without consideration of the stake of the existing IDGC.

idgc of the center1
IDGC of the Center

Economic indicators of work of DGC for 2006 and 1st half of 2007 *

Productive supply of e/e (with regard of losses) in 2006, mln kW*hour

Productive supply of e/e (with regard of losses) for the 1st half of 2007, mln kW*hour

Losses in 2006, mln kW*hour

Amount of losses in 2006, %

Proceeds in 2006, thous.rbl.

Proceeds for the 1st half of 2007, thous. rbl.

Tariffs on transfer of e/e in 2006, rbl/MW*hour

JSC Belgorodenergo

9 580,4

5 006,4

795,4

7,7%

4 962 756,7

3 328 613,4

480,2

JSC Bryanskenergo

3 767,5

1 920,7

206,8

5,2%

1 527 536,0

1 389 297,9

400,0

JSC Voronezhenergo

7 289,1

3 636,3

871,4

10,7%

2 756 784,1

1 620 382,7

372,8

JSC Kostromaenergo

2 485,0

1 271,4

508,6

17,0%

1 664 313,8

995 249,7

640,6

JSC Kurskenergo

5 152,0

2 556,0

580,0

10,1%

2 398 718,0

1 216 634,4

460,9

JSC Lipetskenergo

6 973,6

3 475,1

661,5

8,7%

2 524 778,5

1 520 684,2

333,5

JSC Orelenergo

2 248,8

1 075,8

357,4

13,7%

1 085 440,0

732 802,0

473,7

JSC Smolenskenergo

3 265,5

1 623,1

719,7

18,1%

2 316 465,9

1 203 321,6

660,2

JSC Tambovenergo

3 038,1

1 527,6

253,8

7,7%

1 423 596,0

737 977,0

463,9

JSC Twerenergo

4 500,7

2 292,6

812,8

15,3%

2 378 545,0

1 370 221,3

514,6

JSC Yarenergo

5 743,4

3 573,2

470,8

7,6%

2 872 758,8

1 705 374,3

481,8

Total

54 044,1

27 958,2

6 238,2

25 911 692,6

15 820 558,5

Length of OL by classes of voltage,km

OL 110-150 kV, km

OL 35 kV, km

OL 1-20 kV, km

OL 0,4 kV, km

Rate of OL110-150 kV, %

Rate of OL 35 kV,

%

Rate of OL 1-20 kV, %

Rate of OL 0,4 kV,

%

JSC Belgorodenergo

1 645

2 450

17 454

15 333

8%

8%

10%

11%

JSC Bryanskenergo

1 751

1 755

12 333

10 481

8%

6%

7%

7%

JSC Voronezhenergo

3 105

3 685

20 452

23 059

15%

12%

12%

16%

JSC Kostromaenergo

1 770

2 549

11 497

9 014

8%

8%

7%

6%

JSC Kurskenergo

1 909

2 824

15 007

13 735

9%

9%

9%

9%

JSC Lipetskenergo

1 517

2 311

11 706

10 339

7%

8%

7%

7%

JSC Orelenergo

1 361

1 864

12 877

11 712

6%

6%

8%

8%

JSC Smolenskenergo

2 561

3 770

19 120

12 118

12%

12%

11%

8%

JSC Tambovenergo

1 876

3 155

11 896

11 803

9%

10%

7%

8%

JSC Twerenergo

2 720

3 988

26 317

17 321

13%

13%

15%

12%

JSC Yarenergo

1 030

2 084

12 024

10 396

5%

7%

7%

7%

Total

21 245

30 435

170 683

145 311

100%

100%

100%

100%

*Preliminary data for the 1st half of 2007

Source: Business plans of DGC

technological connection refusals in connection for 2006 1 st half of 2007
Technological connection- refusals in connection for 2006 – 1st half of 2007.

Source: data of UES FGC

system of standard units
System of standard units

According to the System of standard units for distribution of the general tariff proceeds by classes of voltage adopted by Decree N 25/3 ofthe Energy Commission of the RF as of May 12, 2000 as appendix to the Strategy of calculation of the amount of payment for the services on transfer of electric energy:

  • Amount of the overhead power transmission lines (OPTL) and cable power transmission lines (CPTL) is defined in standard units depending from length, voltage,design and material of the supports *:

PTL

Voltage, kV

Amount of chains on the support

Material of the supports

Amount of standard units for 100 km of OL right-of-way

OPTL

110-150

1

wood

180

Metal

160

ferroconcrete

130

2

metal

270

ferroconcrete

180

35

1

wood

170

metal

140

ferroconcrete

120

2

metal

180

ferroconcrete

150

1-20

1

wood

160

Wood on ferroconcrete stubs

140

ferroconcrete, metal

110

0,4

1

260

220

150

CPTL

110

2300

20-35

470

3-10

350

Up to 1 kV

270

  • Amount of substations, transformer substations (TS), complex transformer substations (CTS),etc. *:

Name

Measurement unit

Amount of standard units for 1 measurement unit

110-150 kV

35 kV

1-20 kV

Substation

SB

105

75

-

Power transformer (one- or three-phase) or reactor or booster transformer

Equipment unit

7,8

2,1

1,0

One-transformer TSB, CTSB

TSB, CTSB

-

-

2,3

Two-transformer TSB, CTSB

TSB, CTSB

-

-

3,0

One-transformer substation 34/0,4 kV

SB

-

3,5

-

* Extracts on certain kinds of equipment are presented