THE ROLE OF THE PRIVATE SECTOR IN REFORMING THE UKRAINIAN POWER MARKET

1. THE ROLE OF THE PRIVATE SECTOR IN REFORMING THE UKRAINIAN POWER MARKET Vitaly Butenko Chief Strategy Officer March 2008

2. DTEK - THE LARGEST PRIVATELY OWNED COMPANY IN THE UKRAINIAN POWER SECTOR The first and only private vertically integrated power utility company in Ukraine COAL PRODUCTION GENERATION POWER DISTRIBUTION Coal production in Ukraine – 75.5 Mt* Electricity generation by TPPs in Ukraine – 73.5TWh* Electricity output from WEM** – 161.3TWh* DTEK’s market share 20.9 % DTEK’s market share 7.6 % DTEK’s market share 27.1 % • Pavlogradugol • KomsomoletsDonbassa mine • Service-Invest • PESEnergougol • Vostokenergo * for the year 2007 ** excluding export Source: DTEK, Energobusiness 2

3. OPERATING STRUCTURE DTEK COAL GENERATION DISTRIBUTION OTHER Vostokenergo, LLC (3 TPPs) COAL MINING PES-Energougol, OJSC Sotsis, LLC KomsomoletsDonbassa, OJSC(1 mine) Service-Invest, LLC Service Enterprise, LLC Pavlogradugol, OJSC (10 mines) Ecoenergoresurs, LLC COAL ENRICHMENT (5 plants) Revenue structure for 2007 (in US $’MM) COAL GENERATION DISTRIBUTION OTHER Source: DTEK 3

4. COMPANY HISTORY 2007 DTEKreceives its first credit ratings from Moody’s (B2) and Fitch (B+). Both ratings are one notch below Ukraine’s sovereign rating.At the end of 2007 the Company buys two coal enrichment plants: Oktyabrskaya CEP and Dobropolskaya CEP. 2006 In 2006, DTEK acquires PES-Energougol OJSC, a company supplying power to 25.5 thousand consumers, with over 1 000 km of overhead transmission lines and 380 step-down sub-stations. 2005 DTEK Corporation is officially registered on July 6, 2005. As a result of DTEK’s incorporation, a single center of responsibility for financial and production performance is set up in the format of a corporation, unified management processes are introduced, and the vertical integration of the Donbass Fuel-Energy Company’s enterprises is completed. 2004 In 2004, SCM publicly announces plans to establish DTEK as Ukraine’s first private vertically integrated company in the power sector. DTEK acquires State Holding Company Pavlogradugol OJSC comprised of 10 mines and 2 coal enrichment plants in the Western Donbass region. A group of 15 enterprises ranging from coal production and enrichment to electricity supply is combined together as Donbass Fuel-Energy Company (DTEK). The core of the DTEK Group is formed by three key companies: power generating company Vostokenergo, power supplying company Service-Invest (total length of electric networks is over 2 000 km), and coal mine Komsomolets Donbassa. Coal processing is conducted at DTEK by the coal enrichment plant – Mospinskoye Coal Enrichment Plant Ltd. Tekhrempostavka Ltd., which is also a structural unit of DTEK, deals with the upgrade and reconstruction of power equipment. 2002 4

5. LARGEST PRIVATE PLAYER IN GENERATION … Revenue (US $’MM) Output (TWh) # 2 # 2 • DTEK is the second largest generator of electrical power in Ukraine after State Nuclear Power Generation Company (Energoatom) based on the production volumes in 2007. • DTEK is the #1 thermal power producer in Ukraine. • Revenues from power generation for 2007 reached $892MM, the second highest revenue among the power generating companies in Ukraine. • DTEK firmly holds #1 position in Net Profit among other power generation companies of Ukraine with a record $126MM of Net Profit booked in 2007. Net profit (US $’MM) # 1 State-owned DTEK Private Source: DTEK, Energobusiness, Company’s reports 5

6. … & DISTRIBUTION MARKET IN UKRAINE Revenue (US $’MM) Purchases (TWh) # 3 # 4 Net profit (US $’MM) • In distribution, DTEK is in the top 5 Ukrainian distribution companies with a total 9.2 TWh of power transmitted in 2007. • DTEK holds #3 position in Revenues and #1 position in Net Profit based on the results of its distribution business in 2007. # 1 State-owned DTEK Private Source: DTEK, Energobusiness, Company’s reports 6

7. UKRAINIAN POWER MARKET STRUCTURE (2007) OWNERSHIP STRUCTURE (by output to WEM*) TYPE OF POWER PLANT (by output to WEM*) Hydro GENERATION CONSUMPTION STRUCTURE OWNERSHIP STRUCTURE (by purchases from WEM*) DISTRIBUTION * Wholesale electricity market Source: DTEK, Energobusiness, 7

8. POWER MARKETIN UKRAINE: TODAY  PROS Generators: competitive tariff (TPP) Generators: fixed tariff (NPP, HPP, CHPP) • Simple market structure • Simplified system for setting tariffs • Ease of control over price fluctuations • Centralized function of system load planning reduces the risk of system overload or failure. Market operator / WEM (Energorynok)  CONS System and high-voltage networks operator (Ukrenergo) • Lack of incentive to invest • Frequent administrative interference • Cross subsidies • No support for ensuring adequate investor returns in distribution companies (“oblenergos”) • Operational efficiencies are not rewarded • No hedging or risk protection for non-payment • No market for auxiliary services • State control over imports, exports and transit. Distributors (“oblenergo” – network owners) Independent suppliers Export operator (Ukrinterenergo) Ukrainian consumers Export 8

9. GOVERNMENT INITIATIVES FOR MARKET REFORM - A TWISTED ROAD FREE MARKET Concept of WEM development approved by the Cabinet of Ministers – the declared gradual transition to a bi-lateral contract model has not materialized. To date, further analysis and planning is required to ensure successful implementation. 2002 NAK ECU is created to manage state owned stakes in generation and distribution companies. A return to government controlled vertically integrated utility. EBRD project: “Ukraine: Tariff reform for transmission and distribution networks” work groups meet occasionally. 2007 - 2008 2004 2003 - 2007 1996 • POOL system is created – vertically integrated utility is broken up into separate parts: • generation • WEM • transmission • distribution. World Bank Project – implementation of WEM development concept (2003-2005 / 2007). Attempt to “resuscitate” the concept for WEM development making. t TOTAL CONTROL 9 9

10. EUROPE: POWER MARKET MODELS OVERVIEW • More than 70% of European countries have adopted a market model which is based on bi-lateral contracts between power producers and consumers. • Less than 30% of European countries are still using a Pool Model. • Trend continues toward more efficient bi-lateral contract based market models. Bi-lateral contracts without Power Exchange State-owned regulated vertically integrated monopolies Pool markets with bi-lateral contracts with physical delivery Pool markets without bi-lateral contracts with physical delivery Bi-lateral contracts with Power Exchange Level of liberalization Regulated markets Free market 10

11. EUROPE: DISTRIBUTION REGULATION • More than 80% of Europe's national markets are using various types of incentive regulation. • The most widely used are “Revenue Cap” and “Rate of Return”. • Despite the variety of methods used, the key basic principals that form the basis for such regulatory environments are: • To guarantee return on capital • Opportunity to receive additional rent via operating efficiencies. Price Cap Revenue Cap Rate of Return Cost + Incentive regulation 11 11

12. SUPPLY / DEMAND CURVES ARE CROSSING Capacity surplus – “buyers” market • Ukrainian power generation market has traditionally been regarded as having surplus capacity. • One-buyer pool system allowed to minimize the price of energy for the end consumer by mixing the cheap energy from HPP and NPP with the more expensive supply from TPP. • Surplus capacity provides little incentive or sense of urgency for the state to pursue a more aggressive tariff policy for power generation expansion and proper maintenance cost recovery, instead opting to keep tariffs at the minimum level sufficient to cover operating costs. Capacity deficit – “producers” market • Capacity surplus will run out in 2009, after which point the risk of peak loads exceeding available working capacity in the system will increase substantially. • Existing model does not stimulate any serious investment in the sector. • Estimated capex required to meet the growing demand for generation capacity ranges from $15Bn to $20Bn* over the next seven years. • State is incapable of meeting the capital requirements needed to sustain the supply level. • Private capital is the answer but will be impossible to attract without substantial structural changes to the regulatory environment and existing market model. Needs in reconstruction & new capacities (GW) TOTAL * Source: DTEK / DTEK estimate 12 12

13. TIME BOMB EFFECT? TODAY • The “Detonating mixture” … • State control of generation • Price control via administrative methods (operating cost + minimum capex) • Unstable and constantly changing political environment leading to more populist policies and decisions • … will lead to uncontrolled capacity deficit for the entire power sector, sharp “emergency” increases in tariffs and increased threat of energy dependence. Price Time TOMORROW Price • Tariff setting mechanisms based on the supply/demand equation and the introduction of a competitive environment in generation will lead to a sustainable increase in capital inflows into the sector. Increased efficiency and reliability of power supply in the long term. • State will continue to control the level of competitive pressure on tariffs as well as influence the market by using NPP and HPP reserves. Time 13

14. DISTRIBUTION VS REGULATORS: DIVERGENCE OF INTERESTS INCENTIVE BASED TARRIFFS (tomorrow) COST + (now) • Investor puts pressure on management to cut costs in order to increase capitalization. • State provides incentives for the owner to improve efficiency while maintaining adequate level of reliability and security. • State monitors the reliability and stability of networks on an on-going basis while the company focuses on long-term efficiency, guaranteed by the regulatory environment. • “Cost +” provides no incentive to keep costs down and network reliability issues are typically addressed via tariff increases. • The state has no effective means to oppose tariff increases without jeopardizing the reliability of the network. • Assets are obsolete. Reinvestment is difficult due to the uncertainty of “tomorrow’s tariffs”. Management Minimum allowable reliability level Regulator Investments in reliability/quality Capitalization Operating costs Operating costs Investments in reliability/quality 14

15. BALANCE OF INTERESTS: THE KEY TO POWER SECTOR DEVELOPMENT PRIVATE SECTOR INTERESTS CONSUMER INTERESTS • Required return on capital • Long-term value growth • Investments and property rights protection • Consistent and transparent rules • Lower tariffs • Reliable and high quality power supply • Reserve capacity for business growth • Predictable tariff performance ROLE OF STATE REGULATORY INSTITUTIONS • Antimonopoly control • Lower cost stimulating environment • Control of quality and reliability of supply • Environmental protection • Provide for open market driven competitive tariff setting mechanism • Allow for investment component to be included in transmission rates • Prevent cross subsidies

16. PRIVATE CAPITAL – IMPETUS FOR PROGRESSIVE CHANGE IN UKRAINE’S POWER MARKET • Private Investors will come to the Sector if there is… • transparent and meaningful privatization • clear and consistent rules of the game • protection against unfair administrative interference INVESTMENT PRIVATIZATION AND ENERGY MARKET LIBERALIZATION • Private Investors will bring to the Sector… • operational experience • cost reduction • increased production volumes • auxiliary services INCREASED PRODUCTION COST REDUCTION • State and consumers will benefit from… • increased capital investments • strengthened energy security • improved quality and reliability of power supply