MRSK Initiation RAB Roll-Out Offe

Alexander Kornilov, Ph.D.
Senior Analyst, Moscow

(+7 495) 788-0334
Fedor Kornachev
Analyst, Moscow
(+7 495) 795-3735
Elina Kulieva, Ph.D.
Analyst, Moscow
(+7 495) 789-8509
Russian Equity Research

MRSK Initiation Utilities
June 30, 2010
RAB Roll-out Offers RABid Value

Target prices and recommendations
The roll-out of RAB-based tariffs across the country is the single
Company 12M TP Upside Rating
most important value-driver in Russia’s power distribution space.
MRSK Holding $0.184 71% O/W
By the beginning of 2011, the new scheme will be fully
MRSK Center $0.069 115% O/W
implemented. The new regime will secure stable and transparent
Summary
MRSK C&V $0.015 135% O/W

returns on distribution assets, facilitating the financing of the
sector’s formidable CAPEX needs. Our preferred play on the theme MOESK $0.075 72% O/W
is MRSK Holding, which not only offers one of the biggest upsides MRSK Urals $0.020 152% O/W
in valuation terms but is also the most liquid stock. Our other top MRSK N.C. $11.2 161% O/W
picks – out of 13 names covered in this report – include MOESK, MRSK South $0.0080 55% O/W
MRSK Center, MRSK Center-Volga and MRSK Urals based on Tomsk DisCo $0.024 48% O/W
valuation, geography and transparency. MRSK Volga $0.0050 43% O/W
MRSK Siberia $0.013 30% E/W
RAB story likely to play out over the next six months: The share Lenenergo $0.91 25% E/W
of MRSK Holding’s regional branches operating under an RAB tariff Kubanenergo $6.1 4% E/W
regime is expected to rise from 29% to 100% by the beginning of MRSK N.West $0.0043 -40% U/W
2011. This roll-out will be the major catalyst for MRSKs over the Source: Bloomberg, Alfa Research
coming months and is not fully reflected in current prices.
Compelling EV/RAB multiples: Current EV/RAB multiples are mainly
in the range of 0.4-0.5x, suggesting significant upside to our DCF-
based EV/RAB metrics of up to 0.8x for some stocks. Current Current EV/RAB multiples, MRSKs
Investment Case
valuations seem out of sync with RAB-implied capital returns. 1.00x
0.81x
RAB regime necessary to secure financing for modernization: 0.80x
0.51x
0.47x
0.45x
0.44x
Russia’s distribution networks require massive investments into
0.40x
0.39x
0.39x
0.60x 0.38x
0.32x
0.29x
renovation and modernization to enhance the reliability of electricity 0.40x

0.16x
supply and remove bottlenecks. This will only materialize if regulated

0.20x
tariffs allow companies to generate sufficiently high returns on
0.00x
invested capital.
Tomsk DisCo
Lenenergo
Kubanenergo
MRSK Center
MRSK Urals
MRSK N.C.
MRSK N.W.
MRSK C&V
MOESK
MRSK South
MRSK Sib.
MRSK Volga
MRSK Holding is our preferred stock in the sector: 70%+ upside
combined with high liquidity suggest that MRSK Holding is the best
way to play the theme, in our view.
MOESK, MRSK Center, MRSK Center-Volga, MRSK Urals our top Source: Company data, Bloomberg, Alfa Research
picks: These MRSK names provide the highest upside supported by
a combination of the lowest inherent regulatory risk, good geography
and high transparency.
Share price performance
Valuation: We value the underlying MRSKs using DCF based on the
Tomsk DisCo
expected parameters of RAB-based tariffs. We value MRSK Holding Kubanenergo
using an equally weighted blend of DCF and sum-of-the-parts Lenenergo
Valuation & Risks
MOESK
approaches and apply a 25% holding discount to the latter. MRSK South
MRSK Urals
Risks: The sector’s performance will be subject to regulatory risk, MRSK NC
MRSK Siberia
particularly the risk of lower iRABs than those expected by MRSK MRSK Northwest
Holding. A key indication to investors will come on July 1, when 19 MRSK Volga
MRSK Cente&Volga
more regions are expected to adopt RAB-based tariffs. The CAPEX MRSK Center
programs of MRSKs have yet to be finalized, posing another risk to MRSK Holding
our valuation. Finally, the low liquidity of many MRSK names is -30% 70% 170% 270% 370%
1M Change YTD Change
another risk facing these stocks.
Source: Bloomberg
RESEARCH DEPARTMENT research@alfabank.ru

The contents of this document have been prepared by Alexander Kornilov of OJSC Alfa Bank ("Alfa Bank") as Investment Research within the meaning of Article 24 of
Commission Directive 2006/73/EC implementing the Markets in Financial Instruments Directive (2004/39/EC). Please refer to the further important information in
relation to this Document located on the last page. www.alfa-bank.com
Equity Market
TABLE OF CONTENTS:
Investment Summary ......................................................................................................4

Our Top Picks.................................................................................................................6
MRSKs on multiples .......................................................................................................8
Key events to watch......................................................................................................10
Risks.............................................................................................................................10
Valuation ........................................................................................................................12
DCF-derived fair EV/RAB varies among the companies...............................................12
WACC: The main factor affecting EV/RAB; major discrepancy among MRSKs ...........13
Initial RAB: The main valuation factor is still uncertain .................................................14
MRSK Holding valuation...............................................................................................16
EV/RAB waterfall analysis ............................................................................................17
Limited Impact on End-User Tariffs .............................................................................21
How much regulatory risk? ...........................................................................................21
Distribution Segment at a Glance ................................................................................23
The second-largest segment of the Russian electricity sector......................................23
The economics of the DisCo business..........................................................................27
The place of DisCos in the sector’s value chain.................................................................................... 27
Electricity loss reimbursement ............................................................................................................... 28
The technology of electricity distribution................................................................................................ 29
RAB-based tariff setting: How does it work?.................................................................31
RAB framework to replace inefficient and archaic “cost plus” tariff setting approach ........................... 31
RAB introduction timeframe................................................................................................................... 34
The principles of RAB-based tariff setting ............................................................................................. 36
Company Profiles ..........................................................................................................41
MRSK Holding ..............................................................................................................41
MRSK Holding DCF valuation ............................................................................................................... 44
MRSK Holding condensed financials .................................................................................................... 45
MOESK (Moscow United DisCo) ..................................................................................46
MOESK DCF valuation .......................................................................................................................... 49
MOESK condensed financials ............................................................................................................... 50
Lenenergo ....................................................................................................................51
Lenenergo DCF valuation...................................................................................................................... 54
Lenenergo condensed financials ........................................................................................................... 55
MRSK Center ...............................................................................................................56
MRSK Center DCF valuation................................................................................................................. 59
MRSK Center condensed financials...................................................................................................... 60
MRSK Center-Volga .....................................................................................................61
MRSK Center-Volga DCF valuation ...................................................................................................... 64
MRSK Center-Volga condensed financials ........................................................................................... 65
MRSK Northwest ..........................................................................................................66
MRSK Northwest DCF valuation ........................................................................................................... 69
MRSK Northwest condensed financials ................................................................................................ 70
MRSK Urals..................................................................................................................71
MRSK Urals DCF valuation ................................................................................................................... 74
MRSK Urals condensed financials ........................................................................................................ 75
2 MRSK Initiation
Equity Market
MRSK Siberia ...............................................................................................................76

MRSK Siberia DCF valuation ................................................................................................................ 79
MRSK Siberia condensed financials ..................................................................................................... 80
MRSK Volga .................................................................................................................81
MRSK Volga DCF valuation .................................................................................................................. 84
MRSK Volga condensed financials ....................................................................................................... 85
MRSK South.................................................................................................................86
MRSK South DCF valuation .................................................................................................................. 89
MRSK South condensed financials ....................................................................................................... 90
MRSK North Caucasus.................................................................................................91
MRSK North Caucasus DCF valuation.................................................................................................. 94
MRSK North Caucasus condensed financials....................................................................................... 95
Tomsk DisCo ................................................................................................................96
Tomsk DisCo valuation.......................................................................................................................... 99
Tomsk DisCo condensed financials .................................................................................................... 100
Kubanenergo ..............................................................................................................101
Kubanenergo DCF valuation ............................................................................................................... 104
Kubanenergo condensed financials .................................................................................................... 105
Tyumenenergo (not listed)..........................................................................................106
Tyumenenergo DCF valuation............................................................................................................. 109
Tyumenenergo condensed financials.................................................................................................. 110
MRSK Initiation 3
Equity Market
Investment Summary
Russia’s power distribution sector will be mainly driven by regulatory change
in the near- to medium term. Based on our estimates, current stock prices fail
to reflect the capital returns implied by the roll-out of RAB-based tariff
regimes, which is anticipated in the next months. Considering the valuation
upside together with factors like transparency, geography and stock liquidity,
MRSK Holding, offering upside of more than 90%, is the best way to get
exposure to the theme. However, a number of regional players, in which
MRSK Holding has mostly majority stakes of 50% to 60%, offer attractive
opportunities in valuation terms, with upsides of between 43% and 161% for
our O/W-rated stocks, combined with acceptable liquidity. These names
include MOESK, MRSK Center, MRSK Center-Volga and MRSK Urals.
In total, in this report we initiate coverage of 13 stocks from the sector,
including MRSK Holding and all its listed subs: MOESK, Lenenergo,
Kubanenergo, Tomsk DisCo, MRSK Holding, MRSK Center, MRSK Center-
Volga, MRSK Northwest, MRSK Volga, MRSK North Caucasus, MRSK South,
MRSK Urals and MRSK Siberia.
Six reasons to be Having eight O/W ratings out of 13 MRSK names indicates our generally
bullish on distribution positive stance on the country’s power, mainly based on the following
considerations:
• The introduction of RAB-based tariffs is the major value-driver and
catalyst for the MRSK story. RAB-based tariffs have been introduced
at only 29% of MRSK Holding’s regional branches. Since this story
has not been played out yet and the regulatory decisions remain to be
seen, we believe many MRSK names offer very attractive upside
combined with a clear-cut catalyst.
• The RAB regime finally provides a transparent framework, allowing
companies to earn sufficient returns on invested capital to generate
and attract the necessary funds for the sector’s formidable CAPEX
needs. Power distribution is the poorest part in the Russian power
sector, which we believe to be one of the most attractive industries of
the Russian economy. With the introduction of RAB-based tariffs, one
of the key ingredients for financing the segment’s CAPEX needs is
being established.
• Stable business with limited risk once RAB-based regulation is
introduced. RAB-based regulation assumes tariffs will be set for a
five-year period, after which they will be revised. This stable and
predictable business means there is limited risk for investors. Once
the active phase of the CAPEX cycle is over, MRSKs may become an
attractive dividend play. All the abovementioned factors make MRSKs
a very attractive investment vehicle for risk-averse investors.
4 MRSK Initiation
Equity Market
Figure 1: Current EV/RAB multiple Figure 2: Average daily turnover

0.90x 600 564
0.81x 538
0.80x
500
0.70x
0.60x 400
0.51x 341 327
0.47x
0.50x 0.44x 0.45x
278
0.38x 0.39x 0.39x 0.40x 300
0.40x
0.32x
0.29x 197
0.30x 200 148 136
0.16x 115
0.20x 94
100
0.10x 20 10
0.00x 0
Tomsk DisCo
Tomsk DisCo
MRSK N.C.
MRSK N.C.
MOESK
MOESK
MRSK N.West
MRSK N.West
MRSK Center
MRSK Center
MRSK Urals
MRSK Urals
MRSK C&V
MRSK C&V
MRSK Siberia
MRSK South
MRSK South
MRSK Siberia
MRSK Volga
MRSK Volga
Kubanenergo
Lenenergo
Kubanenergo
Lenenergo
Source: Bloomberg, Company data, Alfa Research Source: Bloomberg
• Pure domestic play with no currency exposure. Because their

businesses are purely domestic, MRSKs’ cash flows do not have any
exposure to currency risk. This makes the stocks especially attractive
given the ongoing turmoil in the Euro zone.
• EV/iRAB multiples of mainly 0.4-0.5x look very compelling. MRSKs
are mainly trading within a range of 0.4-0.5x EV/RAB (see Figure 1
above). This looks extremely cheap given that our fair EV/RAB for
some names reaches almost 0.8x.
• Possible privatization. MRSKs may be privatized, though this is
unlikely before the full introduction of RAB-based tariffs, i.e. before
2011. Regardless, privatization may be a long-term trigger for MRSK
stocks.
MRSK Holding, MRSK Our ratings and 12M TPs for the 13 MRSK names we cover are summarized
Center, MRSK Center- in the table below. MRSK Holding, MRSK Center, MRSK Center-Volga,
Volga, MOESK and MRSK MOESK and MRSK Urals offer the highest upside and stronger catalysts than
Urals our top picks their peers.
Figure 3: MRSK valuation summary

% of Fair
RTS Fair % of RAB Fair value Current
Company WACC branches Fair EV Equity 12M TP Upside Rating
ticker EV/RAB approved p.s. share price
under RAB value
MRSK Holding,
MRKH N/A 12.9% 19% 29% N/A 6,999 $0.163 $0.184 $0.107 71% O/W
com
MRSK Holding, pref MRKHP $0.149 $0.168 $0.078 115% O/W
MOESK MSRS 0.67x 13.4% 0% 0% 4,623 3,201 $0.066 $0.075 $0.043 72% O/W
MRSK Center MRKC 0.76x 12.7% 54% 45% 3,010 2,581 $0.061 $0.069 $0.032 115% O/W
MRSK Center and
MRKP 0.67x 14.1% 45% 56% 1,839 1,501 $0.013 $0.015 $0.006 135% O/W
Volga
MRSK Volga MRKV 0.52x 17.8% 24% 14% 936 751 $0.0042 $0.0050 $0.0035 43% O/W
MRSK Northwest MRKZ 0.48x 17.8% 18% 14% 489 349 $0.0036 $0.0043 $0.0071 -40% U/W
MRSK Siberia MRKS 0.43x 16.4% 25% 13% 1,234 1,018 $0.011 $0.013 $0.010 30% E/W
MRSK North
MRKK 0.31x 21.8% 0% 0% 304 271 $9.2 $11.2 $4.3 161% O/W
Caucasus
MRSK Urals MRKU 0.54x 17.1% 35% 50% 1,628 1,458 $0.017 $0.020 $0.008 152% O/W
MRSK South MRKY 0.53x 17.1% 34% 50% 736 341 $0.0069 $0.0080 $0.0052 55% O/W
Lenenergo, com LSNG 0.42x 15.5% 0% 0% 1,252 798 $0.79 $0.91 $0.73 25% E/W
Lenenergo, pref LSNGP $0.72 $0.83 $0.80 4% E/W
Kubanenergo KUBE 0.33x 19.2% 0% 0% 347 393 $5.1 $6.1 $5.8 4% E/W
Tomsk DisCo, com TORS 0.42x 18.3% 100% 100% 79 87 $0.020 $0.024 $0.016 48% O/W
Tomsk DisCo, pref TORSP $0.018 $0.022 $0.011 101% O/W
Source: Bloomberg, Alfa Research
MRSK Initiation 5
Equity Market
Figure 4: % of iRAB approved by regulators Figure 5: % of branches with RAB tariffs

120% 120%
100% 100%
100% 100%
80% 80%
60% 54% 56%

45% 60% 50% 50%
45%
40% 35% 34%
25% 24% 40%
18%
20%
20% 14% 14% 13%
0% 0% 0% 0%
0% 0% 0% 0% 0%
Tomsk DisCo
MRSK N.C.
MOESK
MRSK N.West
MRSK Center
MRSK Urals
MRSK C&V
MRSK South
MRSK Siberia
MRSK Volga
Lenenergo
Kubanenergo
0%
Tomsk DisCo
MRSK N.C.
MOESK
MRSK N.West
MRSK Center
MRSK Urals
MRSK C&V
MRSK South
MRSK Siberia
MRSK Volga
Lenenergo
Kubanenergo
Source: Alfa Research Source: Alfa Research
Our Top Picks

MRSK Holding ($0.184; Through its holding structure, which controls all MRSKs, MRSK Holding
O/W, +71%): the most liquid provides exposure to the entire distribution segment. Moreover, MRSK
distribution play Holding is the segment’s most liquid stock, with a daily turnover on MICEX of
$3.3 mln compared with $560,000 for the most liquid underlying MRSK. We
therefore recommend that investors looking for liquidity go O/W MRSK
Holding.
Because MRSK is structured as a holding, it is useful to compare its MCap
with the SoP valuation implied by the MCaps of its underlying assets (the
value of Tyumenenergo, which is not listed, is also taken into consideration):
Figure 6: MRKH MCap vs. marked-to-market SoP Figure 7: MRKH discount to SoP value
250,000 RUB mln 20%
SoP MRKH value 10%

200,000 MRKH Mcap
0%
-10%
150,000
-20%
100,000 -30%
-40%
50,000
-50%
-60%
0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
Source: Bloomberg, Company data, Alfa Research Source: Bloomberg, Company data, Alfa Research
As can be seen from the above charts, MRSK Holding’s discount to its SoP
value has narrowed to virtually zero, though there was a period when it was
obviously mispriced, trading at a premium over the value of its underlying
assets.
In our SoP valuation of MRSK Holding, we nonetheless apply a 25% discount,
which we believe is appropriate in valuing a holding company vs. its
underlying assets. Compared with the market-based discount, our valuation of
the stock looks conservative.
6 MRSK Initiation
Equity Market
MRSK Center ($0.069; MRSK Center is our favorite among the holding’s underlying assets for the
O/W; +115%): lowest following reasons:
regulatory risk, highest
• The company has the highest percentage of its iRAB already
transparency
approved by the regulator (see figures 4 and 5 above) as well as one
of the highest shares of branches that have already introduced RAB-
based tariffs. The company is scheduled to adopt RAB-based tariffs at
all its remaining branches as of July 1. If this happens, MRSK Center
will be the first multi-regional MRSK to be 100% regulated under the
RAB framework, thus reaping the benefits earlier than its peers;
• Because of the previous point, MRSK Center has the lowest
regulatory risk among MRSKs, particularly with regard to lower-than-
expected iRAB;
• MRSK Center has the highest transparency and best disclosure
among MRSKs;
• The stock is the third-most-liquid after MOESK and MRSK North
Caucasus;
• Because it operates in regions not deemed strategic by the Russian
government, we believe MRSK Center has a good chance of being
privatized once the privatization process is launched.
MRSK Center-Volga MRSK Center-Volga is very similar to MRSK Center and enjoys practically the
($0.015; O/W; +135%): same advantages:
more liquid than peers,
low regulatory risk, good • It has one of the highest percentages of iRAB approved by regulators
transparency (45%) and the highest share of branches under RAB (56%);
• MRSK Center-Volga also has much lower regulatory risk (e.g. lower-
than-expected iRAB) than peers;
• The company also has a good level of transparency with an adequate
IR department;
• MRSK Center-Volga is relatively liquid, though not as liquid as MRSK
Center or MOESK;
• Like MRSK Center, the geography of the company’s business makes
it a likely candidate for privatization.
MOESK ($0.075; O/W; We like MOESK primarily for the location of its business:
+72%): a bet on geography
• Operating in the city of Moscow and the surrounding Moscow region,
MOESK has good prospects for its business going forward given the
massive increase in capacity that will be connected to its networks
once developers carry out planned projects in the region. In other
words, we believe MOESK provides the best exposure to an
increasing customer base;
• Favorable geography also means there is little risk of a deterioration
in payment discipline;
• MOESK is the most liquid underlying MRSK, with an average daily
turnover of more than $0.5 mln.
MRSK Urals ($0.02; O/W; MRSK Urals boasts the following advantages:
+152%): exposure to
highly industrialized • Half its branches have already adopted RAB, including
Kurganenergo, in which the company holds a 49% stake;
regions
• The company operates in the highly-industrialized Urals region, and
manufacturing growth will ensure a sustainable increase in its
MRSK Initiation 7
Equity Market
customer base (the company operates in the Sverdlovsk, Perm,

Chelyabinsk and Kurgan regions);
• MRSK Urals is one of the cheapest MRSKs, trading at only 0.29x
EV/RAB.
MRSK North Caucasus MRSK North Caucasus presents an interesting case. Though our iRAB
($11.2; O/W; +161%): estimate for the company is half that guided by MRSK Holding, and we
huge upside, but very applied the highest WACC of any MRSK to reflect the high level of risk
risky play inherent in the stock, the company looks extremely cheap, offering huge
(161%) upside to our target price.
Nonetheless, despite its upside, we do not include the stock in our top picks
list because of valuation risk. In particular, the company faces the worst
payment discipline, a problem inherent to the Caucasus. Moreover, none of its
branches has yet adopted RAB-based tariffs, increasing the risk that
unfavorable initial RAB parameters will be set. Finally, the company operates
in a region that investors tend to avoid because they consider it politically
unstable and dangerous.
Nonetheless, we assign an O/W rating to the stock because our valuation
incorporates many of these risks. We recommend the stock to investors with a
high appetite for risk, an idea supported by the stock’s high liquidity.
MRSKs on multiples
Russian MRSKs are trading at decent discounts to global electricity
distribution peers on 2011E EV/S, EV/EBITDA and P/E. Since they will not
fully adopt RAB-based tariffs until the beginning of 2011, we believe it makes
little sense to at multiples for previous years (e.g. 2010).
8 MRSK Initiation
Equity Market
Figure 8: Russian MRSKs on multiples vs. global peers

Company Country Mcap EV/Sales EV/EBITDA P/E EBITDA margin
$ mln 09 10E 11E 09 10E 11E 09 10E 11E 09 10E 11E
Russian companies
MRSK Holding Russia 4,570 0.6 0.6 0.5 3.0 3.7 2.6 9.9 79.7 9.1 22% 16% 19%
MRSK Center Russia 1,353 1.2 1.0 0.8 5.0 3.2 2.1 13.4 5.3 2.7 25% 31% 38%
MRSK Center-Volga Russia 730 0.9 0.7 0.6 5.4 5.9 2.8 28.5 neg 4.8 16% 13% 21%
MRSK Volga Russia 618 0.9 0.8 0.6 4.9 5.6 3.2 14.1 26.9 6.2 18% 14% 20%
MRSK Northwest Russia 681 1.0 0.9 0.7 7.7 15.4 4.9 n/m n/m 12.2 13% 6% 14%
MRSK Siberia Russia 911 1.0 0.8 0.7 9.4 10.0 4.6 neg neg n/m 11% 8% 15%
MRSK North Caucasus Russia 126 0.5 0.4 0.4 5.4 6.4 3.1 neg neg neg 9% 6% 11%
MRSK Urals Russia 679 0.6 0.5 0.4 3.0 2.3 2.1 4.8 3.9 2.8 20% 22% 21%
MRSK South Russia 259 1.1 0.9 0.7 5.1 5.2 2.9 neg 7.1 2.4 21% 18% 26%
MOESK Russia 2,110 1.4 1.4 1.4 3.4 4.4 5.0 5.9 18.0 15.0 42% 32% 27%
Lenenergo Russia 747 1.6 1.4 1.4 4.3 4.4 6.1 8.1 20.6 neg 37% 32% 23%
Kubanenergo Russia 104 0.7 0.6 0.5 4.3 3.8 3.9 1.8 neg 4.0 16% 15% 13%
Tomsk DisCo Russia 67 0.5 0.5 0.4 2.7 6.2 4.2 5.5 n/m 16.7 18% 8% 10%
Russian MRSKs average 0.9 0.8 0.7 4.9 5.9 3.7 10.2 23.1 7.6 11% 9% 10%
Emerging Markets
Eletropaulo Brazil 3,300 0.9 0.8 0.8 4.5 4.0 4.3 6.5 7.2 8.6 20% 20% 18%
Cia General De Electr. Chile 2,387 1.4 1.6 1.5 8.9 8.4 7.9 9.3 15.9 13.8 16% 19% 19%
Aksu Enerji ve Ticaret Turkey 23 11.6 10.4 13.2 14.3 12.7 17.8 6.8 7.6 11.0 81% 82% 74%
Zhytomyroblenergo Ukraine n/a n/a 0.5 0.4 n/a 5.8 5.0 n/a n/a n/a n/a 8% 8%
Kirovogradoblenergo Ukraine n/a n/a 1.0 0.8 n/a 24.3 17.8 n/a n/a n/a n/a 4% 5%
Zakarpattiaoblenergo Ukraine n/a n/a 0.6 0.5 n/a 11.1 8.7 n/a n/a n/a n/a 5% 6%
Zaporizhzhiaoblenergo Ukraine n/a n/a 0.3 0.2 n/a 12.1 8.8 n/a n/a n/a n/a 2% 3%
Average EM 4.6 2.2 2.5 9.2 11.2 10.1 7.5 10.2 11.1 39% 16% 15%
RU DisCos premium/discount to GEM -80% -63% -72% -47% -48% -64% 36% 125% -32% -72% -44% -33%
Source: Bloomberg, Alfa Research
Figure 9: EV/RAB multiples of Russian MRSKs vs. global companies

Company Country Mcap EV/RAB
$ mln
Russian companies
MRSK Holding Russia 4,570 0.41
MRSK Center Russia 1,353 0.45
MRSK Center-Volga Russia 730 0.39
MRSK Volga Russia 618 0.44
MRSK Northwest Russia 681 0.81
MRSK Siberia Russia 911 0.39
MRSK North Caucasus Russia 126 0.16
MRSK Urals Russia 679 0.29
MRSK South Russia 259 0.47
MOESK Russia 2,110 0.51
Lenenergo Russia 747 0.40
Kubanenergo Russia 104 0.38
Tomsk DisCo Russia 67 0.32
Russian MRSKs average 0.42
Emerging Markets
Transelectica SA Romania 325 0.78
Average EM 0.78
MRSKs Premium/discount to EM peers -46%
Developed Markets
National Grid UK 25,535 1.41
Terna Spa Italy 7,223 1.27
SP Ausnet Australia 1,752 1.01
Elia Belgium 1,878 1.16
Average DM 1.21
MRSKs Premium/discount to DM peers -65%
Source: Bloomberg, Company data, Alfa Research
MRSK Initiation 9
Equity Market
MRSKs trade at discounts to foreign RAB-based regulated companies (we

used only high-voltage transmission companies where the RAB value was
available).
Key events to watch

Key events to watch We highlight the following events that will affect MRSKs’ share price
performance and should therefore be closely watched by investors:
1. July 1, 2010: Adoption of RAB-based distribution tariffs in many regions in
Russia. Although it is arguable whether the government will be able to set
these tariffs as prescribed by the Schedule (see Figure 58 with the RAB
transition schedule on pg. 34 of the report), the date will be very important for
MRSK stocks because it will show whether or not the government is actually
going to cut iRAB vs. the numbers expected by the companies themselves.
Disappointing final iRAB figures are the biggest concern expressed by
investors, especially given the possible tariff cuts for the Federal Grid
Company proposed by the Ministry of Economic Development.
2. 2H10: Approval of methodology for regulation of quality of electricity
distribution. The quality of power supply is a very important issue and must
ultimately be addressed by the RAB-based tariff regulatory framework.
Quality-control rules and criteria are being developed, and we expect them to
be finalized by the end of this year. The main component of these rules for
MRSKs would be additional penalties and fines that could be imposed if a
company fails to satisfy the prescribed level of electric supply quality.
3. January 1, 2011: Complete adoption of RAB-based distribution tariffs by all
Russian regions: According to the abovementioned schedule, Russia must
entirely adopt RAB-based distribution tariffs as of the beginning of next year. It
goes without saying that this is a very important date for MRSK stocks.
Risks
Regulatory risks: lower- Because the majority of MRSK Holding’s regional branches have yet to adopt
than-expected iRAB RAB-based tariffs, we consider the determining of the initial parameters of
RAB as the major risk facing MRSK shares. The key unknown is the level of
iRAB for those regions where the new tariffs have not been introduced yet,
while recent comments from the Ministry of Economic Development about
possible cuts to FGC’s RAB-based tariff growth rates in 2011-12 increased
investor concern over the government willingness to reduce iRAB for MRSKs
to smooth out the sharp increases in distribution tariffs unavoidable upon
transition to an RAB-based framework.
Because this is a major risk, we recommend investors go O/W those names
with the highest percentage of iRAB already approved (or alternatively, the
highest share of branches that already operate under the RAB framework).
This is part of the reason why MRSK Center and MRSK Center-Volga are
among our top picks.
CAPEX program has Since CAPEX is another important component of RAB-based tariffs, the
not been finalized precise CAPEX plans are not yet known for many regional branches of
MRSKs where RAB-based tariffs have not yet been introduced. It is no
surprise that MRSK Holding has not provided a consolidated investment
program, since it has not been finalized.
We therefore believe that higher-than-expected CAPEX poses a serious
downside risk to our valuation owing to the discrepancy between our WACC
estimates and the regulatory rate-of-return of 12% applied to the new RAB of
10 MRSK Initiation
Equity Market
DisCos. In other words, until WACC converges with the rate of return, the
investment activity of MRSKs will be value-destructive.
Most MRSK names are Poor liquidity is another risk facing MRSK names. Except for MRSK Holding,
illiquid MRSKs are relatively illiquid, reducing their appeal for international investors.
MRSK Initiation 11
Equity Market
Valuation
DCF-derived fair EV/RAB varies among the
companies
We use DCF to value We used DCF to value each MRSK. We then valued MRSK Holding based on
MRSKs a 50:50 blend of DCF and sum-of-the-parts using the fair values we calculated
for all its underlying assets, including Tyumenenergo, which is not listed.
Key assumptions Below, we summarize the key assumptions and components of the
methodology used in our models to value MRSKs:
• We use a bottom-up approach in our MRSK model: we model each
regional branch individually because tariffs are determined separately
for each region, and then we combine them together in our full MRSK
model;
• We assume RAB-based tariffs will be introduced in accordance with
the schedule approved by the government (see Figure 56 in the
“Distribution Segment at a Glance” section of this report) except for
those regions that have said they will delay introduction;
• By default, we use the RAB numbers provided by MRSK Holding
except in the case of MRSK North Caucasus (see discussion below);
• We assume the first regulatory period for all branches which have not
yet adopted RAB-based tariffs will be for five years;
• Repurchase costs for lost electricity are linked to our recently updated
electricity price outlook (see our report “GenCos: Upgrading on Strong
Catalysts, Improved Price Outlook” of June 22);
• We link our electricity transmission charge to the tariff growth for FGC
in 2010-12 approved by the regulator, while our forecast thereafter is
based on our FGC model;
• The regulatory X-factor is assumed to be 1% p.a., while to be on the
safe side, we conservatively assume a 0% actual efficiency gain from
MRSKs’ OPEX;
• Our WACC takes into consideration six company-specific factors
discussed below;
• We assume a 0% perpetual growth rate;
• In calculating our terminal-year cash flow, we use RAB depreciation in
place of financial-accounting-based D&A charge;
• We apply smoothing if the expected tariff increase in a given year
exceeds 35%. Based on the tariff growth rates of those MRSK
branches where RAB-based tariffs have already been introduced, we
do not believe regulators are likely to allow MRSK tariffs to rise by
over 35-40%. The smoothing mechanism is an important part of RAB-
based tariff regulation (for more information, see the “Distribution
Segment at a Glance” section of this report);
• Ignoring connection-fee revenues. Since the role of the connection
fee mechanism will fade away upon the introduction of RAB-based
tariffs, we assume connection fee revenues will be zero starting in
2010;
12 MRSK Initiation
Equity Market
• Other regional networks removed from throughput and financials.

Many MRSKs have other regional distribution networks in their
covered regions whose operations are usually reflected in both
electricity throughput and P&L numbers. These regional companies
(also known as “TSOs” in accordance with their Russian acronym) are
usually affiliated with local authorities and have nothing to do with
MRSKs in ownership terms. Since it is hard to predict the future
impact of these other regional distribution networks on MRSKs’
business, we adjust the MRSK numbers to completely remove the
effect of these companies.
Valuation summary The table below summarizes our valuation of all underlying DisCos of MRSK
Holding:
Figure 10: Valuation summary

MRSK MRSK MRSK MRSK MRSK MRSK N. MRSK MRSK Len- Kuban- Tomsk Tyumen-
MOESK
Center C&V Volga N.Westt Siberia Caucas. Urals South energo energo DisCo energo
Mcap, $ mln 2,110 1,353 730 618 681 911 126 679 259 747 104 67 N/A
RTS ticker MSRS MRKC MRKP MRKV MRKZ MRKS MRKK MRKU MRKY LSNG KUBE TORS N/A
Fair EV, $ mln 4,623 3,010 1,839 936 489 1,234 304 1,628 736 1,252 347 79 1,485
Fair equity
3,201 2,581 1,501 751 349 1,018 271 1,458 341 798 393 87 1,233
value, $ mln
iRAB, $ mln 6,930 3,950 2,757 1,809 1,013 2,903 987 3,030 1,383 2,976 1,056 185 3,957
Implied fair
0.67x 0.76x 0.67x 0.52x 0.48x 0.43x 0.31x 0.54x 0.53x 0.42x 0.33x 0.42x 0.38x
EV/iRAB
WACC 13.4% 12.7% 14.1% 17.8% 17.8% 16.4% 21.8% 17.1% 17.1% 15.5% 19.2% 18.3% 21.1%
Fair price per
$0.066 $0.061 $0.013 $0.0042 $0.0036 $0.011 $9.2 $0.017 $0.0069 $0.79 $5.1 $0.020 N/A
share, $
12M TP, $ $0.075 $0.069 $0.015 $0.0050 $0.0043 $0.013 $11.2 $0.020 $0.0080 $0.91 $6.1 $0.024 N/A
Current share
$0.043 $0.032 $0.006 $0.0035 $0.0071 $0.010 $4.3 $0.008 $0.0052 $0.73 $5.8 $0.016 N/A
price, $
Upside, % 72% 115% 135% 43% -40% 30% 161% 152% 55% 25% 4% 48% N/A
Rating O/W O/W O/W O/W U/W E/W O/W O/W O/W E/W E/W O/W N/A
Current
0.51x 0.45x 0.39x 0.44x 0.81x 0.39x 0.16x 0.29x 0.47x 0.40x 0.38x 0.32x N/A
EV/RAB
Our DCF-derived EV/RAB multiple varies within a range of 0.3-0.8x,

predominantly reflecting the high discrepancy in WACC among MRSKs (see
the discussion on WACC below). There are also other factors in our models
that affect our fair EV/RAB multiples (see the charts below with our
reconciliation of EV/RAB for all MRSKs).
WACC: The main factor affecting EV/RAB;

major discrepancy among MRSKs
We incorporate six Our build-up WACC estimates incorporate six different company-specific
company-specific factors, including whether it publishes IFRS accounts, the level of
factors into our build- transparency and disclosure, the presence of a large institutional investor
up WACC calculation among the shareholders (e.g. Prosperity Capital Management and MRSK
Center), payment discipline in the regions covered by the MRSK (e.g. MRSK
North Caucasus receives the highest premium for this kind of risk) and
regulatory risk, defined as the level of exposure to possible reductions in iRAB
(those MRSKs with a high share of branches already under RAB-based tariffs
have lower risk, and vice versa). The sixth risk is liquidity, based on the daily
turnover of the stock.
The table below summarizes our WACC estimates for all covered MRSKs (we
assumed a 30:70 D/E gearing ratio, which is in line with what the FTS used to
set the rate-of-return for RAB-based tariffs):
MRSK Initiation 13
Equity Market
Figure 11: WACC build-up calculation

MRSK MRSK MRSK MRSK MRSK MRSK N. MRSK MRSK Len- Kuban- Tomsk Tyumen-
MOESK
Center C&V Volga N.West Siberia Caucas. Urals South energo energo DisCo energo
WACC 13.4% 12.7% 14.1% 17.8% 17.8% 16.4% 21.8% 17.1% 17.1% 15.5% 19.2% 18.3% 21.1%
Cost of debt
Risk-free rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Corporate debt spread 3.0% 3.0% 3.0% 4.0% 4.0% 4.0% 6.0% 4.0% 4.0% 3.0% 4.0% 6.0% 3.0%
Debt rate implied 9.0% 9.0% 9.0% 10.0% 10.0% 10.0% 12.0% 10.0% 10.0% 9.0% 10.0% 12.0% 9.0%
Statutory tax rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
After-tax cost of debt 7.2% 7.2% 7.2% 8.0% 8.0% 8.0% 9.6% 8.0% 8.0% 7.2% 8.0% 9.6% 7.2%
Cost of equity
Risk-free rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Base equity risk
7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
premium
Company-specific
3.0% 2.0% 4.0% 9.0% 9.0% 7.0% 14.0% 8.0% 8.0% 6.0% 11.0% 9.0% 14.0%
adjustments:
- IFRS financials 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 0.0% 2.0% 0.0% 2.0% 2.0% 2.0%
- Transparency and
0.0% 0.0% 0.0% 1.0% 1.0% 0.0% 2.0% 0.0% 1.0% 1.0% 2.0% 1.0% 2.0%
disclosure
- Presence of large
0.0% 0.0% 0.0% 2.0% 2.0% 1.0% 2.0% 2.0% 1.0% 0.0% 1.0% 1.0% 2.0%
institutional investor
- Payment discipline in
0.0% 1.0% 1.0% 1.0% 1.0% 1.0% 3.0% 1.0% 1.0% 0.0% 1.0% 1.0% 0.0%
the region
- Regulatory risk 2.0% 0.0% 1.0% 2.0% 2.0% 2.0% 4.0% 2.0% 1.0% 2.0% 3.0% 0.0% 3.0%
- Liquidity 1.0% 1.0% 2.0% 3.0% 3.0% 3.0% 1.0% 3.0% 2.0% 3.0% 2.0% 4.0% 5.0%
Adjusted equity risk
10.0% 9.0% 11.0% 16.0% 16.0% 14.0% 21.0% 15.0% 15.0% 13.0% 18.0% 16.0% 21.0%
premium
Cost of equity 16.0% 15.0% 17.0% 22.0% 22.0% 20.0% 27.0% 21.0% 21.0% 19.0% 24.0% 22.0% 27.0%
Share of equity: E/(D+E) 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
Share of debt: D/(D+E) 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
Source: Alfa Research
The charts below show that those MRSKs with the lowest WACC have the
highest DCF-based EV/RAB multiples.
Figure 12: MRSKs ranked by fair EV/RAB Figure 13: MRSKs ranked by WACC
21.8%
1.00x 30.0%
21.1%
0.76x
0.71x
19.2%
0.67x
18.3%
17.8%
17.8%
0.64x
0.62x
17.1%
17.1%
0.60x
16.4%
25.0%
15.5%
0.80x
0.54x
14.1%
13.4%
12.7%
0.43x
0.42x
0.42x
20.0%
0.38x
0.60x
0.33x
0.31x
15.0%
0.40x
10.0%
0.20x 5.0%
0.00x 0.0%
Tomsk DisCo
Tomsk DisCo
MRSK N.C.
MRSK N.C.
MOESK
MOESK
MRSK N.West
MRSK N.West
MRSK Center
MRSK Center
MRSK Urals
MRSK Urals
MRSK C&V
MRSK C&V
MRSK South
MRSK Siberia
Tyumenenergo
MRSK Siberia
MRSK South
Tyumenenergo
MRSK Volga
MRSK Volga
Lenenergo
Kubanenergo
Lenenergo
Kubanenergo
Initial RAB: The main valuation factor is still

uncertain
We base our valuation The key factor determining MRSKs’ valuation is the initial regulatory asset
on MRSK Holding’s base (iRAB). This parameter, however, remains uncertain for 71% of the
guided iRAB numbers, regions covered by MRSK Holding. Moreover, Elvira Nabiullina, Russia’s
but they may change Economic Development Minister, recently announced plans to cut next year’s
tariff increase for the Federal Grid Company, spurring fears of possible cuts in
the initial RAB estimates for many of the regions where RAB-based
14 MRSK Initiation
Equity Market
distribution tariffs are being introduced. We have written before that this is
more likely intended to smooth the increase in FGC’s tariffs and lengthen its
regulatory period to five years from the current three; nonetheless, many
investors are very concerned that the initial parameters of RAB-based tariffs
could deteriorate under pressure from the Economic Development Ministry,
which tends to prioritize fighting inflation.
We share these concerns and believe that July 1, 2010, when many MRSK
Holding branches must adopt RAB-based tariffs, will be a very important date
for investors, since it will show whether or not the approved iRAB numbers
differ substantially from those guided by MRSK Holding.
We base our valuation of MRSKs on the numbers provided by MRSK Holding
except in the case of MRSK North Caucasus, which seemed exaggerated
relative to the net PP&E value of the company. The iRAB numbers we use in
our models are provided below:
Figure 14: iRAB numbers assumed in our valuation

MRSK Full RAB value iRAB value iRAB value % of iRAB approved to date
RUB mln RUB mln $ mln
MRSK Center 414,395 118,012 3,934 54%
MRSK Northwest 80,607 29,688 990 18%
MRSK Siberia 253,452 81,624 2,721 25%
MRSK Urals 139,276 74,769 2,492 35%
MRSK South 112,473 37,297 1,243 34%
MRSK Center and Volga 217,940 79,443 2,648 45%
MRSK Volga 158,608 53,981 1,799 24%
MRSK North Caucasus 45,570 29,343 978 0%
MOESK 603,987 207,079 6,903 0%
Lenenergo 180,000 92,256 3,075 0%
Tyumenenergo 230,918 119,191 3,973 0%
Kubanenergo 96,805 24,622 821 0%
Tomsk DisCo 17,080 5,421 181 100%
Source: Company data, Alfa Research
We cut MRSK Holding’s The reason why we adjusted MRSK North Caucasus’s iRAB is highlighted in
iRAB estimate for MRSK the charts below. The iRAB/Net PP&E ratio based on MRSK Holding’s guided
North Caucasus figure looks abnormally high, and the assumed depreciation of MRSK North
Caucasus’s assets is strangely low. We therefore adjusted this number,
applying the average iRAB/Net PP&E ratio of 1.8x to find the iRAB for the
company. The adjusted number is shown in the table above.
Figure 15: iRAB/Net PP&E ratio (MRSK Holding data) Figure 16: iRAB depreciation (MRSK Holding data)
abnormally high ratio! 100%
4.3x
75%
72%
68%
68%
5.0x
67%
66%
66%
64%
63%
80%
52%
49%
4.0x
46%
2.7x
2.5x
2.4x
60%
36%
2.4x
2.1x
3.0x
1.8x
1.7x
1.6x
1.6x
40%
1.3x
1.3x
1.0x
2.0x
20%
1.0x
0%
Tomsk DisCo
MRSK N.C.
MOESK
MRSK N.West
0.0x
MRSK Center
MRSK Center
MRSK Urals
MRSK South
MRSK Siberia
Tyumenenergo
MRSK Volga
Lenenergo
Kubanenergo
Tomsk DisCo
MRSK N.C.
MOESK
MRSK N.West
MRSK Center
MRSK Center
MRSK Urals
MRSK Siberia
MRSK South
Tyumenenergo
MRSK Volga
Lenenergo
Kubanenergo
Source: Company data, Alfa Research Source: Company data, Alfa Research
MRSK Northwest’s MRSK Northwest’s iRAB figure looks abnormally low at 1.0x Net PP&E vs. the
iRAB looks extremely MRSK Holding average of 1.8x. Although we acknowledge that there is
low
MRSK Initiation 15
Equity Market
significant upside risk to this iRAB number, we nonetheless use it in our

valuation in the absence of any other estimates for the company’s iRAB:
MRSK Northwest has the poorest corporate governance and lowest
transparency among MRSKs and refused to give their own guidance for their
initial regulatory asset base. Only one branch out of six, Novgorodenergo, has
adopted RAB-based tariffs.
Regardless, we note that there is significant upside to our current valuation of
the stock should the actual iRAB numbers exceed those guided by MRSK
Holding.
MRSK Holding valuation

We apply equally- We value MRSK Holding using the equally-weighted blended results of the
weighted results of DCF holding’s consolidated DCF and SoP valuation using our fair value for all its
and SoP valuation components. The details of our DCF valuation of MRSK Holding are provided
in the “Company Pages” section of this report. The blended valuation is
summarized in the table below:
Figure 17: Blended target price calculation, MRSK Holding

DCF SoP
Weight 50% 50%
Fair EV 17,169
Net debt 4,029
Minority interest 4,954
Fair equity value 8,186 5,813
Number of shares, mln
- com 41,042 41,042
- pref 2,075 2,075
Assumed pref/com discount 0.9158x 0.9158x
Fair value p.s. $0.191 $0.135
Blended fair value p.s., com $0.163
Blended fair value p.s., pref $0.149
WACC 12.9%
Blended 12M TP, com $0.184
Blended 12M TP, pref $0.168
Current share price, com $0.107
Current share price, pref $0.078
Upside, com 71%
Upside, pref 115%
Rating, com O/W
Rating, pref O/W
Source: Company data, Bloomberg, Alfa Research
We apply a 25% We apply a 25% discount to our SoP valuation, the discount at which holding
holding discount to companies usually trade to the aggregate value of their underlying assets.
our SoP valuation
Our SoP valuation is summarized below:
16 MRSK Initiation
Equity Market
Figure 18: MRSK Holding SoP valuation, $ mln

DCF-based Equity Value Holding stake Equity value attr. to Holding
MOESK 3,201 51% 1,629
MRSK Center 2,581 50% 1,297
MRSK Center and Volga 1,501 50% 756
MRSK Volga 751 68% 508
MRSK Northwest 349 55% 194
MRSK Siberia 1,018 53% 538
MRSK North Caucasus 271 58% 158
MRSK Urals 1,418 52% 731
MRSK South 341 52% 176
Lenenergo 798 46% 365
Kubanenergo 393 25% 100
Tomsk DisCo 87 52% 45
Tyumenenergo 1,233 100% 1,233
Total equity value 7,730
Less: 25% holding discount 1,932
Discounted equity value 5,797
Number of shares, mln
- com 41,042
- pref 2,075
Assumed pref/com discount 0.9158x
Fair value p.s., com $0.135
Figure 19: Five largest contributors to MRSK Holding’s value, $ mln

9000
8000
7000
2083
6000
756
5000
731
4000
1233
3000
1297
2000
1000 1629
0
MOESK MRSK Center Tyumenenergo
MRSK Urals MRSK Center and Volga Other
EV/RAB waterfall analysis

The waterfall charts below reconcile our EV for the MRSKs with their
theoretical value assuming an EV/RAB multiple of 1.0x. We separate the
impact of the following factors affecting our DCF-based EV/RAB multiple:
• WACC discrepancy: WACC differs from the regulatory rate-of-return;
• OPEX discrepancy: We assume a 0% efficiency gain in actual OPEX
vs. the regulatory 1% annual X-factor;
MRSK Initiation 17
Equity Market
• D&A factor: This shows the discrepancy between accounting D&A

charge and RAB depreciation;
• WC factor: This reflects the difference between modeled net working
capital changes and the regulatory ones incorporated into RAB-based
tariffs;
• “Cost +” factor: This reflects the influence of the “pre-RAB” cash flows,
i.e. those which are generated under “cost-plus” tariffs;
• Tax factor: The discrepancy between accounting and regulatory
income taxes;
• Smoothing factor: This reflects the impact of smoothing on RAB-
based tariffs;
• Supply segment factor: This shows the contribution of supply assets’
(retailing companies) cash flows belonging to the MRSKs, if any;
• XR factor: This accounts for exchange-rate fluctuations affecting
ruble-denominated cash flows converted into dollars.
Figure 20: MOESK EV/RAB reconciliation Figure 21: MRSK Center EV/RAB reconciliation
mln $236
mln $4,000
$8,000 $102 $1 $40 $16 $26
$430
$431 $3,500
$7,000 $200 $202
$3 $9 $43
$1,315 $120
$6,958
$6,000 $3,000
$232
$5,000 $2,500
$3,010
$3,951
$4,000 $4,623 $2,000
$3,000 $1,500
$2,000 $1,000
$1,000 $500
$0 $0
Alfa fair OPEX WACC D&A Tax Smoothing WC Cost+ XR EV/RAB=1 Alfa fair OPEX WACC D&A Tax Smoothing WC Cost+ XR EV/RAB=1
EV
EV
Figure 22: MRSK Center and Volga EV/RAB Figure 23: MRSK Volga EV/RAB reconciliation
reconciliation
$3,000 mln $2,000 mln
$170 $108
$655 $719 $91
$150 $213 $0.4 $0.0 $112
$15.4 $11.3 $49 $63
$2,500 $2,768 $1,817
$1,500
$84
$2,000
$94
$1,500 $1,000
$1,839
$936
$1,000
$500
$500
$0 $0
EV EV
18 MRSK Initiation
Equity Market
Figure 24: MRSK Northwest EV/RAB reconciliation Figure 25: MRSK Siberia EV/RAB reconciliation
$1,200 mln mln
$3,000 $177
$1,329 $88 $25 $143
$61 $26 $1 $2,903
$76
$21 $7 $8 $16 $2,500
$365 $0.4 $1,018
$800
$2,000
$21 $1,500 $107
$489 $1,234
$400 $1,000
$500
$0 $0
Alfa fair OPEX WACC D&A Tax Smoothing WC Supply Cost+ XR EV/RAB=1
Alfa fair OPEX WACC D&A Tax Smoothing WC Cost+ XR EV/RAB=1
EV segment
EV
Figure 26: MRSK North Caucasus EV/RAB Figure 27: MRSK Urals EV/RAB reconciliation
reconciliation
$59
$77 $3,500 mln
$1,000 mln
$496 $4 $4 $14 $34 $991 $1,275 $144
$53 $0.0 $93
$3,000 $112 $184
$149
$800
$2,806
$2,500
$600
$2,000 $165
$103 $1,500 $1,628

$400
$304 $1,000
$200
$500
$0
$0
Alfa fair OPEX WACC D&A Tax Smoothing WC Cost+ XR EV/RAB=1 Alfa fair OPEX WACC D&A Tax Smoothing WC Supply Cost+ XR EV/RAB=1
EV EV segment
Figure 28: MRSK South EV/RAB reconciliation Figure 29: Lenenergo EV/RAB reconciliation
mln mln
$1,600 $3,500
$147 $91 $82 $201
$1,400 $476 $40 $3,000 $260
$3 $7 $3,075
$1,388 $1,436 $168 $120
$36 $7
$1,200
$2,500
$1,000
$2,000
$82
$800
$1,500
$736 $54
$600
$1,252
$1,000
$400
$500
$200
$0
$0
EV
EV
MRSK Initiation 19
Equity Market
Figure 30: Kubanenergo EV/RAB reconciliation Figure 31: Tomsk DisCo EV/RAB reconciliation
mln
$1,200 mln $300
$66
$47
$158 $163 $1,091
$1,000 $586 $250
$22 $2
$11 $2 $1 $13
$800 $200 $5 $11
$100
$186
$600 $150
$19
$400 $100
$1
$347
$79
$200 $50
$0 $0
EV EV
Figure 32: Tyumenenergo EV/RAB reconciliation

$239
$4,000 mln
$313
$2 $8 $0 $39 $3,973
$1,896
$3,500
$3,000
$2,500
$2,000
$69
$1,500
$1,485
$1,000
$500
$0
EV
20 MRSK Initiation
Equity Market
Limited Impact on End-User

Tariffs
How much regulatory risk?
Distribution tariff makes In Russia, distribution tariffs account for a relatively small share of the end-
up only 27% of end-user user electricity tariff compared with the power generation component. The
price, reducing charts below provide a breakdown of Russia’s end-user tariff:
regulatory risk
Figure 33: End-user tariff composition, 2009 Figure 34: Change in end-user tariff breakdown
after RAB introduction
Retailing 100%
Regional
charge; 4%
generation;
80% 27% 29%
5%
60% 5% 7%
Distribution;
40%
27%
56% 54%
Generation; 20%
56%
Transm-n; 0%
5%
2009 2012E
Market
Generation Market infrastructure
inf rastr-re; Transmission Distribution
3% Regional generation Retailing charge
Source: Market Council Source: Market Council, Alfa Research
The above charts show that the total share of the “grid” component in end-
user tariffs (i.e. including both transmission and distribution components) will
rise from 32% currently to 36% in 2012, a very small increase. As a result,
distribution tariffs could increase sharply without having a significant influence
on end-user tariffs.
Figure 35: End-user tariff composition Figure 36: End-user tariff, RUB/MWh
100% 4,000
80% 3,000
60%
2,000
40%
20% 1,000
0% 0
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2009
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2009
Generation Market infrastructure Generation component Market infrastructure

Transmission Distribution Transmission component Distribution component
Regional generation Retailing charge Regional generation Retailing charge
Source: Market Council, Alfa Research Source: Market Council, ATS, Alfa Research
The most important conclusion to draw from all this is that in combating
inflation, the government should be more concerned about double-digit annual
gas tariff increases for domestic customers, predominantly in the power
sector, rather than the infrastructure component, including the grid. The latter
MRSK Initiation 21
Equity Market
has a much lower influence on the end-user tariff than power generation,
whose costs are driven exclusively by the gas tariff increases lobbied for
every year by Gazprom.
The table below shows that distribution is a relatively small component in
overall electricity prices. These numbers speak for themselves.
Figure 37: End-user tariff evolution, RUB/MWh

2010E 2011E 2012E 2013E 2014E 2015E
Generation component 1,016 1,182 1,357 1,510 1,621 1,692

+ Market infrastructure 48 52 56 60 63 66
+ Transmission component 109 142 176 199 225 247
+ Distribution component 504 634 740 808 867 916
+ Regional generation 80 86 93 99 105 110
+ Retailing charge 73 87 101 111 120 126
=End-user tariff 1,829 2,183 2,522 2,787 3,002 3,158
Change, y-o-y:
Generation 24% 16% 15% 11% 7% 4%
Transmission 49% 30% 24% 13% 13% 10%
Distribution 27% 26% 17% 9% 7% 6%
Supply 27% 26% 17% 9% 7% 6%
End-user tariff 25% 19% 16% 11% 8% 5%
Tariff composition:
Generation 56% 54% 54% 54% 54% 54%
Market infrastructure 3% 2% 2% 2% 2% 2%
Transmission 6% 7% 7% 7% 8% 8%
Distribution 28% 29% 29% 29% 29% 29%
Regional generation 4% 4% 4% 4% 4% 3%
Retailing charge 4% 4% 4% 4% 4% 4%
22 MRSK Initiation
Equity Market
Distribution Segment at a Glance

The second-largest segment of the Russian
electricity sector
The Russian distribution The distribution business in the Russian utilities sector is currently
segment represented by represented by large, state-controlled MRSK Holding, which holds controlling
MRSK Holding, which stakes in 13 regional distribution companies – MRSKs and two standalone
includes 13 underlying DisCos which have not been merged into the respective MRSKs
distribution companies (Kubanenergo and Tomsk DisCo).
MRSK Holding was created as part of the breakup of UES in mid-2008 and
obtained UES’s controlling stakes in several MRSKs. The MRSKs in turn were
consolidated on the basis of 58 small standalone distribution companies
(DisCos, or RSKs in Russian), which were created as a result of the
unbundling of vertically-integrated AO-energos by line of business, the bulk of
which occurred in 2004-2005.
However, in some rare cases distribution networks remained owned by non-
unbundled energos, specifically the four energos that were independent of
UES (Bashkirenergo, Novosibirskenergo, Tatenergo and Irkutskenergo) and
remote energos (primarily in the Russian Far East). In particular, Far East
Energy Company, or DEK, owns 100% of Far East DisCo holding distribution
networks in Amur, Khabarovsk, Primorye regions and Southern part of
Yakutia Republic.
Apart from MRSK Holding, a significant portion of low-voltage distribution
networks in some regions are still owned by local municipal authorities,
particularly in Moscow and St. Petersburg.
The distribution sector According to government regulations (in particular, the government resolution
is comprised of low- of December 21, 2001, No. 881 “On the Criteria of Ascribing Transmission
voltage networks Lines and Network Units to the United National Power Grid”), all networks with
referred to as “last voltages below 220 kV must be included in distribution companies, including
mile” businesses those that are part of national transmission networks. All lines with voltages of
220 kV and higher have eventually been passed under the umbrella of the
Federal Grid Company (FGC). Although some DisCos own overhead and
cable network lines with 220 kV or higher voltages, these lines are not part of
the Unified National Power Grid.
MRSK Holding structure The structure of MRSK Holding is presented on the next page:
MRSK Initiation 23
Equity Market
Figure 38: MRSK Holding structure
* Note: Yantarenergo is not pure DisCo owning some power generating assets as well
The grey boxes represent pure distribution companies, i.e. the underlying
MRSKs, while MRSK Holding also holds controlling stakes in some retailing
companies, predominantly in the Caucasus region, and some other assets,
including 100% of Yantarenergo, which is a vertically-integrated utility in the
Kaliningrad region.
The geography of MRSK Holding and its subsidiaries is shown on the map
below:
Figure 39: MRSK Holding geography
MRSK
Northwest
Lenenergo
Moscow Tyumenenergo
United DisCo
Tomsk DisCo
MRSK
Center-Volga Isolated areas
MRSK Center
MRSK South
Kubanenergo
MRSK
MRSK Urals
Volga
MRSK
North Caucasus Independent
energos
MRSK Siberia
Twelve subsidiaries of Twelve out of the 13 underlying distribution companies of MRSK Holding are
MRSK Holding are listed listed and trade on Russian stock exchanges. The charts below compare the
underlying companies by revenue, EBITDA, throughput and MCap:
24 MRSK Initiation
Equity Market
Figure 40: MRSKs by 2009 revenue, $ mln Figure 41: MRSKs by 2009 EBITDA, $ mln
MOESK MOESK
MRSK Urals MRSK Center
MRSK Center Tyumen-go
MRSK C&V MRSK Urals
Tyumen-go Lenenergo
MRSK Siberia MRSK C&V
MRSK Volga MRSK Volga
MRSK N.W. MRSK South
Lenenergo MRSK Siberia
MRSK South MRSK N.W.
Kubanenergo Kubanenergo
MRSK N.C. MRSK N.C.
Tomsk DisCo Tomsk DisCo
0 500 1,000 1,500 2,000 2,500 3,000 0 200 400 600 800 1,000 1,200
Source: Company data, Alfa Research Source: Company data, Alfa Research
Figure 42: MRSKs by 2009 throughput, GWh Figure 43: MRSKs by Mcap, $ mln
MRSK C&V MOESK
MRSK Center MRSK Center
Lenenergo MRSK Siberia
MOESK
MRSK Volga Lenenergo
Tyumen-go MRSK C&V
MRSK Urals MRSK N.West
MRSK South MRSK Urals
MRSK N.W. MRSK Volga
MRSK Siberia MRSK South
Kubanenergo
MRSK N.C.
MRSK N.C.
Tomsk DisCo Kubanenergo
Tomsk DisCo
0 20,000 40,000 60,000 80,000
0 500 1,000 1,500 2,000 2,500
Source: Company data Source: Bloomberg, Alfa Research
Distribution is the After power generation, the distribution segment is currently the second-
second-largest largest segment in the Russian utilities sector in terms of market cap,
segment in the amounting to $13 bln, or 18% of the total market cap of all listed companies in
Russian utilities sector the Russian utilities universe.
by market cap
MRSK Holding is now the fourth largest name in the sector in terms of MCap
after RusHydro, Federal GridCo and OGK-4. Mosenergo and Inter RAO are
the two other largest names in the power sector.
Among MRSKs, MOESK, MRSK Center and MRSK Siberia are the three
largest stocks, having the highest MCaps at the moment.
MRSK Initiation 25
Equity Market
Figure 44: Russian electricity sector MCap, $ bln Figure 45: Distribution is the 2nd largest segment
90 Generation Distribution Transmission
VICs Supply Other VICs Supply Other
80 7% 2% 4%
1 3
70 5
60 12 Transm-n
50 16%
13
Generation
40
54%
30
20 41
Distrib-n
10 18%
0
Source: Bloomberg, Alfa Research Source: Bloomberg, Alfa Research
Figure 46: MRSK Holding has 4th largest MCap, $ Figure 47: Top 5 underlying MRSKs by MCap, $ mln
20.0 3,000
16.0 13.4 2,110

12.0
2,000
12.0
1,353
8.0 5.0 911
4.6 3.8 747 730
3.3 1,000
4.0
0.0
0
FGC
RusHydro
OGK-4
Inter RAO
Holding
Mosenergo
MRSK
MOESK MRSK MRSK Lenenergo MRSK

Center Siberia Center
and Volga
Source: Bloomberg, Alfa Research Source: Bloomberg, Alfa Research
26 MRSK Initiation
Equity Market
The economics of the DisCo business

DisCos collect cash
from supply The place of DisCos in the sector’s value chain
companies but are For a better understanding of the role of distribution companies in the Russian
obliged to pay tariffs utilities sector, we have provided a chart showing the place of DisCos in the
to the FGC sector’s overall value chain:
Figure 48: Current place of DisCos in sector value chain

purchase electricity losses
Wholesale Electricity Market pay transmission Retail Electricity Market
OGK/TGK tariff pay distribution tariff Major Consumers
IPPs Federal Grid pay retail electricity tariff
Distribution Supply
Hydro-OGK Company
Companies Companies
Rosenergoatom (National Grid)
Block-Stations Small end users
pay generators' price electricity flows

Electricity consumers - money flows
participants in WEM
The above figure demonstrates that distribution companies in Russia have

supply companies as their main consumers. Supply companies purchase
electricity from generators on the wholesale market and then re-sell it to their
customers on the regional level. However, they are obliged to pay distribution
tariffs to the DisCos for the physical “last mile” delivery of the electricity to
end-users.
On the other hand, DisCos are obliged to pay transmission tariffs established
by the government to the Federal Grid Company. This transmission tariff is set
by the Federal Tariff Service. In fact, this payment for electricity transmission
by DisCos is a component of their operating expenses, amounting on average
to 20-30% of total OPEX and thus always reflected in the respective tariff for
DisCos. Transmission tariffs are thus passed through distribution tariffs onto
supply companies purchasing the electricity on the wholesale market, and
eventually onto their customers through regional end-user tariffs.
DisCos’ position in the Essentially, DisCos’ role in the sector value chain protects them from the non-
value chain better payment and cash accumulation problems still persisting in some problematic
protects them from regions of Russia. Supply companies fully take on these risks as they directly
non-payments unlike interact with end-users, including households, regional communal services
supply companies and small and medium-sized industrial consumers. Meanwhile, supply
companies are obliged to pay DisCos for providing physical electricity
distribution services regardless of their ability to collect cash from their end-
user customers on a timely basis. At this time, supply companies are exposed
to much greater risk from this situation and are thus less predictable than
distribution companies, for whom local authorities constitute the sole
uncertainty regarding state-controlled regulations.
However, during the crisis in 2009, many MRSKs faced serious problems with
non-payment owing to the poor payment discipline of end-user customers,
who were late in paying their suppliers. This in turn made it difficult for the
suppliers to pay MRSKs.
The role of MRSKs will Figure 47 depicts the value chain in the Russian utilities sector as it is
remain the same going expected to be after the completion of all the transformations caused by the
forward current cycle of reforms:
MRSK Initiation 27
Equity Market
Figure 49: The target value chain and DisCos

purchase electricity losses
Wholesale Electricity Market Retail Electricity Market
pay RAB
transmission tariff pay RAB distribution Major Consumers
OGK/TGK
tariff
IPPs pay liberalized retail
Federal Grid Supply electricity tariff
Hydro-OGK MRSKs
Company Companies
Rosenergoatom
Block-Stations Small end users
pay competitive generators' price electricity flows

Electricity consumers - money flows
participants in WEM
The DisCos’ position in the value chain is unlikely to change as even the new
tariff regulation scheme does not assume any change in the role of DisCos in
the industry.
Electricity loss reimbursement
DisCos reimburse Distribution networks accept electricity from high-voltage grids owned mainly
electricity losses through by the Federal Grid Company and other suppliers (i.e. power plants directly
purchases from supply connected to distribution networks). Transmission of this electricity to end-
companies consumers through their low-voltage distribution networks is then referred to
as the “last mile.” However, as with any electricity transfers over a network,
DisCos lose a portion of the transmitted electricity in the process, which they
are then obliged to reimburse through additional purchases.
In Russia, all DisCos purchase power from supply companies to compensate
for their electricity losses in accordance with the tariffs set by the local
Regulatory Energy Commissions for loss payments. Electricity loss
reimbursement expenses in the framework of approved loss standards are
included in the tariff for DisCos because this is an item of operating expenses
for the companies. DisCos are thus able to purchase their losses on the
wholesale market, where prices are usually lower than retail tariffs set by
supply companies. However, this is not currently favorable because of the
high cost of equipping all DisCos’ reception centers with electricity calculation
systems. Nevertheless, Russian DisCos do not rule out that they may begin
purchasing electricity directly on the wholesale electricity market soon.
The mechanism for DisCo electricity loss reimbursement is shown in Figure
48 below.
28 MRSK Initiation
Equity Market
Figure 50: Electricity loss reimbursement

High-voltage Grid DisCo End Consumers
Electricity input
Electricity sales Electricity sales
Electricity bought from

Electricity losses
supply company
Purchases losses
Supply Company
Source: Alfa Bank Research
Electricity losses over Generally, total electricity losses pertaining to networking companies (both
networks are divided transmission and distribution) are divided into two main types: technological
into two types losses and commercial losses. The former occur due to the physical process
of electricity transmission through the networks and change depending on the
state of the networks, their depreciation, the outdoor temperature and other
factors. More significantly, there is a strong negative correlation between
voltage and loss, a result of the physics of electricity.
Commercial losses, on the other hand, are caused by poor counting of
electricity leading to ordinary theft. Commercial losses are currently
considered the main lever for diminishing total electricity losses via
implementation of modern technologies for better measurement of electricity
consumption.
The technology of electricity distribution

Electricity distribution The main technological process behind electricity distribution is shown in
involves a number of Figure 49. Electricity is supplied to DisCos from a national grid through electric
stages power supply centers, which are generally owned by the Federal Grid
Company as they involve high-voltage networking assets. The electricity then
goes to distribution centers (owned by DisCos) via high-voltage supply cables
and is then delivered to transformer centers through distribution cable lines,
which lower electricity voltage and deliver electricity through transformer
substations to end users.
MRSK Initiation 29
Equity Market
Figure 51: Electricity distribution technology

National Grid
Electric Power
High-voltage
Supply Center
Supply Cables
Distribution
Center
Distribution Cables
Transformer
Center
Transformer Transformer Transformer

… 0.4 kV
Substation 1 Substation 2 Substation N
End electricity users
Source: Alfa Bank Research
30 MRSK Initiation
Equity Market
RAB-based tariff setting: How does it work?

RAB framework to replace inefficient and archaic “cost
plus” tariff setting approach
RAB approach is being In 2011 the electricity market will be fully liberalized, i.e. the generating
adopted by Russian business will become completely deregulated (except for electricity sold to
electric utilities households). On the other hand, monopolistic businesses, primarily networks
including distribution and transmission, will become state-regulated. However,
the current “cost plus” mechanism is set to be replaced with the more
progressive and internationally accepted RAB regulation-based system.
“Cost plus,” as its title suggests, involves setting tariffs by tying them to the
regulated company’s operating costs, interest expenses, taxes, dividends and
necessary capital expenditures financed through own funds, deriving so-called
“necessary regulated revenues.” The distribution tariff is then calculated by
dividing necessary regulated revenues by electricity sales, i.e. electricity input net
of network losses. Figures 50-51 below compare the typical breakdown of “cost
plus” distribution tariffs for Russian MRSKs.
Figure 52: “Cost plus” tariff breakdown Figure 53: “Cost +” vs. RAB tariff setting
methodology
100%
4.0% 0.2% "Cost +" regulation RAB-based regulation
90% 10.8%
80% 8.5%
Margin RAB depreciation
70%
Return on new CAPEX
60%
Depreciation
Return on old CAPEX
50% Income tax Income tax
40% Controllable OPEX Controllable OPEX
76.5%
30% Non-controllable OPEX Non-controllable OPEX
20% "Cost +" revenue RAB tariff revenue
10%
0%
Operating
Depreciation 1
Necessary CAPEX Taxes Dividends
expenses
“Cost plus” tariff regulation approach has three major drawbacks discussed
below.
Decisions on tariffs highly “Cost plus” tariffs for regional DisCos are set on an annual basis by local
politicized, especially at regulators (Regional Energy Committees). Tariff-setting usually becomes a
regional level subject of debate between local governments – who control the Regional Energy
Committees – and their regional DisCo’s management, meaning that establishing
economically justified and adequate tariffs under “cost plus” directly depends on
the lobbying abilities of the local DisCo management. Tariff-setting under “cost
plus” thus becomes more a political than an economic issue.
“Cost plus” fails to The “cost plus” system, because of its reliance on operating expenses and
encourage cost political favor, is not ideal for DisCos. On the contrary, it sometimes leads to
savings artificially exaggerated operating costs in order to justify higher tariffs. If a
company reports that it has substantially reduced costs within the previous
regulated period, it would likely face a reduction in its tariffs during the next period
because the local regulator is always interested in keeping tariffs as low as
possible to satisfy the local authorities’ constituents. Thus, under the current
framework, DisCos are unable to retain saving from reduced costs if they report
their operating expenses properly. Therefore it does not come as a surprise that
MRSK Initiation 31
Equity Market
operating expenses for Russian DisCos (less depreciation) are currently

exaggerated so much, which suggests decent upside potential on cost savings
from cutting out the “operating fat”. Needless to say, that all these inefficiencies of
DisCos are passed through their tariffs on to the end-user customers.
“Cost plus” prevents Another unfavorable peculiarity of the “cost plus” regulation system is the one-
active borrowing year term for tariffs. This system makes DisCo business less predictable as their
restraining efficiency prices may change dramatically from year to year without any relationship to the
of MRSK business market. This consequently leads to a situation in which distribution companies in
Russia are virtually unable to attract long-term loans as their creditors consider
the one-year tariff terms as very risky because no one knows what tariff the
company will receive in the next period due to political decisions.
RAB-based regulatory approach is free of virtually all the above-mentioned
drawbacks of the “cost plus” mechanism and thus proved itself in many
countries around the globe such as the Czech Republic, Hungary, Bulgaria,
Romania, Ukraine, Lithuania and Latvia as very efficient and progressive way
to regulate tariffs of natural monopolies.
RAB regulation is Considering these problems and the large-scale investment needs of the
more progressive power distribution segment, the government has decided to adopt the RAB-
according to all based regulatory approach for MRSKs (see the section below on the
criteria timeframe discussion). Below we provide a comparative analysis of “cost plus”
and RAB.
Figure 54: RAB vs. “cost plus”

Criteria "Cost plus" regulation RAB-based regulation
Approved market return reflecting industrial risks - important
Attractiveness for investors No mechanisms of regulation of return on investments
part of regulation
Efficiency incentives 2 years after payback period of cost savings measures 5 years for cost saving fact
Economic incentives and responsibility for reliability and
Reliability incentives No regulation of reliability
quality of provided services
One-year regulation period: risks are unacceptable by 5 year regulation period (3 year - for the first transitional
Reduction of regulatory risks
strategic investors period)
Tariffs are indexed with factual inflation and change of
Reduction of macroeconomic risks Tariffs are indexed with inflation federal factors, i.e. tariffs are irrelevant to the all non-
controlled factors
Source: Federal Grid Company, Alfa Bank Research
The comparison of RAB-based tariff setting and “cost plus” is additionally

visualized by the below chart:
Figure 55: The evolution of tariff regulation
"Cost plus" tariff approach RAB-based regulatory approach
Compensates for the incurred costs Encourages investments and operating efficiency
Composition of the tariff-based revenue: Composition of the tariff-based revenue:
Operating expenses Depreciation of initial RAB Return on iRAB
Net income Depreciation of newly Return on newly

Asset depreciation + invested capital (new RAB) invested capital
+
Reserved for
CAPEX Operating expenses
reinvestment and
dividends
Watched by
Taxes and charges Controlled by Company
Regulator
Source: Federal Grid Company, Alfa Research
Legislation came in The legislation for RAB-based tariff regulation was approved by the
force, rules are clear government and went into force with Decree #109 of June 18, 2008,
32 MRSK Initiation
Equity Market
accompanied by an order by the Federal Tariff Service describing the

methodology of tariff regulation. Decree #30 of January 19, 2010 sets the
schedule of RAB-based tariff introduction in various regions across Russia for
MRSKs and other distribution companies (discussed below).
The RAB-based regulation being applied to Russian companies in the
meantime is illustrated in the figure below:
Figure 56: RAB regulation in Russia

Network reliability and development requirements:
- Reliability and quality standards
- Forecasting of on-peak loads and new connections
CAPEX: OPEX reimbursement:

Market cost of
- Reconstruction plans - Level of historical costs
capital (reflecting
- Network development plans risks) - Order for reducing costs along with technical progress
- Plans for improvement of service quality
Depreciation of Invested Capital + Return on Invested Capital + Operating expenses
Economic incentives for efficiency and reliability:
Regulated gross
- Bonuses/penalties for reliability based on the benchmarking approach
revenue
- Retention of costs cut for some period
Adjustments to impartial factors:

Tariff - Adjustment to inflation
- Reimbursement of costs not subject to company control
- Adjustment to volume of electricity sales
Source: Federal Grid Company
Assumptions behind The guiding principle behind RAB is its encouragement of private investment
RAB in the sector through guaranteed fair returns and efficiency incentives. As in
most foreign countries that have adopted the system, RAB in Russia relies on
several key assumptions:
• The establishment of a regulatory asset base (RAB) at the
replacement cost of a company’s assets determined by independent
appraisers and approved by regulators. New investments will increase
this base while depreciation will diminish it;
• Inclusion into the tariff of a 12% post-tax rate of return from the RAB
for the newly-built assets while using 6-9-12% rates of return for the
first three years of the first regulatory period for the “old” assets
included into initial RAB (iRAB);
• A five-year tariff-setting period (three years for the first transitional
period) and an annual adjustment for inflation and changing national
macroeconomic factors;
• Allowing companies to retain the benefits of operating cost savings
within the five-year period while bearing the economic responsibility to
fulfill the reliability and service requirements.
It is expected that in real terms the RAB tariff will decline in the future,
primarily thanks to OPEX improvements and an increasing share of RAB
depreciation and return on RAB components in the aggregate RAB-based
tariff vs. the OPEX component.
Who are the decision The general decision-making system for RAB-based tariff setting for MRSKs
makers? and their branches is depicted in the below chart.
MRSK Initiation 33
Equity Market
Russia’s Federal Tariff Service (FTS) plays a central role in this scheme, as it
is responsible for general supervision of the process and development and
adjustment of the methodology of tariff setting while also determining and
estimating the key macroeconomic parameters that should be incorporated
into the tariffs. In turn, the FTS works with the Ministry of Energy to set various
industry standards and also with the Ministry of Economic Development,
which is responsible for macro forecasts and therefore closely watches the
tariffs of natural monopolies.
Every region of Russia has a Regional Energy Committee (REC), which is
responsible for tariff setting at the regional level. Not surprisingly, RECs report
directly to local authorities, which usually fight high tariff increases. RECs are
the final decision-makers for MRSKs, since their tariffs are set at the regional
level. RECs are in turn supervised by the FTS, which must approve their tariff
decisions. MRSKs submit the required data, including operational reports and
OPEX numbers, to RECs for tariff calculation.
Figure 57: Decision-making scheme for MRSK RAB-based tariffs

Regional Authorities
Calculate tariffs and determine the expected tariff growth
rates, submit to FTS for approval RAB-based tariff setting
Submissions of required
data, e.g. OPEX
Regional Energy
Ministry of Energy DisCo (MRSK branch) 1
Committee (REC) 1
Calculate tariffs and determine the expected tariff growth
…
rates, submit to FTS for approval
RAB-based tariff setting
Regional Energy
Federal Tariff Service (FTS) DisCo (MRSK branch) k
Main macro Committee (REC) j
parameters for Submissions of required
tariff regulation; data, e.g. OPEX
general
…
…
supervision and
Ministry of Economic methodology Regional Energy
DisCo (MRSK branch) m
Development Committee (REC) n Submissions of required
data, e.g. OPEX
Calculate tariffs and determine the expected tariff growth RAB-based tariff setting
rates, submit to FTS for approval
RAB introduction timeframe

MRSK Holding to be 100% RAB-based tariffs were introduced for the first time in 2008 for distribution
RAB-regulated as of 2011 companies in five regions: MRSK Center (Belgorod and Tver), MRSK South
(Astrakhan), MRSK Volga (Orenburg) and MRSK Urals (Perm). In 2009 the
list of RAB-based regulated regional branches of MRSKs was extended to
include five more regions.
The official schedule for adoption of RAB-based tariffs by MRSKs approved
by the government is presented below:
34 MRSK Initiation
Equity Market
Figure 58: The official schedule for introduction of RAB-based tariffs for MRSKs
RAB tariffs in place RAB tariffs in place
MRSK Center 2008 2009 1H10 2H10 2011 MRSK North Caucasus 2008 2009 1H10 2H10 2011
Belgorodenergo 1 1 1 1 1 Dagenergo 1
Bryanskenergo 1 1 Stavropolenergo 1 1
Kostromaenergo 1 1 Kabardino-Balkarian Branch 1
Kurskenergo 1 1 1 Karachaevo-Cherkessian Branch 1
Lipetskenergo 1 1 1 1 Severo-Ossetian Branch 1
Orelenergo 1 1 Ingush Branch 1
Smolenskenergo 1 1 % of RAB-regulated branches 0% 0% 0% 17% 100%
Tambovenergo 1 1
Tverenergo 1 1 1 1 1 MRSK Northwest 2008 2009 1H10 2H10 2011
Voronezhenergo 1 1 Arkhenergo 1
Yarenergo 1 1 1 Karelenergo 1
% of RAB-regulated branches 18% 27% 45% 100% 100% Kolenergo 1
Komienergo 1
MRSK Center and Volga 2008 2009 1H10 2H10 2011 Novgorodenergo 1 1 1
Vladimirenergo 1 1 1 Vologdaenergo 1
Ivenergo 1 Pskovenergo 1 1
Kalugaenergo 1 1 1 % of RAB-regulated branches 0% 0% 14% 29% 100%
Kirovenergo 1
Marienergo 1 MRSK Volga 2008 2009 1H10 2H10 2011
Nizhnovenergo 1 Samara distribution networks 1 1
Ryazanenergo 1 1 1 1 Saratov distribution networks 1 1
Tulenergo 1 1 1 1 Ulyanovsk distribution networks 1 1
Udmurtenergo 1 1 1 Mordovenergo 1 1
% of RAB-regulated branches 0% 22% 56% 56% 100% Penzaenergo 1 1
Chuvashenergo 1 1
MRSK South 2008 2009 1H10 2H10 2011 Orenburgenergo 1 1 1 1 1
Astrakhanenergo 1 1 1 1 1 % of RAB-regulated branches 14% 14% 14% 100% 100%
Volgogradenergo 1 1
Rostovenergo 1 1 1 1 MRSK Urals 2008 2009 1H10 2H10 2011
Kalmenergo 1 1 Kurganenergo 1 1 1 1
% of RAB-regulated branches 25% 50% 50% 100% 100% Permenergo 1 1 1 1 1
Sverdlovenergo 1
MOESK 2008 2009 1H10 2H10 2011 Chelyabenergo 1
City of Moscow 1 % of RAB-regulated branches 25% 50% 50% 50% 100%
Moscow region 1
% of RAB-regulated branches 0% 0% 0% 0% 100% MRSK Siberia 2008 2009 1H10 2H10 2011
Altaienergo 1
Lenenergo 2008 2009 1H10 2H10 2011 Buryatenergo 1
St Petersburg 1 Krasnoyarskenergo 1
Leningrad region 1 Kuzbass DisCo 1
% of RAB-regulated branches 0% 0% 0% 0% 100% Omskenergo 1 1 1
Tyvaenergoholding 1
Kubanenergo 2008 2009 1H10 2H10 2011 Khakasenergo 1 1
Kubanenergo 1 Chitaenergo 1 1
% of RAB-regulated branches 0% 0% 0% 100% 100% % of RAB-regulated branches 0% 0% 13% 38% 100%
Tyumenenergo 2008 2009 1H10 2H10 2011 Tomsk DisCo 2008 2009 1H10 2H10 2011
Tyumenenergo 1 Tomsk DisCo 1
% of RAB-regulated branches 0% 0% 0% 0% 100% % of RAB-regulated branches 0% 0% 100% 100% 100%
Source: Government, Company data, Alfa Research
The gray cells show those branches of MRSKs which have RAB-based
distribution tariffs over the respective periods. We calculated the percentage
of RAB-based regulated branches as a simple ratio of the number of RAB-
based regulated branches to the total number of branches in the respective
distribution company.
As can be seen, all the regions covered by MRSK Holding must be RAB-
based regulated as of the beginning of 2011. At the start of this year, only
29% (18 out of 63) of regional DisCos belonging to MRSK Holding had
MRSK Initiation 35
Equity Market
adopted RAB-based tariffs, while this number is expected to reach 62% (39
out of 63) as of July 1, 2010 according to the above schedule, followed by
100% on January 1, 2011.
3-year period might be All the “pilot” DisCos adopted a three-year period as their first regulatory
extended to 5-years, period, which is expected to be followed by five-year periods thereafter.
new branches will Federal Grid Company also adopted a three-year period as of the beginning
adopt 5-years period of 2010. Meanwhile, all those MRSK branches with three-year periods, as well
as FGC, are now allowed to extend their first regulatory period to five years,
and many MRSKs have already expressed interest in doing so.
The principles of RAB-based tariff setting

Key base factors set for The regulators determine the base parameters at the beginning of each
the entire regulatory regulatory period. They are fixed and cannot be revised for the entire period
period (this list is not complete and contains only the most important parameters):
• Base OPEX: base regulatory level of operating expenses;
• X-factor: the index of OPEX efficiency, implying the prescribed
percentage of annual OPEX reduction. The X-factor must be set
within a range of 1.0% and 2.5%;
• iRAB: initial regulatory asset base set by regulators;
• NWC: net working capital determined by regulators for the entire
regulatory period. NWC is determined within a range of 4% and 8% of
the regulatory revenue for the previous year;
• RoR: rate-of-return on invested capital determined by the FTS
together with the Ministry of Economic Development.
Three components Under the RAB regulatory framework, revenue consists of three main
form RAB-based components. The so-called “smoothing” mechanism is sometimes applied to
revenue revenues to avoid sharp tariff increases over the regulatory period:
Re venuet = OPEX t + RAB depreciationt + RAB returnt + Smoothing t

where OPEXt is total regulatory OPEX of year t, RAB depreciationt – annual
depreciation of the regulatory asset base including newly built assets, RAB
returnt – regulatory return on RAB, while Smoothingt is a special adjustment
applied to the revenue to smooth out tariff growth.
Below, we discuss each component of revenue in more detail.
OPEX combines The OPEX number consists of controllable and uncontrollable operating costs:
controllable and
uncontrollable costs OPEX t = Controllable OPEX t + Uncontrollable OPEX t
Controllable OPEX includes the following items:
• Raw materials;
• Repair and maintenance costs;
• Personnel expenses;
• Other OPEX.
Controllable OPEX does not include PP&E depreciation charge, interest
expenses, lease payments and other costs, many of which are part of
uncontrollable OPEX.
The annual controllable OPEX is calculated based on the following formula:
36 MRSK Initiation
Equity Market
Controllable OPEX t = Controllable OPEX t −1 ⋅ (1−" X − factor" ) ⋅ (1 + it ) ⋅

⋅ (1 + Elasticity ⋅ Assets quantity indext )
Where the X-factor has already been described, it – inflation, Elasticity – the
index of elasticity of OPEX to asset growth (0.75x for the first regulatory
period) and Assets quantity indext – the increase of the regulated company’s
assets measured in special units.
Uncontrollable OPEX comprises the following cost items which cannot be
controlled by the regulated company and must be reimbursed by tariffs based
on the actual numbers:
• Transmission charge – paid by MRSKs to the Federal Grid Company;
the FGC’s tariffs are also set in accordance with RAB-based
methodology as of 2010;
• Lease payments;
• Income tax;
• Other costs.
RAB depreciation: RAB depreciation is calculated every year by dividing the previous year-end
depreciation period is full regulatory asset base (including depreciation) by 35 years, which is the
35 years prescribed depreciation period for RAB.
RAB return RAB return comprises return on “old” RAB, i.e. the assets owned by the DisCo
prior to the first year of regulation under RAB and included into its iRAB by
regulators, and return on newly-built assets, which form the so-called “new”
RAB:
RAB returnt = OldRABt −1 ⋅ RoRold + NewRABt −1 ⋅ RoRnew

In turn, the following formula determines “new” RAB performance:
t
New RABt = ∑ CAPEX j − Accumulated depreciation of RABt + NWC
j =1
where CAPEX j - annual CAPEX of year j, while the other components of the
equation have already been described.
When does the It is not difficult to notice that the RAB methodology concept is not different
EV/RAB=1 equation from the residual income valuation concept, whereby the equity value of a
hold? company is equal to its book value when and only when ROIC equals the
company’s WACC. Therefore, the RAB-regulated company should be valued
in line with its RAB when the return on RAB set by the regulator is in line with
its actual WACC, applied to discount its future free cash flow.
The table below provides an example of a perfect hypothetical company
whose return on RAB coincides with its WACC and actual OPEX does not
differ from that prescribed by its regulator.
MRSK Initiation 37
Equity Market
Figure 59: The RAB-based regulated utility, hypothetical example of a perfect company*
Line Unit 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
1st regulatory period 2nd regulatory period 3rd regulatory period
Macro assumptions
Annual inflation 9% 9% 8% 8% 7% 6% 5% 4% 4% 4% 4% 4%
OPEX
Allowed controllable expenses (1) c.u. 1,000 1,069 1,143 1,211 1,271 1,321 1,360 1,400 1,442 1,484 1,528
Allowed uncontrollable expenses (2) c.u. 1,000 1,080 1,166 1,248 1,323 1,389 1,445 1,502 1,563 1,625 1,690
Factual OPEX total (5)=(3)+(4) c.u. 2,000 2,149 2,310 2,459 2,594 2,710 2,805 2,903 3,004 3,110 3,218
- controllable OPEX (3) c.u. 1,000 1,069 1,143 1,211 1,271 1,321 1,360 1,400 1,442 1,484 1,528
- uncontrollable OPEX (4) c.u. 1,000 1,080 1,166 1,248 1,323 1,389 1,445 1,502 1,563 1,625 1,690
Regulatory X-factor (6) % 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%
Factual efficiency gain (factual X-factor) (7) % 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%
RAB performance
iRAB before depreciation (8) c.u.18,993
iRAB, eoy (9) c.u.10,000
"Old" RAB, boy (10) c.u. n/a 10,000 9,457 8,915 8,372 7,829 7,287 6,744 6,201 5,659 5,116 4,573
"Old" RAB depreciation (11) c.u. n/a 543 543 543 543 543 543 543 543 543 543 543
"New" RAB, eoy (12) c.u. n/a 2,000 4,000 5,943 7,829 9,65710,42911,143 11,829 12,486 13,114 13,714
"New" RAB depreciation (13) c.u. n/a 0 57 114 171 229 286 314 343 371 400 429
CAPEX (14) c.u. n/a 2,000 2,000 2,000 2,000 2,000 1,000 1,000 1,000 1,000 1,000 1,000
Net working capital, eoy (15) c.u. n/a 100 100 100 100 100 100 100 100 100 100 100
NWC change (16) c.u. n/a 100 0 0 0 0 0 0 0 0 0 0
Aggregate RAB, eoy (17) c.u.10,000 11,557 12,958 14,30115,58616,81516,98717,130 17,244 17,330 17,388 17,416
- "old" RAB (18)=(10)-(11) c.u.10,000 9,457 8,915 8,372 7,829 7,287 6,744 6,201 5,659 5,116 4,573 4,031
- "new" RAB (19)=(12)-(13)+(15) c.u. 0 2,100 4,043 5,929 7,757 9,52910,24310,929 11,586 12,214 12,814 13,386
Allowed revenue
Rate-of-return for the "old" assets (20) % 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%
Rate-of-return for the newly built assets (21) % 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%
Total RAB, eoy (22)=(23)+(24) c.u.10,000 11,557 12,958 14,30115,58616,81516,98717,130 17,244 17,330 17,388 17,416
- "old" RAB, eoy (23)=(18) c.u.10,000 9,457 8,915 8,372 7,829 7,287 6,744 6,201 5,659 5,116 4,573 4,031
- "new" RAB, eoy (24)=(19) c.u. 2,100 4,043 5,929 7,757 9,52910,24310,929 11,586 12,214 12,814 13,386
Return on RAB, total (25)=(26)+(27) c.u. 1,408 1,627 1,824 2,014 2,195 2,368 2,392 2,412 2,428 2,440 2,448
- return on the "old" RAB (26)=(20)*(23) c.u. 1,408 1,332 1,255 1,179 1,102 1,026 950 873 797 720 644
- return on the newly built RAB (27)=(21)*(24) c.u. 0 296 569 835 1,092 1,342 1,442 1,539 1,631 1,720 1,804
Allowed OPEX (28)=(1)+(2) c.u. 2,000 2,149 2,310 2,459 2,594 2,710 2,805 2,903 3,004 3,110 3,218
RAB depreciation (29)=(11)+(13) c.u. 543 600 657 714 771 828 857 886 914 943 971
Return on RAB (30)=(25) c.u. 1,408 1,627 1,824 2,014 2,195 2,368 2,392 2,412 2,428 2,440 2,448
Income tax (31)=(38) c.u. 352 407 456 503 549 592 598 603 607 610 612
Total allowed revenue (32)=(28)+…+(31) c.u. 4,303 4,783 5,247 5,690 6,108 6,498 6,651 6,803 6,953 7,102 7,250
DCF value
Revenues (33)=(32) c.u. 4,303 4,783 5,247 5,690 6,108 6,498 6,651 6,803 6,953 7,102 7,250
- % growth, y-o-y % n/a 11% 10% 8% 7% 6% 2% 2% 2% 2% 2%
OPEX (inclusive D&A) (34)=(5)+(40) c.u. 2,543 2,749 2,967 3,173 3,365 3,538 3,662 3,788 3,918 4,052 4,190
- % growth, y-o-y % n/a 8% 8% 7% 6% 5% 3% 3% 3% 3% 3%
EBITDA (35)=(36)+(40) c.u. 2,303 2,634 2,937 3,231 3,514 3,788 3,847 3,900 3,949 3,993 4,031
- % growth, y-o-y % n/a 14% 12% 10% 9% 8% 2% 1% 1% 1% 1%
- % margin % 54% 55% 56% 57% 58% 58% 58% 57% 57% 56% 56%
Operating income (EBIT) (36)=(33)-(34) c.u. 1,760 2,034 2,281 2,517 2,743 2,959 2,990 3,015 3,035 3,050 3,060
- % growth, y-o-y % n/a 16% 12% 10% 9% 8% 1% 1% 1% 0% 0%
- % margin % 41% 43% 43% 44% 45% 46% 45% 44% 44% 43% 42%
Tax rate (37) % 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Income tax (38)=(37)*36) c.u. 352 407 456 503 549 592 598 603 607 610 612
NOPAT (39)=(36)-(38) c.u. 1,408 1,627 1,824 2,014 2,195 2,368 2,392 2,412 2,428 2,440 2,448
Plus: D&A expense (40)=(29) c.u. 543 600 657 714 771 828 857 886 914 943 971
- % growth, y-o-y % n/a 11% 10% 9% 8% 7% 3% 3% 3% 3% 3%
Less: Changes in WC (41)=(16) c.u. 100 0 0 0 0 0 0 0 0 0 0
Operating Cash Flow (42)=(39)+(40)-(41) c.u. 1,851 2,227 2,481 2,728 2,966 3,196 3,249 3,297 3,342 3,383 3,419
CAPEX (43)=(14) c.u. 2,000 2,000 2,000 2,000 2,000 1,000 1,000 1,000 1,000 1,000 1,000
- CAPEX/D&A x 3.7x 3.3x 3.0x 2.8x 2.6x 1.2x 1.2x 1.1x 1.1x 1.1x 1.0x
- % of sales % 46% 42% 38% 35% 33% 15% 15% 15% 14% 14% 14%
Unlevered FCF (44)=(42)-(43) c.u. -149 227 481 728 966 2,196 2,249 2,297 2,342 2,383 2,419
Projection year x 1 2 3 4 5 6 7 8 9 10 11
Discount rate (WACC) % 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%
Discount factor x 0.88x 0.77x 0.67x 0.59x 0.52x 0.45x 0.40x 0.35x 0.31x 0.27x 0.23x
38 MRSK Initiation
Equity Market
Line Unit 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
1st regulatory period 2nd regulatory period 3rd regulatory period
Present value of FCF c.u. -131 174 324 430 500 996 894 801 716 638 568
Terminal year cash flow c.u. 2,452
Terminal value c.u. 17,415
PV of TV (45) c.u. 3,584
Sum of PV of FCF (46) c.u. 6,415
Total EV (47)=(45)+(46) c.u. 10,000
iRAB (48)=(9) c.u. 10,000
EV/iRAB (49)=(47)/(48) x 1.0x
* Note: c.u. – conditional unit
Figure 60: Perfect RAB-based regulated company, key assumptions

iRAB c.u. 10,000
Depreciation of the assets reflected in iRAB % 47%
Regulated rate-of-return % 14.1%
WACC % 14.1%
Years of return on invested capital years 35
Annual X-factor for OPEX % 1.0%
Assumed annual efficiency gain % 1.0%
Base year OPEX:
"Controllable" c.u. 1,000
"Uncontrollable" c.u. 1,000
Actual OPEX:
"Controllable" c.u. 1,000
"Uncontrollable" c.u. 1,000
Net working capital c.u. 100
Perpetual growth rate % 0%
Income tax rate % 20%
Figure 61: WACC of a perfect company

WACC components:
Share of equity 70.0%
Share of debt 30.0%
Risk free rate 7.0%
Base equity risk premium 7.0%
Liquidity premium 2.0%
Cost of equity 16.0%
Cost of debt (pre-tax) 12.0%
Cost of debt (post-tax) 9.6%
WACC 14.1%
As can be seen, the DCF-based EV of the company (10,000) exactly matches

its initial RAB (10,000) when the regulatory return on its assets (14.1%)
matches its WACC (14.1%). When this condition does not hold, the
company’s EV/RAB multiple differs from 1.0x depending on whether its
regulatory return is higher or lower than its WACC.
Another factor that also contributes to a possible discrepancy between EV and
RAB, and hence a deviation of EV/RAB from 1.0x, is OPEX, which might differ
from those numbers set by the regulator. In other words, if the company
exceeds its regulatory OPEX in a given regulatory period, its intrinsic value
may be substantially higher than its RAB, and vice versa.
In sum, we stress that there are two main factors on which a company might
out- or underperform and which then determine the EV/RAB multiple: out- or
underperformance on WACC vs. rate-of-return and on actual OPEX vs.
regulatory OPEX.
MRSK Initiation 39
Equity Market
The charts below demonstrate the sensitivity of our perfect company’s

EV/RAB multiple to various combinations of WACC vs. return and actual
OPEX vs. the regulatory one.
Figure 62: Sensitivity to return-WACC spread, ppts Figure 63: Sensitivity to OPEX spread*, ppts
2.5x EV/RAB 1.5x EV/RAB
2.0x 1.0x
1.5x
0.5x
1.0x
0.0x
0.5x
0.0x (0.5)x
(0.5)x (1.0)x
-14-12-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 -14-12-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14
Source: Alfa Research * Note: OPEX spread is defined here as difference between actual
efficiency gain and regulatory X-factor
The charts depict the extent to which the EV/RAB multiple might deviate from
1.0x depending on the out- or underperformance of the regulated company on
WACC and OPEX.
The EV/RAB multiples of some real-world companies regulated under RAB
are provided in the table below:
Figure 64: EV/RAB of real-world companies

Company Country EV/RAB
Federal Grid Company Russia 0.46x
Transelectica SA Romania 0.78x
National Grid UK 1.41x
Terna Spa Italy 1.27x
SP Ausnet Australia 1.01x
Elia Belgium 1.16x
The table shows that some of the companies are trading at substantial
discounts to their RAB, with EV/RAB multiples well below 1.0x (e.g. Russia’s
Federal Grid Company, with 0.55x EV/RAB, mainly explained by the large
discrepancy between its WACC and rate-of-return, as well as Romania’s
Transelectrica), while others are trading at a large premium over their RAB
(e.g. UK-based National Grid, valued at 1.42x EV/RAB).
Although WACC and OPEX are the two main factors affecting EV/RAB, there
are a number of other factors that could also lead to EV and RAB
discrepancies. Regarding our DCF-based fair EV/RAB multiples for the
MRSKs covered in this report, see the discussion in the Valuation section.
40 MRSK Initiation
Equity Market
MRSK Holding
Address: 26/1 Ulansky pereulok, MRSK
Northwest
Moscow, Russia 107996 Moscow
Lenenergo
Tyumenenergo
United DisCo
Tel: +7 (495) 710 53 33 MRSK
Tomsk DisCo
Center-Volga Isolated areas

E-mail: info@holding-mrsk.ru
MRSK Center
Website: http://www.holding-mrsk.ru
MRSK South
CEO Nikolay Shvets

Kubanenergo
MRSK
CFO Aleksey Demidov MRSK Urals
Volga
MRSK
Investor Relations Maria Stepanova North Caucasus Independent
energos
MRSK Siberia
Bloomberg Ticker MRKH RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKH.RTS - The most liquid name in the MRSK universe
Closing price, ord $0.107 - Provides most diversified exposure to distribution play via big
Closing price, pref $0.078 holding structure
Average daily volume $3.35 mln - Possible center of consolidation of MRSKs under one umbrella
of a single-share company
Free float 25%
52 week change 108% - Likely candidate for MSCI inclusion
Shares outstanding, ord 926,021,679 WEAKNESSES AND THREATS

Shares outstanding, pref 93,264,311 - Regulatory risks (only 23% of regional branches adopted RAB-
based tariffs)
Market Cap, mln $4,570
12 M Target price, ord $0.184 - State-controlled status: the interests of government might not
coincide with the interests of minority shareholders
12M Target price, pref $0.168
- Possible dilution via potential series of new share issues in
Upside, ord 71% favor of the government
Recommendation, ord O/W - The strengths of particular MRSKs are diversified away when
Upside, pref 115% investors gain exposure to the sector through MRSK Holding
shares
Recommendation, pref O/W
Figure 65: Financial data

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 13,271 14,917 17,546 20,443 23,781 27,395 31,031
EBITDA, $ mln 2,890 2,323 3,340 4,503 6,045 7,513 9,087
Net Income, $ mln 463 57 502 822 1,382 2,039 2,796
EV/Sales, x 1.0 0.9 0.8 0.7 0.6 0.5 0.4
EV/EBITDA, x 4.7 5.8 4.1 3.0 2.2 1.8 1.5
P/E, x 9.9 79.7 9.1 5.6 3.3 2.2 1.6
Operating margin, % 11.6% 5.9% 8.9% 11.4% 14.9% 17.7% 20.1%
EBITDA margin, % 21.8% 15.6% 19.0% 22.0% 25.4% 27.4% 29.3%
Net margin, % 3.5% 0.4% 2.9% 4.0% 5.8% 7.4% 9.0%
Net debt/EBITDA 1.39 2.33 2.02 1.74 1.35 1.04 0.49
EV/Throughput, $/MWh 24.38 24.26 23.85 23.47 23.01 22.45 21.80
MRSK Initiation 41
Equity Market
Figure 66: Shareholder breakdown Figure 67: Relative share price performance
$0.20
Others
45%
$0.15
$0.10
$0.05
$0.00
Russian Jun-09 Dec-09 Jun-10
gov-t MRSK Holding RTSI$ Index Rebased
55%
Source: Company data, Alfa Research Source: Alfa Research
Figure 68: MRKH MCap vs. marked-to-market Figure 69: MRKH discount to SoP value
250,000 RUB mln 20%
SoP MRKH value 10%

200,000 MRKH Mcap
0%
-10%
150,000
-20%
100,000 -30%
-40%
50,000
-50%
-60%
0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
Figure 70: Grid length breakdown, km Figure 71: Transformer capacity breakdown,
2,500,000 500,000
84,929
686,010 102,995
2,000,000 400,000
1,500,000 1,027,711 300,000 78,022

207,176
1,000,000 200,000
500,000 259,146 100,000
0 0
Overhead lines (>110 kV) Overhead lines (6-35 kV) High voltage (>110 kV) Medium voltage (6-35 kV)
Overhead lines (0.4 kV) Cable lines Low voltage (0.4 kV)
42 MRSK Initiation
Equity Market
Figure 72: Key financial figures Figure 73: Distribution tariff evolution
30,000.00 $mln 50% 1000 25%
RUB/MWh
900
25,000.00 40% 800 20%
20,000.00 700
30%
600 15%
15,000.00
20% 500
10,000.00 400 10%
10% 300
5,000.00
200 5%
0.00 0% 100
2009 2010 2011 2012 2013 2014 0 0%
2009
2010
2011
2012
2013
2014
2015
Revenue EBITDA EBITDA Margin
Figure 74: Distribution tariff vs. inflation Figure 75: Revenue breakdown by branch, RUB bln
25% 1,000
20% 800
15% 600
400
10%
200
5%
0
0% 2009 2010 2011 2012 2013 2014 2015
2010
2011
2012
2013
2014
2015
MOESK MRSK Center

MRSK Center&Volga MRSK Urals
Distribution tariff Ruble inflation MRSK Siberia+Tomsk DisCo Other
Figure 76: CAPEX breakdown by branch, RUB mln Figure 77: MRSKs current EV/iRAB ranking
180 1.2x
0.81x
160 1.0x
140
0.51x
120 0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
100
0.32x
0.6x
0.29x
80
0.16x
60 0.4x
40 0.2x
20
0.0x
0
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
2009 2010 2011 2012 2013 2014 2015

MOESK Lenergo
MRSK Center MRSK Center&Volga
MRSK Urals Other
MRSK Initiation 43
Equity Market
MRSK Holding DCF valuation
Figure 78: MRSK Holding DCF model

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenues 14,917 17,546 20,443 23,781 27,395 31,031 31,287 33,479 35,358 37,254 39,253
- % growth, y-o-y 12% 18% 17% 16% 15% 13% 1% 7% 6% 5% 5%
EBITDA 2,323 3,340 4,503 6,045 7,513 9,087 7,374 7,484 7,517 7,431 7,372
- % growth -20% 44% 35% 34% 24% 21% -19% 1% 0% -1% -1%
- % margin 16% 19% 22% 25% 27% 29% 24% 22% 21% 20% 19%
Operating income (EBIT) 881 1,559 2,334 3,532 4,846 6,248 4,418 4,420 4,345 4,156 4,225
- % growth -43% 77% 50% 51% 37% 29% -29% 0% -2% -4% 2%
- % margin 6% 9% 11% 15% 18% 20% 14% 13% 12% 11% 11%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 176 312 467 706 969 1,250 884 884 869 831 845
NOPAT 704 1,247 1,867 2,826 3,877 4,998 3,535 3,536 3,476 3,324 3,380
Depreciation and amortization 1,443 1,781 2,169 2,513 2,667 2,839 2,956 3,065 3,172 3,276 3,393
- % growth 7% 23% 22% 16% 6% 6% 4% 4% 3% 3% 4%
Changes in WC -565 -185 -192 -61 -146 -109 -728 -397 -365 -415 -425
Operating Cash Flows 2,712 3,214 4,228 5,400 6,690 7,946 7,219 6,997 7,013 7,015 7,198
CAPEX 3,324 4,243 4,422 4,811 5,301 3,669 3,033 3,140 3,211 3,295 3,393
- CAPEX/D&A 2.3x 2.4x 2.0x 1.9x 2.0x 1.3x 1.0x 1.0x 1.0x 1.0x 1.0x
- % of sales 22% 24% 22% 20% 19% 12% 10% 9% 9% 9% 9%
Unlevered FCF -612 -1,029 -194 589 1,389 4,277 4,186 3,857 3,802 3,720 3,805
Discount rate (WACC) 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
Discount factor 0.9 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.3
Present value of FCF -576 -858 -144 386 806 2,198 1,906 1,556 1,358 1,178 1,067
Assumed perpetual growth rate 0%
Terminal year cash flow 3,805
Terminal value 29,567
PV of terminal value 8,293
Sum of PV of FCF 8,876
Total EV 17,169
Net debt, 2009 4,029
Minority interest, 2009 4,954
Fair equity value 8,186
# of shares (mln)
common 41,042
preferred 2,075
pref/com discount 0.9158x
Fair value per share $0.191
Figure 79: WACC calculation

Cost of debt
Risk-free rate 6.0%
Corporate debt spread 3.0%
Debt rate implied 9.0%
Statutory tax rate 20.0%
After-tax cost of debt 7.2%
Cost of equity
Risk-free rate 6.0%
Base equity risk premium 7.0%
Company-specific adjustments 0.8%
Adjusted equity risk premium 7.8%
Liquidity adjustment 1.2
Cost of equity 15.3%
Share of equity: E/(D+E) 70%
Share of debt: D/(D+E) 30%
WACC 12.9%
44 MRSK Initiation
Equity Market
MRSK Holding condensed financials
Figure 80: MRSK Holding condensed financials, $ mln

INCOME STATEMENT 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenues 14,723 13,271 14,917 17,546 20,443 23,781 27,395 31,031 31,287 33,479 35,358 37,254 39,253
Electricity distribution 12,079 11,042 13,651 16,193 19,001 22,216 25,707 29,220 29,359 31,433 33,185 34,942 36,791
Electricity sales 803 844 935 1,006 1,079 1,178 1,277 1,380 1,479 1,579 1,688 1,807 1,936
Other 2,644 2,229 1,265 1,352 1,441 1,565 1,688 1,812 1,928 2,046 2,174 2,312 2,461
Operating expenses 13,605 11,737 14,036 15,987 18,109 20,249 22,549 24,784 26,869 29,060 31,013 33,098 35,027
Electricity transmission charge 3,794 2,206 3,284 4,301 5,258 6,022 7,274 8,577 9,923 11,383 12,548 13,809 15,102
Personnel costs 2,315 2,390 2,587 2,729 2,871 3,088 3,290 3,473 3,630 3,795 3,967 4,147 4,335
Electricity losses purchased 2,449 2,461 3,123 3,374 3,807 4,316 4,720 5,027 5,265 5,492 5,757 6,041 6,346
D&A charge 1,254 1,350 1,443 1,781 2,169 2,513 2,667 2,839 2,956 3,065 3,172 3,276 3,147
Operating income (EBIT) 1,202 1,540 881 1,559 2,334 3,532 4,846 6,248 4,418 4,420 4,345 4,156 4,225
EBITDA 2,456 2,890 2,323 3,340 4,503 6,045 7,513 9,087 7,374 7,484 7,517 7,431 7,372
Interest income 47 26 29 22 25 31 36 41 47 47 50 53 56
Interest expense 339 590 803 620 783 909 966 916 603 231 0 0 0
Other 76 -33 4 4 4 4 4 5 5 5 5 5 6
Pre-tax income (EBT) 986 943 110 964 1,580 2,658 3,920 5,378 3,867 4,240 4,401 4,214 4,287
Income tax charge 255 215 22 193 316 532 784 1,076 773 848 880 843 857
Minority interest 323 266 31 270 442 744 1,098 1,506 1,083 1,187 1,232 1,180 1,200
Net income 409 463 57 502 822 1,382 2,039 2,796 2,011 2,205 2,288 2,191 2,229
Margins, %
EBITDA margin 17% 22% 16% 19% 22% 25% 27% 29% 24% 22% 21% 20% 19%
Operating margin 8% 12% 6% 9% 11% 15% 18% 20% 14% 13% 12% 11% 11%
Pre-tax margin 7% 7% 1% 5% 8% 11% 14% 17% 12% 13% 12% 11% 11%
Net margin 3% 3% 0% 3% 4% 6% 7% 9% 6% 7% 6% 6% 6%
BALANCE SHEET 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Cash and equivalents 662 966 749 850 1,022 1,189 1,370 1,552 1,564 2,803 6,510 10,137 13,598
Accounts receivable 2,571 2,348 2,683 3,045 3,662 4,260 4,907 5,558 5,604 5,997 6,333 6,673 7,031
Inventories 405 374 461 502 581 647 725 800 872 948 1,015 1,088 1,163
Other 143 266 303 344 414 482 555 629 634 678 716 755 795
Total current assets 3,781 3,954 4,196 4,741 5,679 6,577 7,557 8,539 8,674 10,426 14,575 18,652 22,587
Net PPE 17,979 18,583 20,620 21,716 23,969 26,267 28,901 29,731 29,807 29,883 29,923 29,942 30,188
Deferred tax assets 144 147 148 139 139 139 139 139 139 139 139 139 139
Other non-current assets 559 1,130 1,273 1,415 1,673 1,924 2,195 2,468 2,491 2,658 2,802 2,947 3,100
Total non-current assets 18,681 19,860 22,041 23,270 25,781 28,330 31,234 32,337 32,438 32,680 32,864 33,028 33,427
Total assets 22,462 23,814 26,237 28,011 31,460 34,907 38,791 40,876 41,112 43,106 47,438 51,680 56,014
Current debt 1,880 2,224 845 1,266 1,640 1,797 2,289 1,507 578 0 0 0 0
Accounts payable 4,706 4,429 5,457 5,940 6,880 7,656 8,582 9,472 10,322 11,220 12,017 12,872 13,760
Other 106 68 77 88 105 123 141 160 161 172 182 192 202
Total current liabilities 6,693 6,720 6,379 7,294 8,626 9,575 11,012 11,138 11,061 11,393 12,199 13,064 13,963
Non-current debt 2,951 2,772 5,329 6,345 7,195 7,561 6,868 4,520 1,735 0 0 0 0
Deferred tax liabilities 966 907 914 857 857 857 857 857 857 857 857 857 857
Other non-current liabilities 708 1,636 1,652 1,553 1,557 1,561 1,565 1,570 1,574 1,579 1,585 1,590 1,596
Total non-current liabilities 4,625 5,314 7,895 8,754 9,608 9,979 9,290 6,946 4,166 2,436 2,441 2,447 2,452
Total liabilities 11,317 12,034 14,274 16,048 18,234 19,554 20,302 18,085 15,227 13,829 14,640 15,511 16,415
Minority interest 4,650 4,954 5,025 4,972 5,415 6,159 7,257 8,762 9,845 11,032 12,265 13,445 14,645
Share capital 1,462 1,426 1,437 1,347 1,347 1,347 1,347 1,347 1,347 1,347 1,347 1,347 1,347
Reserves 8 27 27 25 25 25 25 25 25 25 25 25 25
Retained earnings 5,025 5,374 5,474 5,618 6,440 7,822 9,861 12,657 14,668 16,873 19,161 21,352 23,582
Total shareholders equity 6,495 6,826 6,938 6,990 7,812 9,194 11,233 14,029 16,040 18,245 20,533 22,725 24,954
Total liabilities and equity 22,462 23,814 26,237 28,011 31,460 34,907 38,791 40,876 41,112 43,106 47,438 51,680 56,014
CASH FLOW STATEMENT 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
CF from operating activity 2,568 2,276 2,899 3,358 4,408 5,609 6,915 8,166 7,380 7,085 7,057 7,062 7,001
CF from investing activity -3,873 -2,109 -3,324 -4,243 -4,422 -4,811 -5,301 -3,669 -3,033 -3,140 -3,211 -3,295 -3,393
CF from financing activity 1,396 158 201 1,038 187 -632 -1,434 -4,315 -4,335 -2,706 -139 -140 -148
Cash flow for the period 91 325 -224 153 172 167 181 182 13 1,238 3,707 3,627 3,461
XR effect -124 -20 7 -52 0 0 0 0 0 0 0 0 0
Cash at the beginning of the year 695 662 966 749 850 1,022 1,189 1,370 1,552 1,564 2,803 6,510 10,137
Cash at the end of the year 662 966 749 850 1,022 1,189 1,370 1,552 1,564 2,803 6,510 10,137 13,598
MRSK Initiation 45
Equity Market
MOESK (Moscow United DisCo)

Address: 3, bld 2, Paveletsky proezd,
Moscow 115114, Russia
Tel: +7 (495) 980 12 88
MOESK
E-mail: odou@moesk.ru
Website: http://www.moesk.ru
CEO Andrey Konovalov
CFO Olga Bulanova
Investor Relations Darya Baranova
Bloomberg Ticker MSRS RU STRENGTHS AND OPPORTUNITIES:

Reuters ticker MSRS.RTS Favorable geography of business (Moscow and region)
Closing price $0.043 Strong payment discipline
Average daily volume $0.57 mln
High liquidity relative to other MRSKs
Free float 10%
52 week change 32%
Shares outstanding 48,707,091,574
WEAKNESSES AND THREATS:
12 M Target price $0.075 Regulatory risks: 0% of iRAB has been approved
Upside 72%
Recommendation O/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 2,457 2,527 2,586 3,027 3,770 4,498 5,354
EBITDA, $ mln 1,029 798 701 909 1,394 1,839 2,438
Net Income, $ mln 360 117 141 280 741 1,074 1,526
EV/Sales, x 1.4 1.4 1.4 1.2 0.9 0.8 0.7
EV/EBITDA, x 3.4 4.4 5.0 3.9 2.5 1.9 1.4
P/E, x 5.9 18.0 15.0 7.5 2.8 2.0 1.4
EBITDA margin, % 41.9% 31.6% 27.1% 30.0% 37.0% 40.9% 45.5%
Net margin, % 14.7% 4.6% 5.4% 9.3% 19.6% 23.9% 28.5%
Net debt/EBITDA 1.38 1.65 2.30 2.20 1.66 1.23 0.79
EV/iRAB, x 0.51
46 MRSK Initiation
Equity Market
$0.12
Other
10% $0.10
$0.08
Moscow
$0.06
gov-t
8% MRSK $0.04
Holding $0.02
51%
$0.00
Gazprom Jun-09 Dec-09 Jun-10
31% MOESK RTSI$ Index Rebased
MRSK Holding Rebased
Figure 84: Key financial figures Figure 85: Electricity transmission and losses
6,000.00 50% 80 ths.GWH 30%
$mln
5,000.00 70
40%
60
4,000.00 20%
30% 50
3,000.00 40
20% 30
2,000.00 10%
20
1,000.00 10%
10
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015
Revenue EBITDA EBITDA Margin Througput Losses % of losses
Figure 86: Grid length breakdown, km Figure 87: Transformer capacity breakdown, MVA
120,000 46,387 70,000
19,335
100,000 60,000
80,000 50,000 1,949

41,863
23,513 40,000
60,000
31,944 30,000
40,000
20,000
20,000 11,357 10,000
0 0
MRSK Initiation 47
Equity Market
Figure 88: Distribution tariff evolution Figure 89: Distribution tariff vs. inflation
1,800 30% 30%
RUB/MWh
1,600 25%
25%
1,400
20%
1,200 20%
1,000 15%
15%
800 10%
600 10% 5%
400
5% 0%
200
2010E
2011E
2012E
2013E
2014E
2015E
0 0%
2010E
2011E
2012E
2013E
2014E
2015E
2009
Distribution tariff Ruble inflation
Figure 90: MOESK revenue breakdown, RUB mln Figure 91: MRSKs current EV/iRAB ranking
230,000 1.2x
0.81x
1.0x
180,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
0.32x
0.6x
0.29x
130,000
0.16x
0.4x
80,000 0.2x
0.0x
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
30,000
Volga
Northwest
-20,000 2011 2012 2013 2014 2015
Smoothing OPEX RAB Depr. Return on RAB
48 MRSK Initiation
Equity Market
MOESK DCF valuation

Figure 92: MOESK DCF model
2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 2,457 2,527 2,586 3,027 3,770 4,498 5,354 5,102 5,407 5,659 5,914 6,178
- % growth, y-o-y 30% 3% 2% 17% 25% 19% 19% -5% 6% 5% 5% 4%
- distribution revenues 2,091 2,527 2,586 3,027 3,770 4,498 5,354 5,102 5,407 5,659 5,914 6,178
- connection fee proceeds 336 - - - - - - - - - - -
- other 30 - - - - - - - - - - -
EBITDA 1,029 798 701 909 1,394 1,839 2,438 1,948 1,995 2,009 2,012 2,014
- % growth 50% -22% -12% 30% 53% 32% 33% -20% 2% 1% 0% 0%
- % margin 42% 32% 27% 30% 37% 41% 46% 38% 37% 36% 34% 33%
Operating income (EBIT) 686 335 262 480 948 1,375 1,954 1,446 1,475 1,484 1,481 1,476
- % growth 82% -51% -22% 83% 98% 45% 42% -26% 2% 1% 0% 0%
- % margin 28% 13% 10% 16% 25% 31% 36% 28% 27% 26% 25% 24%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 137 67 52 96 190 275 391 289 295 297 296 295
NOPAT 549 268 210 384 759 1,100 1,563 1,156 1,180 1,187 1,184 1,181
Depreciation and amortization 343 463 439 429 446 464 484 502 520 525 531 538
- % growth 11% 35% -5% -2% 4% 4% 4% 4% 3% 1% 1% 1%
Changes in WC -196 -127 -69 -69 5 9 62 -39 37 62 75 94
Operating Cash Flows 1,087 858 717 881 1,199 1,555 1,985 1,697 1,662 1,651 1,640 1,625
CAPEX 585 570 995 1,018 1,100 1,006 997 576 592 609 626 644
- CAPEX/D&A 1.7x 1.2x 2.3x 2.4x 2.5x 2.2x 2.1x 1.1x 1.1x 1.2x 1.2x 1.2x
- % of sales 24% 23% 38% 34% 29% 22% 19% 11% 11% 11% 11% 10%
Unlevered FCF 502 288 -278 -137 99 549 988 1,122 1,070 1,041 1,014 981
Discount rate (WACC) 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
Discount factor 1.0 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 0.3
Present value of FCF 502 270 -230 -100 64 312 496 496 418 359 308 263
Terminal year cash flow 981
Total EV 4,623
Net debt, 2009 1,422
# of shares:
Common, mln 48,707
Implied EV/RAB 0.67
Implied 2010E EV/EBITDA 5.8
Implied 2010E EV/S 1.8

Cost of debt
Risk-free rate 6%
Corporate debt spread 3%
Debt rate implied 9%
Statutory tax rate 20%
After-tax cost of debt 7%
Cost of equity
Risk-free rate 6%
Base equity risk premium 7%
Company-specific adjustments:
IFRS standards 0%
Transparency and disclosure 0%
Presence of large institutional investor 0%
Payment discipline in the region 0%
Regulatory risk 2%
Liquidity 1%
Adjusted equity risk premium 10%
Cost of equity 16%
WACC 13.4%
MRSK Initiation 49
Equity Market
MOESK condensed financials

Figure 94: MOESK condensed financial statements, $ mln
Income statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenues 1,894 2,457 2,527 2,586 3,027 3,770 4,498 5,354 5,102 5,407 5,659 5,914 6,178
Connection fees 394 336 - - - - - - - - - - -
Other 114 30 - - - - - - - - - - -
Raw materials 65 60 65 69 73 79 84 89 93 97 102 107 112
Personnel costs 263 311 337 357 376 405 433 458 480 503 527 552 578
Payroll taxes 39 29 31 33 35 37 40 42 44 46 48 51 53
Federal Grid charge 54 196 292 392 491 572 701 831 964 1,112 1,233 1,364 1,498
Electricity losses purchased 169 359 453 452 531 621 695 748 789 833 878 927 978
Depreciation 519 420 553 585 616 664 709 750 786 824 863 905 948
Other expenses 488 433 461 436 427 443 461 482 500 517 523 529 535
Other operating income 81 37 - - - - - - - - - - -
Operating income (EBIT) 378 686 335 262 480 948 1,375 1,954 1,446 1,475 1,484 1,481 1,476
EBITDA 686 1,029 798 701 909 1,394 1,839 2,438 1,948 1,995 2,009 2,012 2,014
Interest income 18 12 - - - - - - - - - - -
Interest expense 95 226 185 82 121 - - - - - - - -
Other operating expenses -5 4 - - - - - - - - - - -
Pre-tax income (EBT) 305 468 150 180 359 948 1,375 1,954 1,446 1,475 1,484 1,481 1,476
Profit tax 45 116 30 36 72 190 275 391 289 295 297 296 295
Income before minority interest 260 352 120 144 287 759 1,100 1,563 1,156 1,180 1,187 1,184 1,181
Minority interest: share of net result 17 8 -3 -3 -7 -18 -26 -37 -27 -28 -28 -28 -28
Net income 276 360 117 141 280 741 1,074 1,526 1,129 1,152 1,159 1,157 1,153
Margins, %
EBITDA margin 36.2% 41.9% 31.6% 27.1% 30.0% 37.0% 40.9% 45.5% 38.2% 36.9% 35.5% 34.0% 32.6%
Operating margin 19.9% 27.9% 13.3% 10.1% 15.8% 25.2% 30.6% 36.5% 28.3% 27.3% 26.2% 25.0% 23.9%
Pre-tax margin 16.1% 19.1% 6.0% 7.0% 11.8% 25.2% 30.6% 36.5% 28.3% 27.3% 26.2% 25.0% 23.9%
Net margin 14.6% 14.7% 4.6% 5.4% 9.3% 19.6% 23.9% 28.5% 22.1% 21.3% 20.5% 19.6% 18.7%
Balance sheet 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Cash and cash equivalents 209 251 127 125 151 189 225 268 255 270 330 970 1,575
Accounts receivable 354 290 303 299 362 451 538 640 610 646 676 707 738
Inventories 97 73 87 92 107 119 134 147 159 172 184 196 209
Other current assets 0 23 23 22 22 22 22 22 22 22 22 22 22
Total current assets 660 637 540 538 641 780 918 1,076 1,045 1,110 1,211 1,894 2,544
Intangible assets 5 3 3 3 3 3 3 3 3 3 3 3 3
PPE 5,515 5,857 6,011 6,174 6,764 7,418 7,961 8,473 8,547 8,620 8,703 8,799 8,905
Deferred tax assets 85 - - - - - - - - - - - -
Other non-current assets 862 739 773 763 922 1,148 1,370 1,631 1,554 1,647 1,724 1,802 1,882
Total assets 7,127 7,236 7,328 7,478 8,330 9,350 10,252 11,183 11,149 11,379 11,641 12,498 13,334
Current financial debt 671 1,002 193 275 538 627 623 549 319 152 - - -
Accounts payable 763 1,290 1,453 1,454 1,600 1,696 1,789 1,842 1,863 1,875 1,855 1,824 1,775
Other current liabilities 29 24 24 23 23 23 23 23 23 23 23 23 23
Total current liabilities 1,463 2,316 1,670 1,751 2,161 2,346 2,435 2,414 2,204 2,050 1,878 1,846 1,797
Non-current debt 1,236 671 1,255 1,460 1,615 1,881 1,869 1,648 957 457 - - -
Other non-current liabilities 1,502 1,042 1,051 985 985 985 985 985 985 985 985 985 985
Total non-current liabilities 2,991 1,965 2,559 2,682 2,837 3,103 3,091 2,870 2,179 1,679 1,222 1,222 1,222
Total liabilities 4,454 4,281 4,228 4,433 4,998 5,449 5,525 5,285 4,384 3,729 3,100 3,069 3,020
Minority interest 22 13 16 18 25 43 69 106 133 161 189 217 244
Share capital 826 805 812 761 761 761 761 761 761 761 761 761 761
Additional paid-in capital 630 614 619 581 581 581 581 581 581 581 581 581 581
Retained earnings 1,196 1,522 1,652 1,685 1,965 2,516 3,316 4,451 5,291 6,148 7,011 7,871 8,729
Total liabilities and shareholders equity 7,127 7,236 7,328 7,478 8,330 9,350 10,252 11,183 11,149 11,379 11,641 12,498 13,334
Cash flow statement 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
CF from operating activity 1,037 1,082 895 733 906 1,199 1,555 1,985 1,697 1,662 1,651 1,640 1,625
CF from investing activity -1,492 -575 -570 -995 -1,018 -1,100 -1,006 -997 -576 -592 -609 -626 -644
CF from financing activity 406 -459 -451 268 139 -62 -513 -946 -1,134 -1,055 -982 -374 -376
Cash flow for the period -50 48 -126 7 26 37 36 43 -13 15 59 640 605
XR effect -19 -3 1 -4 - - - - - - - - -
Cash at the beginning of the year 277 206 252 123 125 151 189 225 268 255 270 330 970
Cash at the end of the year 209 251 127 125 151 189 225 268 255 270 330 970 1,575
50 MRSK Initiation
Equity Market
Lenenergo
Address: 1 Konstitutsyi square,
St.Petersburg 196247, Lenenergo
Russia
Tel: +7 (812) 595 86 13
E-mail: office@lenenergo.ru
Website: http://www. lenenergo.ru
CEO Dmitry Ryabov
CFO Sergey Nikolaev
Investor Relations Ulyana Davydova
Bloomberg Ticker LSNG RU STRENGTHS AND OPPORTUNITIES

Reuters ticker LSNG.RTS - Favorable geography of business (St. Petersburg and
Closing price, ord $0.72 Leningrad region)
Closing price, pref $0.80 - High historical dividend yield for preferred shares
Average daily volume $0.02 mln - Strong payment discipline
Free float 20% - Good transparency and disclosure
52 week change 46% WEAKNESSES AND THREATS
Shares outstanding, ord 926,021,679 - Regulatory risks (none of two branches have adopted RAB-
Shares outstanding, pref 93,264,311 based tariffs)
Market Cap, mln $747 - Poor liquidity
12 M Target price, ord $0.91 - Planned additional preferred share issue
12M Target price, pref $0.83 - Very high debt burden
Upside, ord 25%
Recommendation, ord E/W
Upside, pref 4%
Recommendation, pref E/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 764 850 855 1,084 1,428 1,942 2,496
EBITDA, $ mln 188 280 275 196 347 615 1,041
Net Income, $ mln 92 36 -11 42 336 668 1,032
EV/Sales, x 1.6 1.4 1.4 1.1 0.8 0.6 0.5
EV/EBITDA, x 6.4 4.3 4.4 6.1 3.5 2.0 1.2
P/E, x 8.1 20.6 - 18.0 2.2 1.1 0.7
EBITDA margin, % 24.6% 32.9% 32.2% 18.1% 24.3% 31.7% 41.7%
Net margin, % 12.1% 4.3% -1.3% 3.8% 23.5% 34.4% 41.4%
Net debt/EBITDA 2.41 2.31 4.32 8.80 5.82 3.33 1.59
EV/iRAB, x 0.40
MRSK Initiation 51
Equity Market
$2.00
Other
31% $1.50
MRSK $1.00
Holding
46% $0.50
$0.00
St.Petersburg
administration Jun-09 Dec-09 Jun-10
Lenenergo RTSI$ Index Rebased
23%
2,000.00 50% 120 30%
$mln ths.GWH
40% 100
1,500.00
80 20%
30%
1,000.00 60
20%
40 10%
500.00
10% 20
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015
60,000 25,000
12,219
50,000 20,000 6,818
11,587
40,000
15,000 10,961
30,000 20,684
10,000
20,000
10,000 7,015 5,000
2,123
0 0
52 MRSK Initiation
Equity Market
1,800 60% 60%
RUB/MWh
1,600 50%
50%
1,400
40%
1,200 40%
1,000 30%
30%
800 20%
600 20% 10%
400
10% 0%
200
2010E
2011E
2012E
2013E
2014E
2015E
0 0%
2010E
2011E
2012E
2013E
2014E
2015E
2009
Figure 104: Lenenergo revenue breakdown, RUB mln Figure 105: MRSKs current EV/iRAB ranking
80,000 1.2x
0.81x
70,000 1.0x
60,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
50,000
0.32x
0.6x
0.29x
0.16x
40,000 0.4x
30,000 0.2x
20,000 0.0x
Tomsk DisCo
MOESK
NC
10,000
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
0
-10,000 2011 2012 2013 2014 2015
MRSK Initiation 53
Equity Market
Lenenergo DCF valuation

Figure 106: Lenenergo DCF model
2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 764 850 855 1,084 1,428 1,942 2,496 2,130 2,256 2,363 2,462 2,561
- % growth, y-o-y 10% 11% 1% 27% 32% 36% 29% -15% 6% 5% 4% 4%
- distribution revenues 603 947 887 1,152 1,474 1,942 2,496 2,130 2,256 2,363 2,462 2,561
- other 29 - - - - - - - - - - -
EBITDA 188 280 275 196 347 615 1,041 1,506 1,040 1,072 1,093 1,102
- % growth ! 49% -2% -29% 77% 77% 69% 45% -31% 3% 2% 1%
- % margin 27% 37% 32% 23% 32% 43% 54% 60% 49% 47% 46% 45%
Operating income (EBIT) 122 144 106 19 164 421 838 1,294 824 860 885 897
- % growth ! 18% -26% -83% 781% 157% 99% 55% -36% 4% 3% 1%
- % margin 18% 19% 13% 2% 15% 30% 43% 52% 39% 38% 37% 36%
Tax rate 29% -20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 35 -29 21 4 33 84 168 259 165 172 177 179
NOPAT 173 85 15 131 337 670 1,036 659 688 708 718 724
- % growth 106% 24% 5% 3% 6% 5% 4% 2% -2% -2% -2% -2%
Changes in WC 89 45 -51 -24 12 11 23 -27 15 29 35 44
Operating Cash Flows 220 209 243 339 519 862 1,223 903 885 887 887 881
CAPEX 238 347 817 788 721 716 566 272 279 287 295 201
- % of sales 31% 41% 96% 73% 50% 37% 23% 13% 12% 12% 12% 8%
Unlevered FCF -19 -138 -574 -450 -202 146 658 631 605 600 592 680
Discount factor 1.00 0.93 0.81 0.70 0.60 0.52 0.45 0.39 0.34 0.29 0.26 0.22
Present value of FCF -19 -129 -462 -314 -122 76 298 248 206 177 151 150
PV of terminal value 972
Sum of PV of FCF 280
Total EV 1,252
Net debt, 2009 454
Fair equity value 798
# of shares:
common 926,021,679
preferred 93,264,311
pref/com discount 0.9158
Implied EV/RAB 0.42

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 0%
Regulatory risk 2%
Liquidity 3%
Cost of equity 19%
WACC 15.5%
54 MRSK Initiation
Equity Market
Lenenergo condensed financials

Figure 108: Lenenergo condensed financial statements, $ mln
Revenues 692 764 850 855 1,084 1,428 1,942 2,496 2,130 2,256 2,363 2,462 2,561
Electricity distribution 462 516 850 855 1,084 1,428 1,942 2,496 2,130 2,256 2,363 2,462 2,561
Connection fees 210 222 - - - - - - - - - - -
Other 20 25 - - - - - - - - - - -
Operating expenses 570 619 743 836 920 1,007 1,104 1,201 1,305 1,397 1,478 1,565 1,657
Raw materials 9 7 8 8 8 9 10 10 11 11 12 12 13
Personnel costs 93 94 100 106 112 121 129 136 143 150 157 164 172
Federal Grid charge 111 98 164 215 255 282 330 381 447 511 564 621 679
Depreciation 68 135 169 178 183 194 203 211 216 212 208 204 201
Other expenses 165 154 135 143 151 163 174 184 193 202 212 222 232
Operating income (EBIT) 122 144 106 19 164 421 838 1,294 824 860 885 897 905
EBITDA 188 280 275 196 347 615 1,041 1,506 1,040 1,072 1,093 1,102 1,106
Interest income 13 2 - - - - - - - - - - -
Pre-tax income (EBT) 155 77 46 -14 52 421 838 1,294 824 860 885 897 905
Profit tax 45 -15 9 -3 10 84 168 259 165 172 177 179 181
Income before minority interest 111 92 36 -11 42 337 670 1,036 659 688 708 718 724
Minority interest: share of net result 0 0 0 0 0 -1 -2 -3 -2 -2 -2 -2 -2
Net income 111 92 36 -11 42 336 668 1,032 657 686 706 715 722
Margins, %
EBITDA margin 27.2% 36.6% 32.4% 23.0% 32.0% 43.1% 53.6% 60.3% 48.8% 47.5% 46.3% 44.7% 43.2%
Pre-tax margin 22.5% 10.1% 5.4% -1.7% 4.8% 29.5% 43.1% 51.9% 38.7% 38.1% 37.5% 36.4% 35.3%
Net margin 16.0% 12.1% 4.3% -1.3% 3.8% 23.5% 34.4% 41.4% 30.9% 30.4% 29.9% 29.1% 28.2%
Cash and cash equivalents 85 98 17 17 22 29 39 50 43 45 47 79 474
Inventories 8 12 14 16 18 20 23 25 27 30 32 34 36
Total current assets 350 310 239 228 251 280 322 368 342 354 365 404 808
PPE 2,245 2,425 2,624 3,079 3,684 4,211 4,725 5,079 5,135 5,202 5,281 5,372 5,475
Long-term financial investments 10 17 18 16 16 16 16 16 16 16 16 16 16
Other non-current assets 30 9 10 10 13 17 23 30 25 27 28 29 31
Total assets 2,826 2,921 3,051 3,485 4,116 4,676 5,238 5,644 5,669 5,751 5,842 5,973 6,481
Current financial debt 15 219 77 254 438 512 522 426 307 200 95 - -
Accounts payable 477 609 576 593 635 645 666 677 686 681 660 633 597
Total current liabilities 529 845 672 865 1,090 1,175 1,205 1,121 1,010 898 772 650 614
Non-current debt 439 333 587 950 1,314 1,537 1,565 1,279 921 599 284 - -
Other non-current liabilities 193 52 52 49 49 49 49 49 49 49 49 49 49
Total non-current liabilities 830 560 815 1,164 1,528 1,751 1,779 1,493 1,135 813 499 214 214
Total liabilities 1,360 1,405 1,487 2,029 2,618 2,925 2,985 2,614 2,145 1,711 1,270 864 828
Share capital 186 182 183 172 172 172 172 172 172 172 172 172 172
Additional paid-in capital 1,166 1,143 1,152 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080 1,080
Retained earnings 112 191 229 204 245 497 997 1,771 2,263 2,777 3,306 3,842 4,382
Total liabilities and shareholders
2,826 2,921 3,051 3,485 4,116 4,676 5,238 5,644 5,669 5,751 5,842 5,973 6,481
equity
CF from operating activity 364 213 221 250 361 519 862 1,223 903 885 887 887 881
CF from investing activity -409 -210 -347 -817 -788 -721 -716 -566 -272 -279 -287 -295 -304
CF from financing activity 138 12 45 568 433 209 -136 -647 -638 -603 -598 -560 -182
Cash flow for the period 92 15 -81 1 5 7 10 11 -7 3 2 32 395
XR effect -8 -1 0 -1 - - - - - - - - -
Cash at the beginning of the year - 84 98 17 17 22 29 39 50 43 45 47 79
Cash at the end of the year 85 98 17 17 22 29 39 50 43 45 47 79 474
MRSK Initiation 55
Equity Market
MRSK Center
Address: 4/2 Glukharev alley,
Moscow, Russia 129090
Tel: +7 (495) 747 92 92
Tver region
E-mail: ir@mrsk-1.ru Smolensk region Yaroslavl region
Bryansk region Kostroma region
MRSK
Website: http://www.mrsk-1.ru Kursk region Orel region
Tyumen
Lipetsk region MRSK
Belgorod region
Siberia
CEO Eugeny Makarov Tambov region
Voronezh region Far East
DisCo
CFO Eugeny Bronnikov
Investor Relations Eugeny Ochkasov
Bloomberg Ticker MRKC RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKC.RTS - Low regulatory risk (54% of iRAB approved by regulators)
Closing price $0.032 - One of the most liquid MRSK stocks
- The best transparency and disclosure vs. other MRSKs
Free float 30%
- Good chance of being privatized
52 week change 55%
- Presence of large institutional shareholder
Shares outstanding 42,217,941,468
- Strong payment discipline
12 M Target price $0.069 WEAKNESSES AND THREATS
Upside 115% - Regulatory risks (the remaining 46% of iRAB has yet to be
approved; 55% of branches have yet to adopt RAB-based tariffs)
Recommendation O/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 1,397 1,734 2,161 2,352 2,538 2,815 3,101
EBITDA, $ mln 345 537 828 875 904 986 1,084
Net Income, $ mln 101 256 493 536 542 586 626
EV/Sales, x 1.3 1.0 0.8 0.8 0.7 0.6 0.6
EV/EBITDA, x 5.2 3.3 2.2 2.0 2.0 1.8 1.6
P/E, x 13.4 5.3 2.7 2.5 2.5 2.3 2.2
EBITDA margin, % 24.7% 30.9% 38.3% 37.2% 35.6% 35.0% 35.0%
Net margin, % 7.2% 14.7% 22.8% 22.8% 21.4% 20.8% 20.2%
Net Debt/EBITDA 1.03 0.75 0.23 -0.10 0.03 0.20 -0.16
EV/iRAB, x 0.45
56 MRSK Initiation
Equity Market
Other $0.08
31% $0.07
$0.06
$0.05
$0.04
$0.03
Vladimir MRSK
$0.02
Lisin's Holding
$0.01
structures 50%
$0.00
3%
Jun-09 Dec-09 Jun-10
Prosperity
Capital MRSK Center RTSI$ Index Rebased
16% MRSK Holding Rebased
3,000.00 $mln 50% 60 ths.GWH 30%
2,500.00 40% 50
2,000.00 40 20%
30%
1,500.00 30
20%
1,000.00 20 10%
500.00 10% 10
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2015
400,000 145,041 4,921
350,000 50,000 14,864
300,000 40,000
250,000 201,033 8,952
30,000
200,000
22,062
150,000 20,000
100,000
10,000
50,000 29,673
0 0
MRSK Initiation 57
Equity Market
1200 40% 40%
RUB/MWh
35% 35%
1000 30%
30%
800 25%
25% 20%
600 20% 15%
15% 10%
400
10% 5%
200 0%
5%
2010E
2011E
2012E
2013E
2014E
2015E
0 0%
2009
2010
2011
2012
2013
2014
2015
Figure 118: Revenue breakdown, RUB mln Figure 119: MRSKs current EV/iRAB ranking
100,000 1.2x
0.81x
1.0x
80,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
0.32x
60,000 0.6x
0.29x
0.16x
0.4x
40,000
0.2x
20,000 0.0x
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
0
2010 2011 2012 2013 2014
Figure 120: Revenue breakdown by branch, RUB mln Figure 121: Throughput breakdown by branch,
100,000
6,564 B elgo ro denergo
80,000 10,045
B ryanskenergo
60,000 4,506 Vo ro nezhenergo
40,000 Ko stro maenergo
2,589 3,571 Kurskenergo
20,000 Lipetskenergo
0 3,339 Orelenergo
2011 2012 2013 2014 2015 7,188 Smo lenskenergo
2,087 Tambo venergo
Belgorodenergo Bryanskenergo Voronezhenergo Tverenergo
Kostromaenergo Kurskenergo Lipetskenergo 6,036 2,401
4,804 Yarenergo
Orelenergo Smolenskenergo Tambovenergo
Tverenergo Yarenergo
58 MRSK Initiation
Equity Market
MRSK Center DCF valuation

Figure 122: MRSK Center DCF model
2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 1,397 1,734 2,161 2,352 2,538 2,815 3,101 3,299 3,503 3,637 3,819 3,980
- % growth, y-o-y 2% 24% 25% 9% 8% 11% 10% 6% 6% 4% 5% 4%
- other 30 - - - - - - - - - - -
EBITDA 345 537 828 875 904 986 1,084 1,103 1,112 1,082 1,088 1,067
- % growth -4% 56% 54% 6% 3% 9% 10% 2% 1% -3% 1% -2%
- % margin 25% 31% 38% 37% 36% 35% 35% 33% 32% 30% 28% 27%
Operating income (EBIT) 190 354 639 670 678 733 783 766 780 756 770 736
- % growth -14% 87% 80% 5% 1% 8% 7% -2% 2% -3% 2% -4%
- % margin 14% 20% 30% 28% 27% 26% 25% 23% 22% 21% 20% 18%
Tax rate 18% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 33 71 128 134 136 147 157 153 156 151 154 147
NOPAT 157 284 511 536 542 587 626 613 624 605 616 589
Depreciation and
155 182 189 205 227 253 301 337 332 326 319 331
amortization
- % growth 12% 18% 4% 8% 10% 12% 19% 12% -1% -2% -2% 4%
Changes in WC 36 40 34 4 -0 5 7 -2 -4 -8 -3 -7
Operating Cash Flows 276 426 667 737 769 834 920 952 960 938 938 927
CAPEX 220 442 457 452 749 863 394 405 417 384 390 331
- % of sales 16% 26% 21% 19% 29% 31% 13% 12% 12% 11% 10% 8%
Unlevered FCF 56 -17 210 285 20 -28 526 547 543 555 548 596
Discount factor 1.00 0.94 0.84 0.74 0.66 0.58 0.52 0.46 0.41 0.36 0.32 0.29
Present value of FCF 56 -16 175 211 13 -17 273 252 222 201 177 170
Assumed perpetual growth
0%
rate
Total EV 3,010
Net debt, 2009 429
# of shares:
Common, mln 42,218
Implied EV/RAB 0.76

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
Company-specific adjustments: 2%
IFRS standards 0%
Regulatory risk 0%
Liquidity 1%
Cost of equity 15%
WACC 12.7%
MRSK Initiation 59
Equity Market
MRSK Center condensed financials

Figure 124: MRSK Center condensed financial statements, $ mln
Revenues 1,371 1,397 1,734 2,161 2,352 2,538 2,815 3,101 3,299 3,503 3,637 3,819 3,980
Connection fees 104 55 - - - - - - - - - - -
Other 29 30 - - - - - - - - - - -
Raw materials 56 49 50 53 55 59 63 66 69 72 75 78 81
Personnel costs 210 242 254 266 278 298 315 331 344 358 372 387 402
Payroll taxes 49 49 67 70 73 78 83 87 90 94 98 102 106
Federal Grid charge 159 176 258 345 427 502 628 763 906 1,068 1,178 1,297 1,418
Depreciation 139 155 182 189 205 227 253 301 337 332 326 319 331
Other expenses 300 233 191 201 210 225 238 250 261 271 282 294 306
Operating income (EBIT) 220 190 354 639 670 678 733 783 766 780 756 770 736
EBITDA 358 345 537 828 875 904 986 1,084 1,103 1,112 1,082 1,088 1,067
Interest income 0 0 - - - - - - - - - - -
Interest expense 50 71 35 23 - - - - - - - - -
Other operating expenses 8 -3 - - - - - - - - - - -
Pre-tax income (EBT) 162 122 320 617 670 678 733 783 766 780 756 770 736
Profit tax 59 21 64 123 134 136 147 157 153 156 151 154 147
Income before minority interest 103 101 256 493 536 542 587 626 613 624 605 616 589
Minority interest: share of net result 0 0 0 0 0 0 0 0 0 0 0 0 0
Net income 103 101 256 493 536 542 586 626 613 624 605 616 589
Margins, %
EBITDA margin 26.1% 24.7% 30.9% 38.3% 37.2% 35.6% 35.0% 35.0% 33.4% 31.8% 29.7% 28.5% 26.8%
Pre-tax margin 11.8% 8.7% 18.4% 28.5% 28.5% 26.7% 26.0% 25.3% 23.2% 22.3% 20.8% 20.2% 18.5%
Net margin 7.5% 7.2% 14.7% 22.8% 22.8% 21.4% 20.8% 20.2% 18.6% 17.8% 16.6% 16.1% 14.8%
Cash and cash equivalents 3 12 17 21 91 25 28 168 561 948 1,351 1,745 2,153
Inventories 46 41 53 57 66 73 81 89 97 106 113 121 129
Total current assets 229 225 290 341 451 415 460 644 1,069 1,490 1,917 2,341 2,776
PPE 1,402 1,435 1,708 1,861 2,108 2,630 3,239 3,332 3,401 3,485 3,543 3,614 3,655
Deferred tax assets 28 - - - - - - - - - - - -
Total assets 1,694 1,730 2,068 2,268 2,626 3,112 3,768 4,046 4,540 5,045 5,530 6,025 6,502
Current financial debt 183 197 62 20 - 12 57 - - - - - -
Total current liabilities 473 454 339 311 327 369 451 430 464 502 533 567 602
Non-current debt 135 171 358 194 - 37 171 - - - - - -
Total non-current liabilities 337 332 520 346 152 190 324 152 152 152 152 152 152
Total liabilities 810 786 859 657 479 559 775 583 617 654 686 719 754
Minority interest - 0 0 0 0 0 1 1 1 1 1 1 1
Share capital 143 140 141 132 132 132 132 132 132 132 132 132 132
Retained earnings 738 802 1,065 1,476 2,012 2,418 2,858 3,328 3,787 4,255 4,709 5,170 5,612
Total shareholders equity 884 944 1,208 1,610 2,146 2,553 2,993 3,462 3,922 4,390 4,843 5,305 5,746
CF from operating activity 315 277 433 671 737 769 834 920 952 960 938 938 927
CF from financing activity 29 -49 15 -209 -214 -86 31 -386 -154 -156 -152 -154 -148
Cash flow for the period -11 10 5 5 70 -66 3 140 393 387 403 394 407
XR effect - - - -1 - - - - - - - - -
Cash at the beginning of the year 14 2 12 17 21 91 25 28 168 561 948 1,351 1,745
Cash at the end of the year 3 12 17 21 91 25 28 168 561 948 1,351 1,745 2,153
60 MRSK Initiation
Equity Market
MRSK Center-Volga
Address: 33 Rozhdestvenskaya st,
Nizhny Novgorod 603950, Russia
Tel: +7 (831) 431-91-51
E-mail: Kiseleva_NG@mrsk-cp.ru Vladimir region
Website: http://www. mrsk-cp.ru Kaluga region Ivanovo region

Tula region
Ryazan region Kirov region MRSK
CEO Eugeny Ushakov Nizhnov region
Tyumen
MRSK
Mariy-El Udmurtia Siberia
CFO Olga Tikhomirova Republic Republic Far East
DisCo
Investor Relations Natalya Kiseleva
Bloomberg Ticker MRKP RU STRENGHTS AND OPPORTUNITIES

Reuters ticker MRKP.RTS - Low regulatory risk (the highest share of branches under RAB
nd
Closing price $0.006 tariffs – 56%, the 2 highest share of approved iRAB among
multiregional MRSKs – 45%)
- High liquidity relative to other MRSK stocks
Free float 30%
- Good transparency and disclosure
52 week change 24%
Shares outstanding 112,679,817,043 - Likely privatization candidate
Market Cap, mln $730 - Presence of large institutional shareholder

Upside 135% - Regulatory risk
Recommendation O/W - Anticipated increase of debt burden

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 1,257 1,455 1,809 2,161 2,417 2,716 3,179
EBITDA, $ mln 199 182 380 568 645 729 982
Net Income, $ mln 26 -22 151 280 380 446 647
EV/Sales, x 0.9 0.7 0.6 0.5 0.4 0.4 0.3
EV/EBITDA, x 5.4 5.9 2.8 1.9 1.7 1.5 1.1
P/E, x 28.5 - 4.8 2.6 1.9 1.6 1.1
EBITDA margin, % 15.8% 12.5% 21.0% 26.3% 26.7% 26.9% 30.9%
Net margin, % 2.0% -1.5% 8.3% 13.0% 15.7% 16.4% 20.4%
Net debt/EBITDA 1.70 2.75 1.60 1.05 0.62 0.22 -0.20
EV/Throuhput, $/MWh 21.0 20.6 20.4 20.3 20.1 19.6 18.9
EV/iRAB, x 0.39
MRSK Initiation 61
Equity Market
Other $0.020
26%
Prosperity $0.015
Capital
16% $0.010
$0.005
HQ
5% $0.000
MRSK
Energosouz
Holding
MRSK Center&Volga RTSI$ Index Rebased
5% 48%
3,000.00 $mln 50% 60 ths.GWH 30%
2,500.00 40% 50
2,000.00 40 20%
30%
1,500.00 30
20%
1,000.00 20 10%
500.00 10% 10
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2015
300,000 50,000
95,349 4,442
250,000 40,000 10,932
200,000
134,456 30,000 4,479
150,000 24,010
20,000
100,000
50,000 10,000
25,551
0 0
High voltage (>110 kV) Medium voltage (6-35 kV)
Overhead lines (>110 kV) Overhead lines (6-35 kV)
Low voltage (0.4 kV)
Overhead lines (0.4 kV) Cable lines
62 MRSK Initiation
Equity Market
1200 40% 40%
RUB/MWh
35% 35%
1000
30%
30%
800 25%
25%
20%
600 20% 15%
15% 10%
400
10% 5%
200 0%
5%
2010
2011
2012
2013
2014
2015
0 0%
2009
2010
2011
2012
2013
2014
2015 Distribution tariff Ruble inflation
115,000 1.2x
0.81x
1.0x
95,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
75,000 0.32x
0.6x
0.29x
0.16x
55,000 0.4x
0.2x
35,000
0.0x
Tomsk DisCo
MOESK
NC
15,000
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
-5,000
2011 2012 2013 2014 2015
120,000
6,946 5,488
100,000 Vladimirenergo
80,000 3,210 Ivenergo
60,000 5,576 Kalugaenergo

3,557
40,000 Kirovenergo
20,000 Marienergo
4,032 5,083
0 Nizhnovenergo
2011 2012 2013 2014 2015 Ryazanenergo
2,187
Vladimirenergo Ivenergo Kalugaenergo Tulenergo
Kirovenergo Marienergo Nizhnovenergo 14,809
Ryazanenergo Tulenergo Udmurtenergo Udmurtenergo
MRSK Initiation 63
Equity Market
MRSK Center-Volga DCF valuation
Figure 138: MRSK Center-Volga DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 1,257 1,455 1,809 2,161 2,417 2,716 3,179 3,106 3,314 3,488 3,678 3,868
- % growth, y-o-y 5% 16% 24% 19% 12% 12% 17% -2% 7% 5% 5% 5%
- other 16 - - - - - - - - - - -
EBITDA 199 182 380 568 645 729 982 714 726 725 726 720
- % growth -4% -8% 109% 50% 13% 13% 35% -27% 2% 0% 0% -1%
- % margin 16% 13% 21% 26% 27% 27% 31% 23% 22% 21% 20% 19%
- % growth -21% -74% 1058% 85% 17% 17% 45% -33% 2% -1% 0% -2%
- % margin 6% 1% 12% 19% 20% 21% 25% 17% 17% 16% 15% 14%
Tax rate 38% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 28 4 44 81 95 112 162 108 110 109 108 106
NOPAT 45 15 175 324 380 446 647 430 438 435 433 426
- % growth 9% 30% -1% 1% 4% 1% 1% 1% 2% 2% 2% 2%
Changes in WC 52 -2 33 32 12 13 41 -45 1 -1 -1 -2
CAPEX 142 301 420 395 244 251 258 265 272 280 288 188
- % of sales 11% 21% 23% 18% 10% 9% 8% 9% 8% 8% 8% 5%
Unlevered FCF -23 -120 -117 60 294 354 522 387 343 337 330 428
Discount factor 1.00 0.94 0.82 0.72 0.63 0.55 0.49 0.43 0.37 0.33 0.29 0.25
Present value of FCF -23 -112 -96 43 186 196 253 165 128 110 95 107
Total EV 1,839
Net Debt, 2009 338
# of shares: 112,697,817,043
common 112,697,817,043
Implied EV/RAB 0.67

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 0%
Transparency and Disclosure 0%
Regulatory risk 1%
Liquidity 1%
Cost of equity 17%
WACC 14.1%
64 MRSK Initiation
Equity Market
MRSK Center-Volga condensed financials

Figure 140: MRSK Center-Volga condensed financial statements, $ mln
Revenues 1,199 1,257 1,455 1,809 2,161 2,417 2,716 3,179 3,106 3,314 3,488 3,678 3,868
Connection fees 71 39 - - - - - - - - - - -
Other 22 16 - - - - - - - - - - -
Raw materials 47 37 40 42 44 48 51 54 57 59 62 65 68
Personnel costs 210 240 260 274 289 311 332 351 367 384 402 421 441
Payroll taxes 44 50 54 57 60 65 69 73 76 80 83 87 91
Federal Grid charge 191 222 334 438 530 602 730 868 1,009 1,154 1,273 1,401 1,532
Depreciation 115 126 163 161 163 169 171 174 176 179 182 185 188
Other expenses 206 182 163 162 164 175 178 177 173 169 168 168 168
EBITDA 207 199 182 380 568 645 729 982 714 726 725 726 720
Interest income 2 1 - - - - - - - - - - -
Pre-tax income (EBT) 80 41 -28 188 350 475 558 809 538 548 544 542 532
Profit tax 10 16 -6 38 70 95 112 162 108 110 109 108 106
Income before minority interest 69 26 -22 151 280 380 446 647 430 438 435 433 426
Minority interest: share of net result -33 0 0 0 0 0 0 0 0 0 0 0 0
Net income 37 26 -22 151 280 380 446 647 430 438 435 433 426
Margins, %
EBITDA margin 17.3% 15.8% 12.5% 21.0% 26.3% 26.7% 26.9% 30.9% 23.0% 21.9% 20.8% 19.7% 18.6%
Pre-tax margin 6.6% 3.3% -1.9% 10.4% 16.2% 19.7% 20.5% 25.4% 17.3% 16.5% 15.6% 14.7% 13.8%
Net margin 3.1% 2.0% -1.5% 8.3% 13.0% 15.7% 16.4% 20.4% 13.9% 13.2% 12.5% 11.8% 11.0%
Cash and cash equivalents 83 83 29 35 43 48 54 196 476 708 935 1,156 1,372
Inventories 24 27 33 36 41 46 52 57 62 67 72 77 82
PPE 1,341 1,338 1,486 1,644 1,876 1,950 2,029 2,113 2,202 2,296 2,395 2,498 2,601
Total assets 1,649 1,697 1,837 2,052 2,369 2,497 2,640 2,952 3,314 3,681 4,041 4,403 4,761
Current financial debt 36 176 71 125 129 105 54 - - - - - -
Non-current debt 327 245 460 520 511 343 161 - - - - - -
Total liabilities 730 774 929 1,055 1,091 934 742 569 608 646 681 718 756
Share capital 382 373 376 352 352 352 352 352 352 352 352 352 352
Retained earnings 537 549 531 644 925 1,210 1,544 2,030 2,353 2,681 3,007 3,332 3,652
Total shareholders equity 920 923 908 997 1,278 1,563 1,898 2,383 2,706 3,034 3,360 3,685 4,005
CF from financing activity 247 13 57 118 -63 -289 -348 -380 -107 -111 -110 -110 -108
Cash flow for the period 74 1 -54 8 8 5 6 142 280 232 227 221 217
XR efferct -8 -1 0 -1 - - - - - - - - -
Cash at the beginning of the year 17 82 83 28 35 43 48 54 196 476 708 935 1,156
Cash at the end of the year 83 83 29 35 43 48 54 196 476 708 935 1,156 1,372
MRSK Initiation 65
Equity Market
MRSK Northwest
Address: 5 bld A Voronezhskaya st.,
St.Petersburg, Russia 191119
Karelia Republic
Murmansk region
Tel: +7 (812) 305 10 00 Pskov region Arkhangelsk region
E-mail: post@mrsksevzap.ru Novgorod region
Vologda region MRSK
Komi Republic
Website: http://www.mrsksevzap.ru Tyumen
MRSK
Siberia
CEO Alexander Kukhmay Far East
DisCo
CFO Olga Makarova

Investor Relations Andrey Karandashev
Bloomberg Ticker MRKZ RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKZ.RTS - Upside risk to iRAB estimate (looks abnormally low)
Closing price $0.07 - Involvement in retailing business (Pskov region) adjacent to its
Average daily volume $0.09 mln core power distribution business
Free float 35% WEAKNESSES AND THREATS
52 week change 167% - High regulatory risk (only 18% of iRAB is approved; only one
Shares outstanding 95,785,923,138 branch has RAB-based tariffs)
Market Cap, mln $681 - Poor transparency and disclosure

12 M Target price $0.0043 - Low liquidity
Upside -40% - The most expensive on EV/RAB
Recommendation U/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 835 913 1,148 1,314 1,442 1,587 1,734
EBITDA, $ mln 107 53 166 214 230 235 238
Net Income, $ mln 2 -35 56 94 116 117 115
EV/Sales, x 1.0 0.9 0.7 0.6 0.6 0.5 0.5
EV/EBITDA, x 7.7 15.4 5.0 3.8 3.6 3.5 3.4
P/E, x - - 12.2 7.3 5.9 5.8 5.9
Operating margin, % 2.9% -2.9% 6.9% 10.3% 10.2% 9.3% 8.4%
EBITDA margin, % 12.8% 5.8% 14.4% 16.3% 16.0% 14.8% 13.7%
Net margin, % 0.2% -3.8% 4.9% 7.1% 8.1% 7.3% 6.6%
Net Debt/EBITDA 1.29 3.18 0.87 0.47 0.09 -0.26 -0.62
EV/Throuhput, $/MWh 21.1 20.9 20.6 20.6 20.5 20.3 19.7
EV/iRAB, x 0.81
66 MRSK Initiation
Equity Market
$0.010
$0.008
Other $0.006
45%
$0.004
$0.002
MRSK
Holding $0.000
55% Jun-09 Dec-09 Jun-10
MRSK Northw est RTSI$ Index Rebased
2,000.00 $mln 50% 50 ths.GWH 30%
40% 40
1,500.00
20%
30% 30
1,000.00
20% 20
10%
500.00
10% 10
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2015
200,000 30,000
51,227 4,035 6,914
25,000
150,000
91,442 20,000 4,020
100,000 15,000 13,815
10,000
50,000
24,557 5,000
0 0
MRSK Initiation 67
Equity Market
600 25% 25%
RUB/MWh
500 20% 20%
400 15%
15%
300 10%
10%
200 5%
100 5%
0%
2010
2011
2012
2013
2014
2015
0 0%
2009
2010
2011
2012
2013
2014
2015
59,000 1.2x
0.81x
1.0x
49,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
39,000 0.32x
0.6x
0.29x
0.16x
29,000 0.4x
19,000 0.2x
0.0x
Tomsk DisCo
9,000
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
-1,000
2011 2012 2013 2014 2015
60,000 3,170
50,000 7,956
1,608 Vologdaenergo
40,000
30,000 Arhenergo
20,000 Komienergo
10,525 3,492 Karelenergo
10,000
0 Kolenergo
2011 2012 2013 2014 2015 Pskovenergo
5,401
Vologdaenergo Arhenergo Komienergo Novgorodenergo
Karelenergo Kolenergo Pskovenergo 6,796
Novgorodenergo
68 MRSK Initiation
Equity Market
MRSK Northwest DCF valuation
Figure 154: MRSK Northwest DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 835 913 1,148 1,314 1,442 1,587 1,734 1,890 2,043 2,172 2,312 2,456
- % growth, y-o-y 3% 9% 26% 14% 10% 10% 9% 9% 8% 6% 6% 6%
- distribution revenues 664 845 1,074 1,229 1,346 1,484 1,627 1,781 1,931 2,059 2,196 2,338
- other 31 - - - - - - - - - - -
EBITDA 107 53 166 214 230 235 238 243 247 249 252 257
- % growth -22% -50% 211% 29% 8% 2% 1% 2% 2% 1% 1% 2%
- % margin 13% 6% 14% 16% 16% 15% 14% 13% 12% 11% 11% 10%
Operating income (EBIT) 25 -27 80 135 147 147 145 159 160 158 156 156
- % growth -57% -209% -397% 70% 8% 0% -1% 10% 0% -1% -1% 0%
- % margin 3% -3% 7% 10% 10% 9% 8% 8% 8% 7% 7% 6%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 5 -5 16 27 29 29 29 32 32 32 31 31
NOPAT 20 -21 64 108 117 118 116 128 128 126 125 125
- % growth 2% -3% 7% -9% 7% 6% 6% -11% 5% 5% 5% 5%
Changes in WC -3 -7 25 13 5 4 3 4 4 3 3 4
CAPEX 84 80 96 111 84 86 89 91 93 96 99 101
- % of sales 10% 9% 8% 8% 6% 5% 5% 5% 5% 4% 4% 4%
Unlevered FCF 21 -15 28 62 112 116 117 116 118 119 119 121
Discount factor 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2
Present value of FCF 21 -14 22 41 63 55 48 40 34 29 25 22
Terminal value 681
Total EV 489
Net debt, 2009 139
# of shares:
Common, mln 95,786
Implied EV/RAB 0.48

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 0%
Regulatory risk 2%
Liquidity 3%
Cost of equity 22%
WACC 17.8%
MRSK Initiation 69
Equity Market
MRSK Northwest condensed financials

Figure 156: MRSK Northwest condensed financial statements, $ mln
Revenues 812 835 913 1,148 1,314 1,442 1,587 1,734 1,890 2,043 2,172 2,312 2,456
Electricity distribution 627 664 845 1,074 1,229 1,346 1,484 1,627 1,781 1,931 2,059 2,196 2,338
Connection fees 28 17 - - - - - - - - - - -
Electricity retail 123 123 68 75 84 95 103 107 109 111 114 116 118
Other 34 31 - - - - - - - - - - -
Operating expenses 761 813 940 1,069 1,178 1,295 1,439 1,589 1,731 1,883 2,015 2,156 2,300
Raw materials 45 43 46 49 51 54 57 60 62 64 67 69 72
Personnel costs 198 222 238 250 260 278 294 308 319 331 343 356 370
Electricity losses purchased 160 180 271 358 432 487 581 686 804 920 1,015 1,117 1,222
Depreciation 106 108 132 145 162 181 195 208 221 231 241 252 264
Other expenses 80 82 80 86 78 84 88 93 83 87 92 96 101
Operating income (EBIT) 57 25 -27 80 135 147 147 145 159 160 158 156 156
EBITDA 137 107 53 166 214 230 235 238 243 247 249 252 257
Interest income 1 2 - - - - - - - - - - -
Other operating expenses - 5 - - - - - - - - - - -
Profit tax 8 1 -9 14 24 29 29 29 32 32 32 31 31
Minority interest: share of net
3 0 0 1 1 1 1 1 1 1 1 1 1
result
Net income 42 2 -35 56 94 116 117 115 126 126 125 124 124
Margins, %
EBITDA margin 16.9% 12.8% 5.8% 14.4% 16.3% 16.0% 14.8% 13.7% 12.8% 12.1% 11.5% 10.9% 10.4%
Operating margin 7.0% 2.9% -2.9% 6.9% 10.3% 10.2% 9.3% 8.4% 8.4% 7.8% 7.3% 6.7% 6.4%
Pre-tax margin 6.5% 0.3% -4.8% 6.1% 9.0% 10.2% 9.3% 8.4% 8.4% 7.8% 7.3% 6.7% 6.4%
Net margin 5.1% 0.2% -3.8% 4.9% 7.1% 8.1% 7.3% 6.6% 6.7% 6.2% 5.7% 5.3% 5.0%
Inventories 25 23 28 30 35 39 43 48 53 57 61 66 70
Total current assets 168 211 224 266 312 341 422 540 655 772 885 1,001 1,119
PPE 910 895 902 856 889 889 887 882 890 896 900 903 904
Total non-current assets 932 921 930 888 925 929 930 929 940 950 957 963 967
Total assets 1,101 1,132 1,154 1,154 1,237 1,270 1,352 1,469 1,596 1,722 1,843 1,964 2,087
Current financial debt 106 63 21 39 28 9 - - - - - - -
Non-current debt 53 93 157 116 85 26 - - - - - - -
Share capital 325 317 319 299 299 299 299 299 299 299 299 299 299
Retained earnings 354 346 314 348 442 529 616 702 797 891 985 1,077 1,169
Total shareholders equity 714 698 669 681 775 862 949 1,035 1,129 1,224 1,317 1,410 1,502
Total liabilities and
1,101 1,132 1,154 1,154 1,237 1,270 1,352 1,469 1,596 1,722 1,843 1,964 2,087
shareholders equity
CF from financing activity 94 -24 2 -28 -64 -110 -68 -32 -36 -35 -35 -34 -35
Cash flow for the period 1 -5 -10 3 2 1 48 85 80 82 84 84 86
XR effect -2 - - - - - - - - - - - -
Cash at the beginning of the
25 24 19 9 11 13 14 62 147 228 310 394 479
year
70 MRSK Initiation
Equity Market
MRSK Urals
Address: 140, Mamina-Sibiryaka st.,
Ekaterinburg, Russia 620026
Tel: +7 (343) 215 26 00
E-mail: ir@mrsk-ural.com
Website: http://www.mrsk-ural.ru Perm region
MRSK
Tyumen
MRSK
Sverdlovsk region Siberia
CEO Valery Rodin
Far East
Chelyabinsk region DisCo
Investor Relations Pavel Chingin
Bloomberg Ticker MRKU RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKU.RTS - Half of branches have already adopted RAB-based tariffs; 35%
Closing price $0.008 of iRAB approved by regulators
Average daily volume $0.14 mln - One of the cheapest MRSKs on EV/RAB
Free float 20% - Operates in highly industrialized Urals region
52 week change 108% - Good transparency and disclosure
Shares outstanding 87,430,485,711 - Involvement in retailing business adjacent to its core power
Market Cap, mln $679 distribution business
Upside 152% - Regulatory risk
Recommendation O/W - Low liquidity

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 1,487 1,745 1,976 2,301 2,600 2,864 3,144
EBITDA, $ mln 298 387 421 540 648 674 714
Net Income, $ mln 140 176 244 340 422 436 462
EV/Sales, x 0.6 0.5 0.4 0.4 0.3 0.3 0.3
EV/EBITDA, x 3.0 2.3 2.1 1.6 1.4 1.3 1.2
P/E, x 4.8 3.9 2.8 2.0 1.6 1.6 1.5
EBITDA margin, % 20.1% 22.2% 21.3% 23.4% 24.9% 23.5% 22.7%
Net margin, % 9.4% 10.1% 12.4% 14.8% 16.2% 15.2% 14.7%
Net debt/EBITDA 0.68 0.30 0.09 -0.06 -0.15 -0.13 -0.48
EV/iRAB, x 0.29
MRSK Initiation 71
Equity Market
$0.025
$0.020
$0.015
Other
48% $0.010
MRSK
Holding $0.005
52%
$0.000
MRSK Urals RTSI$ Index Rebased
3,000.00 $mln 50% 80 ths.GWH 30%
2,500.00 70
40%
60
2,000.00 20%
30% 50
1,500.00 40
20% 30
1,000.00 10%
20
500.00 10%
10
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2015
40,000 10,166
46,772 4,509
150,000 35,000
30,000 3,775
74,306 25,000 23,132
100,000
20,000
15,000
50,000 30,298 10,000
5,000
0 0
72 MRSK Initiation
Equity Market
500 25% 25%
RUB/MWh
450
400 20% 20%
350
15%
300 15%
250 10%
200 10%
150 5%
100 5%
0%
50
2009
2010
2011
2012
2013
2014
0 0%
2010
2011
2012
2013
2014
2015
100,000 1.2x
0.81x
1.0x
80,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
0.32x
60,000 0.6x
0.29x
0.16x
0.4x
40,000
0.2x
20,000 0.0x
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
0
2010 2011 2012 2013 2014
OPEX RAB Depr. Return on RAB
Figure 168: Revenue breakdown by branch, RUB mln Figure 169: Throughput breakdown by branch, GWh
120,000 Sverdlovenergo
100,000 1,436
1,952
80,000
60,000 Permenergo
40,000
20,000
0 Chelyabenergo
2011 2012 2013 2014 2015 2,701
Sverdlovenergo Permenergo
2,754 Ekaterinburg
Chelyabenergo Ekaterinburg grid
Electric Grid
Ekaterinburg supply Company
MRSK Initiation 73
Equity Market
MRSK Urals DCF valuation

Figure 170: MRSK Urals DCF model
2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 1,487 1,745 1,976 2,301 2,600 2,864 3,144 3,390 3,636 3,848 4,072 4,304
- % growth, y-o-y n/a 17% 13% 16% 13% 10% 10% 8% 7% 6% 6% 6%
- electricity sales 317 237 254 266 284 301 315 328 340 353 367 381
- other 37 - - - - - - - - - - -
EBITDA 298 387 421 540 648 674 714 736 746 751 751 750
- % growth n/a 30% 9% 28% 20% 4% 6% 3% 1% 1% 0% 0%
- % margin 20% 22% 21% 23% 25% 24% 23% 22% 21% 20% 18% 17%
- % growth n/a 49% 12% 39% 24% 3% 6% 2% 1% 0% -1% -1%
- % margin 12% 16% 16% 19% 20% 19% 19% 18% 17% 16% 15% 14%
Tax rate 10% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 18 55 62 86 106 110 117 119 120 121 120 119
NOPAT 168 220 247 343 426 440 467 476 482 482 479 476
- % growth n/a -1% 1% -1% 4% 6% 6% 8% 2% 3% 3% 71%
Changes in WC 35 8 -2 11 10 -5 -3 -5 -8 -8 -9 -9
CAPEX 118 190 285 365 356 467 226 232 239 246 253 260
- % of sales 8% 11% 14% 16% 14% 16% 7% 7% 7% 6% 6% 6%
Unlevered FCF 128 134 77 78 176 102 374 390 394 392 387 485
Discount factor 1.00 0.92 0.79 0.67 0.58 0.49 0.42 0.36 0.31 0.26 0.22 0.19
Present value of FCF 128 124 61 52 101 50 157 140 121 102 86 92
Total EV 1,628
Net Debt, 2009 209
Stake in Kurganenergo 40
# of shares:
Common, mln 87,430
Implied EV/RAB 0.54

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 0%
Regulatory risk 2%
Liquidity 3%
Cost of equity 21%
WACC 17.1%
74 MRSK Initiation
Equity Market
MRSK Urals condensed financials

Figure 172: MRSK Urals condensed financial statements, $ mln
Revenues 1,241 1,487 1,745 1,976 2,301 2,600 2,864 3,144 3,390 3,636 3,848 4,072 4,304
Electricity distribution 841 1,109 1,507 1,721 2,036 2,316 2,563 2,829 3,062 3,295 3,495 3,705 3,923
Electricity sales 308 317 237 254 266 284 301 315 328 340 353 367 381
Connection fees 64 41 - - - - - - - - - - -
Other 28 37 - - - - - - - - - - -
Raw materials 19 20 21 22 24 25 27 29 30 32 33 35 36
Personnel costs 140 146 157 166 175 189 201 213 223 234 245 257 269
Payroll taxes 32 30 32 34 36 39 41 44 46 48 50 53 55
Federal Grid charge 250 262 394 514 627 705 845 1,000 1,155 1,322 1,458 1,605 1,755
Depreciation 109 113 112 112 111 116 123 130 141 144 148 152 156
Other expenses 364 418 352 375 394 422 448 472 492 513 535 558 581
EBITDA 159 298 387 421 540 648 674 714 736 746 751 751 750
Interest income 1 0 - - - - - - - - - - -
Interest expense 21 33 53 - - - - - - - - - -
Other operating expenses -4 -3 - - - - - - - - - - -
Profit tax -6 15 44 62 86 106 110 117 119 120 121 120 119
Net income 35 140 176 244 340 422 436 462 471 477 478 475 471
Margins, %
EBITDA margin 12.8% 20.1% 22.2% 21.3% 23.4% 24.9% 23.5% 22.7% 21.7% 20.5% 19.5% 18.4% 17.4%
Pre-tax margin 2.7% 10.5% 12.7% 15.6% 18.6% 20.5% 19.2% 18.6% 17.6% 16.6% 15.7% 14.7% 13.8%
Net margin 2.8% 9.4% 10.1% 12.4% 14.8% 16.2% 15.2% 14.7% 13.9% 13.1% 12.4% 11.7% 10.9%
Cash and cash equivalents 29 48 97 85 32 98 86 340 607 878 1,146 1,410 1,669
Inventories 22 26 30 33 39 43 49 54 59 64 69 74 79
PPE 1,582 1,528 1,619 1,685 1,939 2,179 2,523 2,618 2,710 2,805 2,903 3,004 3,108
Total assets 1,862 1,882 2,075 2,158 2,432 2,794 3,176 3,579 3,985 4,398 4,805 5,214 5,622
Current financial debt 191 34 - - - - - - - - - - -
Non-current debt 121 218 214 125 - - - - - - - - -
Share capital 296 289 291 273 273 273 273 273 273 273 273 273 273
Retained earnings 875 917 1,101 1,269 1,608 1,923 2,249 2,595 2,947 3,304 3,661 4,016 4,368
CF from financing activity 34 -99 -97 -82 -130 -111 -114 -121 -122 -124 -124 -123 -122
Cash flow for the period -3 20 48 -6 -53 66 -12 254 267 271 268 264 259
Cash at the beginning of the year 32 29 48 90 85 32 98 86 340 607 878 1,146 1,410
Cash at the end of the year 29 48 97 85 32 98 86 340 607 878 1,146 1,410 1,669
MRSK Initiation 75
Equity Market
MRSK Siberia
Address: 144a, Bograda st.,
Krasnoyarsk 660021, Russia
Tel: +7 (3912) 74 41 74
E-mail: ir@mrsk-sib.ru
MRSK
Website: http://www.mrsk-sib.ru Tyumen
CEO Aleksandr Antropenko Kemerovo region Krasnoyarsk region Far East

DisCo
CFO Alena Grigoryeva Omsk region

Chita region
Altai region
Investor Relations Igor Troukhachyov Buryatia Republic
Khakassia Republic
Tyva Republic
Bloomberg Ticker MRKS RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKS.RTS - Exposure to highly industrialized regions in Siberia
Closing price $0.01 - Good transparency and disclosure
- Possible merger of Tomsk DisCo into MRSK Siberia
Free float 10%
WEAKNESSES AND THREATS
52 week change 129%
- Regulatory risks (only 25% of iRAB has been approved by
Shares outstanding 89,367,655,115 regulators)
Market Cap, mln $911 - Poor liquidity
12 M Target price $0.013 - Ongoing problems with “last-mile” agreements
Upside 30%
Recommendation E/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 1,120 1,323 1,667 2,035 2,509 3,101 3,733
EBITDA, $ mln 120 112 243 415 671 980 1,364
Net Income, $ mln -26 -45 76 190 367 570 815
EV/Sales, x 1.0 0.9 0.7 0.6 0.4 0.4 0.3
EV/EBITDA, x 9.4 10.1 4.6 2.7 1.7 1.2 0.8
P/E, x - - 11.9 4.8 2.5 1.6 1.1
Operating margin, % 0.1% -1.3% 7.0% 14.3% 21.5% 27.0% 32.2%
EBITDA margin, % 10.7% 8.5% 14.6% 20.4% 26.7% 31.6% 36.5%
Net margin, % -2.3% -3.4% 4.6% 9.3% 14.6% 18.4% 21.8%
Net debt/EBITDA 1.78 2.60 1.92 1.71 1.64 1.67 0.91
EV/iRAB, x 0.39
76 MRSK Initiation
Equity Market
Other $0.020
10%
Nornikel $0.015
8%
$0.010
MRSK $0.005
Holding
53% $0.000
Donalink Jun-09 Dec-09 Jun-10
Limited MRSK Siberia RTSI$ Index Rebased
3,500.00 50% 120 30%
$mln ths.GWH
3,000.00 100
40%
2,500.00
80 20%
2,000.00 30%
60
1,500.00 20%
40 10%
1,000.00
10% 20
500.00
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015
300,000 50,000
82,928 3,746 11,762
250,000 40,000
200,000 147,416 7,200
30,000 24,763
150,000
20,000
100,000
50,000 39,840 10,000
0 0
MRSK Initiation 77
Equity Market
700 RUB/MWh 40% 40%
600 35% 35%
30%
500 30%
25%
25%
400 20%
20% 15%
300
15% 10%
200 10% 5%
100 0%
5%
2010E
2011E
2012E
2013E
2014E
2015E
0 0%
2010E
2011E
2012E
2013E
2014E
2015E
50,000 1.2x
0.81x
1.0x
40,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
30,000 0.6x
0.32x
0.29x
0.16x
0.4x
20,000
0.2x
10,000 0.0x
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
0
2011 2012 2013 2014 2015
-10,000
120000
100000 A ltaienergo
388
80000 4,765 7,346 404
60000 Go rno -A ltaisk
11,662 3,713 Electric Netwo rks
40000 B uryatenergo
20000
0 8,141 Krasno yarskenergo
2011 2012 2013 2014 2015

Kuzbassenergo
32,834
A ltaienergo Go rno -A ltaisk grids B uryatenergo
Omskenergo
Krasno yarskenergo Kuzbassenergo Omskenergo
Khakasenergo Chitaenergo Tyvaenergo 22,931 Khakasenergo
78 MRSK Initiation
Equity Market
MRSK Siberia DCF valuation
Figure 186: MRSK Siberia DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 1,120 1,323 1,667 2,035 2,509 3,101 3,733 3,579 3,881 4,128 4,357 4,627
- % growth, y-o-y n/a 18% 26% 22% 23% 24% 20% -4% 8% 6% 6% 6%
- other 34 - - - - - - - - - - -
EBITDA 120 112 243 415 671 980 1,364 974 996 1,002 971 971
- % growth n/a -7% 117% 70% 62% 46% 39% -29% 2% 1% -3% 0%
- % margin 11% 8% 15% 20% 27% 32% 37% 27% 26% 24% 22% 21%
Operating income (EBIT) 1 -17 116 290 539 837 1,203 785 803 802 765 759
- % growth n/a -1911% -770% 150% 86% 55% 44% -35% 2% 0% -5% -1%
- % margin 0% -1% 7% 14% 21% 27% 32% 22% 21% 19% 18% 16%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 0 -3 23 58 108 167 241 157 161 160 153 152
NOPAT 1 -14 93 232 431 670 963 628 642 642 612 607
- % growth n/a 9% -2% -2% 6% 9% 13% 17% 3% 3% 3% 61%
Changes in WC -5 -19 16 25 39 47 62 -79 -5 -7 -14 -9
Operating Cash Flows 125 134 204 332 523 766 1,062 895 841 848 832 946
CAPEX 125 179 386 529 755 1,064 318 327 336 345 321 330
- % of sales 11% 14% 23% 26% 30% 34% 9% 9% 9% 8% 7% 7%
Unlevered FCF 0 -45 -182 -198 -232 -298 744 568 505 503 511 616
Discount factor 1.00 0.93 0.80 0.68 0.59 0.50 0.43 0.37 0.32 0.28 0.24 0.20
Present value of FCF 0 -41 -145 -135 -136 -150 323 212 162 138 121 125
Total EV 1,234
Net debt, 2009 216
# of shares:
Common, mln 89,368
Implied EV/RAB 0.4

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 0%
Regulatory risk 2%
Liquidity 3%
Cost of equity 20%
WACC 16.4%
MRSK Initiation 79
Equity Market
MRSK Siberia condensed financials

Figure 188: MRSK Siberia condensed financial statements, $ mln
Revenues 1,162 1,120 1,323 1,667 2,035 2,509 3,101 3,733 3,579 3,881 4,128 4,357 4,627
Connection fees 78 47 - - - - - - - - - - -
Other 50 34 - - - - - - - - - - -
Raw materials 39 36 39 41 43 47 50 53 55 58 61 63 66
Personnel costs 205 183 197 209 220 237 253 268 281 294 308 323 338
Payroll taxes 44 43 46 49 51 55 59 62 65 69 72 75 79
Federal Grid charge 318 323 483 640 791 933 1,145 1,333 1,517 1,737 1,915 2,107 2,305
Depreciation 120 119 129 127 124 132 143 161 188 194 200 206 212
Other expenses 243 239 220 232 245 264 282 298 313 327 343 360 377
Operating income (EBIT) 54 1 -17 116 290 539 837 1,203 785 803 802 765 759
EBITDA 174 120 112 243 415 671 980 1,364 974 996 1,002 971 971
Interest income 0 0 - - - - - - - - - - -
Interest expense 20 30 38 21 53 80 123 184 141 105 75 42 6
Pre-tax income (EBT) 34 -30 -56 95 237 459 714 1,020 644 698 728 723 753
Profit tax -26 -4 -11 19 47 92 143 204 129 140 146 145 151
Income before minority interest 61 -26 -45 76 190 367 571 816 515 558 582 578 602
Net income 61 -26 -45 76 190 367 570 815 515 557 581 578 601
Margins, %
EBITDA margin 15.0% 10.7% 8.5% 14.6% 20.4% 26.7% 31.6% 36.5% 27.2% 25.7% 24.3% 22.3% 21.0%
Operating margin 4.6% 0.1% -1.3% 7.0% 14.3% 21.5% 27.0% 32.2% 21.9% 20.7% 19.4% 17.6% 16.4%
Pre-tax margin 2.9% -2.7% -4.2% 5.7% 11.7% 18.3% 23.0% 27.3% 18.0% 18.0% 17.6% 16.6% 16.3%
Net margin 5.2% -2.3% -3.4% 4.6% 9.3% 14.6% 18.4% 21.8% 14.4% 14.4% 14.1% 13.3% 13.0%
Inventories 21 21 27 31 36 41 47 53 58 65 70 76 82
Total current assets 215 243 282 340 426 522 642 769 745 809 861 911 1,252
PPE 1,196 1,167 1,226 1,400 1,805 2,429 3,349 3,506 3,645 3,787 3,933 4,048 4,166
Total assets 1,449 1,449 1,548 1,780 2,272 2,993 4,035 4,320 4,434 4,641 4,841 5,007 5,467
Current financial debt 132 85 44 121 182 281 417 321 239 170 96 14 -
Non-current debt 64 133 261 362 546 842 1,252 963 717 509 288 41 -
Total non-current liabilities 194 259 388 482 666 961 1,372 1,083 836 629 408 161 120
Total liabilities 538 586 722 931 1,234 1,679 2,293 1,967 1,694 1,483 1,246 978 987
Share capital 303 296 298 279 279 279 279 279 279 279 279 279 279
Retained earnings 609 568 528 569 758 1,033 1,461 2,072 2,458 2,876 3,312 3,745 4,196
Total shareholders equity 912 864 826 848 1,038 1,313 1,740 2,351 2,737 3,155 3,591 4,024 4,475
CF from operating activity 113 135 142 208 342 539 790 1,099 923 862 863 840 829
CF from investing activity -139 -119 -179 -386 -529 -755 -1,064 -318 -327 -336 -345 -321 -330
CF from financing activity 13 -12 45 182 191 220 279 -774 -598 -523 -515 -517 -213
Cash flow for the period -13 3 9 4 4 5 6 6 -2 3 2 2 286
XR Effect - - - -1 - - - - - - - - -
80 MRSK Initiation
Equity Market
MRSK Volga
Address: 42/44 Pervomayskaya st.,
Saratov, 410031, Russia
Tel: +7 (8452) 30 24 89
E-mail: yg.burceva@mrsk-volgi.ru
Website: http://www.mrsk-volgi.ru Mordov Republic MRSK
Tyumen
Chuvashia Republic MRSK
Penza region
CEO Vladimir Ryabikin Ulyanovsk region Siberia
Samara region Far East
Saratov region DisCo
CFO Aleksey Berezovskyi Orenburg region
Investor Relations Yulia Burtseva
Bloomberg Ticker MRKV RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKV.RTS - Good chance of being privatized
Closing price $0.003 WEAKNESSES AND THREATS
- Regulatory risk (only 24% of iRAB has been approved by
Free float 30% regulator; 14% of branches have adopted RAB-based tariffs)
52 week change 21% - Low liquidity
Shares outstanding 178,577,801,146 - Poor transparency and disclosure
Market Cap, mln $618
12 M Target price $0.005
Upside 43%
Recommendation O/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 923 1,028 1,271 1,483 1,732 1,973 2,073
EBITDA, $ mln 163 142 249 317 426 495 429
Net Income, $ mln 44 23 100 157 243 298 244
EV/Sales, x 0.9 0.8 0.6 0.5 0.5 0.4 0.4
EV/EBITDA, x 4.9 5.6 3.2 2.5 1.9 1.6 1.9
P/E, x 14.1 26.9 6.2 3.9 2.5 2.1 2.5
EBITDA margin, % 17.6% 13.8% 19.6% 21.4% 24.6% 25.1% 20.7%
Net margin, % 4.7% 2.2% 7.9% 10.6% 14.0% 15.1% 11.8%
Net debt/EBITDA 1.14 1.38 0.53 0.07 -0.25 -0.56 -0.98
EV/Throuhput, $/MWh 13.9 13.7 13.4 13.2 13.0 12.8 12.4
EV/iRAB, x 0.44
MRSK Initiation 81
Equity Market
$0.012
Other $0.010
26%
$0.008
Agana $0.006
6% $0.004
$0.002
$0.000
MRSK Jun-09 Dec-09 Jun-10
Holding MRSK Volga RTSI$ Index Rebased
2,000.00 $mln 50% 80 30%
1,800.00 70 ths.GWH
1,600.00 40%
60
1,400.00 20%
1,200.00 30% 50
1,000.00 40
800.00 20% 30
600.00 10%
20
400.00 10%
200.00 10
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2015
250,000 40,000
75,727 7,201
35,000
200,000
30,000 5,144
150,000 116,214 25,000 21,428
20,000
100,000 15,000
10,000
50,000 29,837 5,000
0 0
Overhead lines (0.4 kV) Low voltage (0.4 kV)
82 MRSK Initiation
Equity Market
600 35% 35%
RUB/MWh 30%
30%
500 25%
25%
20%
400 20%
15%
15% 10%
300
10% 5%
200 5% 0%
0% -5%
100 -10%
-5%
2010E
2011E
2012E
2013E
2014E
2015E
0 -10%
2010E
2011E
2012E
2013E
2014E
2015E
2009
68,000 1.2x
0.81x
58,000 1.0x
0.51x
0.8x
0.47x
48,000
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
0.32x
0.6x
0.29x
38,000
0.16x
0.4x
28,000
0.2x
18,000
0.0x
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
8,000
Volga
Northwest
-2,000
2011 2012 2013 2014 2015
Smoothing OPEX RAB Depr. Return
80000
Samara distributio n
70000 4,844 grids
60000 3,757 Sarato v distributio n
50000
20,569 grids
40000
Ulyano vsk
30000 distributio n grids
20000
M o rdo venergo
10000 12,497
0
Orenburgenergo
2011 2012 2013 2014 2015
Samara distributio n grids Sarato v distributio n grids 2,623 P enzaenergo
Ulyano vsk distributio n grids M o rdo venergo
4,499 8,848
Orenburgenergo P enzaenergo Chuvashenergo
Chuvashenergo
MRSK Initiation 83
Equity Market
MRSK Volga DCF valuation
Figure 202: MRSK Volga DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 923 1,028 1,271 1,483 1,732 1,973 2,073 2,231 2,395 2,549 2,707 2,869
- % growth, y-o-y -19% 11% 24% 17% 17% 14% 5% 8% 7% 6% 6% 6%
- other 20 - - - - - - - - - - -
EBITDA 163 142 249 317 426 495 429 429 429 437 439 439
- % growth -23% -13% 75% 27% 34% 16% -13% 0% 0% 2% 0% 0%
- % margin 18% 14% 20% 21% 25% 25% 21% 19% 18% 17% 16% 15%
- % growth -44% -58% 336% 57% 55% 22% -18% -1% -1% 2% 0% -1%
- % margin 7% 3% 10% 13% 18% 19% 15% 14% 13% 12% 11% 11%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 14 6 25 39 61 74 61 61 60 62 62 61
NOPAT 54 23 100 157 243 298 244 242 241 247 247 245
- % growth 7% 19% 9% -2% 1% 1% 1% 1% 1% 1% 1% 2%
Changes in WC 33 -40 7 7 9 7 -2 2 2 3 2 2
CAPEX 73 183 153 153 157 162 166 171 175 180 185 133
- % of sales 8% 18% 12% 10% 9% 8% 8% 8% 7% 7% 7% 5%
Unlevered FCF 42 -6 64 117 199 252 204 195 191 193 190 243
Discount factor 1.0 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.3 0.2 0.2
Present value of FCF -86 42 -6 50 78 112 121 83 67 56 48 40
Total EV 936
Net debt, 2009 185
# of shares:
Common, mln 178,578
Implied EV/RAB 0.52

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 0%
Regulatory risk 2%
Liquidity 3%
Cost of equity 22%
WACC 17.8%
84 MRSK Initiation
Equity Market
MRSK Volga condensed financials
Figure 204: MRSK Volga condensed financial statements, $ mln

Revenues 1,137 923 1,028 1,271 1,483 1,732 1,973 2,073 2,231 2,395 2,549 2,707 2,869
Electricity distribution 1,010 890 1,028 1,271 1,483 1,732 1,973 2,073 2,231 2,395 2,549 2,707 2,869
Connection fees 100 16 - - - - - - - - - - -
Other 28 17 - - - - - - - - - - -
Operating expenses 1,014 856 999 1,146 1,287 1,428 1,601 1,769 1,928 2,094 2,241 2,399 2,563
Raw materials 43 38 41 44 46 50 53 56 59 61 64 67 71
Personnel costs 149 135 147 155 163 176 188 199 208 218 229 240 251
Payroll taxes 36 33 36 38 40 43 46 49 51 54 56 59 62
Federal Grid charge 143 176 264 350 429 490 592 701 811 928 1,023 1,126 1,231
Depreciation 181 122 132 139 147 158 169 179 187 196 206 216 226
Other expenses 151 135 113 124 121 123 125 126 128 130 132 134 137
Other operating income -1 1 - - - - - - - - - - -
EBITDA 210 163 142 249 317 426 495 429 429 429 437 439 439
Interest income 0 0 - - - - - - - - - - -
Interest expense 20 17 - - - - - - - - - - -
Other operating expenses -4 - - - - - - - - - - - -
Profit tax 27 7 6 25 39 61 74 61 61 60 62 62 61
Net income 78 44 23 100 157 243 298 244 242 241 247 247 245
Margins, %
EBITDA margin 18.5% 17.6% 13.8% 19.6% 21.4% 24.6% 25.1% 20.7% 19.2% 17.9% 17.2% 16.2% 15.3%
Pre-tax margin 9.3% 5.5% 2.8% 9.9% 13.2% 17.6% 18.9% 14.7% 13.6% 12.6% 12.1% 11.4% 10.7%
Net margin 6.9% 4.7% 2.2% 7.9% 10.6% 14.0% 15.1% 11.8% 10.9% 10.1% 9.7% 9.1% 8.5%
Cash and cash equivalents 16 14 10 12 15 108 278 418 548 673 799 923 1,041
Inventories 29 26 30 34 40 44 50 56 61 67 72 77 83
Total current assets 154 175 146 159 184 299 490 642 788 929 1,070 1,209 1,344
PPE 868 836 912 884 916 952 990 1,032 1,077 1,126 1,177 1,232 1,289
Total non-current assets 905 870 950 928 968 1,012 1,058 1,103 1,153 1,207 1,263 1,323 1,386
Total assets 1,059 1,045 1,095 1,087 1,152 1,310 1,548 1,746 1,941 2,136 2,334 2,532 2,730
Current financial debt 102 6 7 16 9 - - - - - - - -
Non-current debt 119 193 200 127 27 - - - - - - - -
Share capital 605 591 595 558 558 558 558 558 558 558 558 558 558
Retained earnings 67 108 132 221 378 561 784 967 1,149 1,329 1,515 1,700 1,883
Total shareholders equity 672 699 728 779 936 1,119 1,342 1,525 1,707 1,888 2,073 2,258 2,441
Cash flow for the period -2 -2 -4 3 3 94 170 140 130 125 126 123 119
Cash at the end of the year 16 14 10 12 15 108 278 418 548 673 799 923 1,041
MRSK Initiation 85
Equity Market
MRSK South
Address: 327 Severnaya st.,
Krasnodar 350015, Russia
Tel: +7 (861) 279 87 86
E-mail: ir@mrsk-yuga.ru
Website: http://www. mrsk-yuga.ru MRSK
Tyumen
Rostov region MRSK
CEO Aleksandr Gavrilov Volgograd region Siberia
Far East
DisCo
CFO Igor Lounyov Astrakhan region
Kalmykia Republic
Investor Relations Anna Yourchenko
Bloomberg Ticker MRKY RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKY.RTS - Limited regulatory risk (50% of branches have adopted RAB-
Closing price $0.005 based tariffs)
Average daily volume $0.28 mln - Possible merger of Kubanenergo into MRSK South
Free float 19% WEAKNESSES AND THREATS
52 week change 37% - Regulatory risks
Shares outstanding 49,811,096,064 - No IFRS financial statements and low transparency
Market Cap, mln $259 - High debt burden
12 M Target price $0.008
Upside 55%
Recommendation O/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 605 689 867 1,003 1,167 1,297 1,328
EBITDA, $ mln 128 125 222 268 341 369 310
Net Income, $ mln -37 36 106 120 207 227 177
EV/Sales, x 1.1 0.9 0.8 0.7 0.6 0.5 0.5
EV/EBITDA, x 5.1 5.2 2.9 2.4 1.9 1.8 2.1
P/E, x - 7.1 2.4 2.2 1.2 1.1 1.5
EBITDA margin, % 21.1% 18.2% 25.6% 26.8% 29.2% 28.4% 23.3%
Net margin, % -6.1% 5.3% 12.2% 11.9% 17.8% 17.5% 13.3%
Net debt/EBITDA 3.05 3.93 1.61 1.08 0.62 0.22 -0.16
EV/iRAB, x 0.47
86 MRSK Initiation
Equity Market
Other $0.016
19%
Investment $0.012
funds
8% $0.008
MRSK $0.004
Holding
Lukoil's 52% $0.000
structures Jun-09 Dec-09 Jun-10
21% MRSK South RTSI$ Index Rebased
$mln 50% 40 30%
1,400.00 ths.GWH
1,200.00 40%
30
1,000.00 20%
30%
800.00 20
600.00 20%
10%
400.00 10
10%
200.00
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2015
300,000 40,000
9,051
93,818 2,385 35,000
250,000
30,000
200,000 5,606
25,000
128,573 20,886
150,000 20,000
100,000 15,000
10,000
50,000 25,558 5,000
0 0
MRSK Initiation 87
Equity Market
700 40% 40%
RUB/MWh
35%
600 30%
30%
500 25% 20%
400 20%
10%
15%
300 10% 0%
200 5%
-10%
0%
2010E
2011E
2012E
2013E
2014E
2015E
100
-5%
0 -10%
2010E
2011E
2012E
2013E
2014E
2015E
2009
47,000 1.2x
0.81x
42,000 1.0x
37,000
0.51x
0.8x
0.47x
0.45x
0.44x
32,000
0.40x
0.39x
0.39x
0.38x
0.32x
0.6x
0.29x
27,000
0.16x
22,000 0.4x
17,000 0.2x
12,000 0.0x
Tomsk DisCo
MOESK
7,000
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
2,000
-3,000
2011 2012 2013 2014 2015

60,000
368
50,000
40,000
30,000 Volgogradenergo
12,230
20,000 13,905 Astrakhanenergo
10,000 Rostovenergo
0 Kalmenergo
2011 2012 2013 2014 2015
Volgogradenergo Astrakhanenergo 2,963
Rostovenergo Kalmenergo
88 MRSK Initiation
Equity Market
MRSK South DCF valuation
Figure 218: MRSK South DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 605 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774
- % growth, y-o-y 2% 14% 26% 16% 16% 11% 2% 6% 7% 6% 5% 5%
- distribution revenues 531 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774
- other 44 - - - - - - - - - - -
EBITDA 128 125 222 268 341 369 310 310 319 329 330 330
- % growth 13% -2% 77% 21% 27% 8% -16% 0% 3% 3% 0% 0%
- % margin 21% 18% 26% 27% 29% 28% 23% 22% 21% 21% 20% 19%
- % growth 25% -16% 183% 32% 36% 10% -22% -2% 2% 3% -1% -2%
- % margin 10% 7% 17% 19% 22% 22% 17% 15% 15% 14% 13% 13%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 12 10 29 38 52 57 44 44 45 46 45 45
NOPAT 48 41 115 152 207 227 177 174 179 184 182 178
- % growth 4% 10% 5% 0% 4% 4% 4% 4% 4% 4% 4% 4%
Changes in WC - -4 -21 25 31 9 -33 -6 -3 -4 -8 -10
CAPEX 98 213 98 104 126 117 120 124 127 131 135 107
- % of sales 16% 31% 11% 10% 11% 9% 9% 9% 8% 8% 8% 6%
Unlevered FCF 18 -94 116 102 131 186 178 148 150 155 158 188
Discount factor 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.4 0.3 0.3 0.2 0.2
Total EV 736
Net debt, 2009 395
# of shares:
Common, mln 49,811
Implied EV/RAB 0.53

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standarts application 2%
% of branches under RAB 1%
Liquidity 2%
Cost of equity 21%
WACC 17.1%
MRSK Initiation 89
Equity Market
MRSK South condensed financials
Figure 220: MRSK South condensed financial statements, $ mln

Revenues 595 605 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774
Electricity distribution 502 531 689 867 1,003 1,167 1,297 1,328 1,413 1,513 1,602 1,688 1,774
Connection fees 80 29 - - - - - - - - - - -
Other 13 44 - - - - - - - - - - -
Operating expenses 546 545 638 723 813 908 1,013 1,107 1,195 1,290 1,372 1,461 1,551
Raw materials 27 25 27 29 30 33 35 37 39 41 43 45 47
Personnel costs 92 102 110 117 123 132 141 149 156 163 171 179 187
Payroll taxes 22 24 26 28 29 31 33 35 37 38 40 42 44
Depreciation 135 66 72 76 80 86 92 97 102 107 112 117 123
Other expenses 44 96 80 84 85 89 93 96 100 104 108 112 117
EBITDA 113 128 125 222 268 341 369 310 310 319 329 330 330
Other operating expenses 9 34 - - - - - - - - - - -
Pre-tax income (EBT) 17 -32 45 132 150 259 284 221 218 223 230 227 223
Profit tax 18 5 9 26 30 52 57 44 44 45 46 45 45
Income before minority interest -1 -37 36 106 120 207 227 177 174 179 184 182 178
Net income -1 -37 36 106 120 207 227 177 174 179 184 182 178
Margins, %
EBITDA margin 19.1% 21.1% 18.2% 25.6% 26.8% 29.2% 28.4% 23.3% 21.9% 21.1% 20.5% 19.5% 18.6%
Pre-tax margin 2.9% -5.3% 6.6% 15.3% 14.9% 22.2% 21.9% 16.7% 15.4% 14.8% 14.3% 13.5% 12.6%
Net margin -0.1% -6.1% 5.3% 12.2% 11.9% 17.8% 17.5% 13.3% 12.3% 11.8% 11.5% 10.8% 10.1%
Inventories 47 45 54 60 71 79 89 98 106 115 123 131 139
Total current assets 302 462 470 473 558 640 705 760 904 1,054 1,202 1,351 1,499
PPE 891 892 1,038 992 1,017 1,062 1,094 1,126 1,158 1,190 1,222 1,254 1,286
Total non-current assets 908 910 1,056 1,010 1,036 1,082 1,114 1,146 1,179 1,211 1,243 1,276 1,308
Total assets 1,210 1,371 1,526 1,483 1,594 1,722 1,820 1,906 2,082 2,265 2,445 2,626 2,807
Current financial debt 72 48 27 92 75 56 24 - - - - - -
Non-current debt 244 388 472 275 225 167 71 - - - - - -
Share capital 169 165 166 156 156 156 156 156 156 156 156 156 156
Retained earnings 45 7 44 143 263 419 589 722 852 986 1,124 1,260 1,394
Total shareholders equity 722 668 709 768 887 1,043 1,213 1,346 1,477 1,610 1,748 1,884 2,018
1,210 1,371 1,526 1,483 1,594 1,722 1,820 1,906 2,082 2,265 2,445 2,626 2,807
equity
CF from operating activity -6 60 120 217 214 258 303 298 272 277 286 293 295
CF from financing activity 150 68 53 -117 -108 -130 -184 -140 -44 -45 -46 -46 -45
XR effect -1 -1 - - - - - - - - - - -
90 MRSK Initiation
Equity Market
MRSK North Caucasus

Address: 18 Podstantsionnaya st.,
Energetik,
Pyatigorsk 357506, Russia
Tel: +7 (8793) 33-66-80
MRSK
E-mail: Mrsk-sk@mrsk-sk.ru Tyumen
MRSK
Kabardino-Balkaria Siberia
Website: http://www. mrsk-sk.ru Karachaevo- Republic
Cherkessia Far East
Republic DisCo
CEO Magomed Kaitov Stavropol region
North Ossetia
Republic
Investor Relations Anna Kountsevitch Chechnya
Dagestan Republic
Republic
Bloomberg Ticker MRKK RU STRENGTHS AND OPPORTUNITIES

Reuters ticker MRKK.RTS - One of the most liquid MRSKs
Closing price $4.28 - The cheapest MRSK on EV/iRAB
WEAKNESSES AND THREATS
Free float 30%
- The highest regulatory risks – none of the branches has RAB-
52 week change 256% based tariffs, and MRSK Holding’s iRAB guidance looks
Shares outstanding 29,532,052 abnormally high and unrealistic
Market Cap, mln $126 - The poorest payment discipline of all MRSKs
12 M Target price $11.2 - The highest percentage of electricity losses
Upside 161% - Unfavorable location of business
Recommendation O/W - No IFRS financial statements
- Expected sharp increase in debt burden

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 386 454 536 674 829 842 386
EBITDA, $ mln 25 52 81 161 257 220 25
Net Income, $ mln -22 -1 23 91 168 137 -22
EV/Sales, x 0.4 0.4 0.3 0.2 0.2 0.2 0.4
EV/EBITDA, x 6.4 3.1 2.0 1.0 0.6 0.7 6.4
P/E, x -5.7 -116.9 5.4 1.4 0.8 0.9 -5.7
Operating margin, % -5.3% 1.4% 6.7% 16.9% 25.3% 20.3% -5.3%
EBITDA margin, % 6.4% 11.5% 15.2% 23.8% 31.0% 26.1% 6.4%
Net margin, % -5.7% -0.2% 4.3% 13.5% 20.2% 16.2% -5.7%
Net Debt/EBITDA 3.18 1.07 0.41 -0.14 -0.52 -1.13 3.18
EV/iRAB, x 0.16
MRSK Initiation 91
Equity Market
$10.0
$8.0
Other
42% $6.0
$4.0
$2.0
MRSK
Holding $0.0
58% Jun-09 Dec-09 Jun-10
MRSK NC RTSI$ Index Rebased
1,000.00 $mln 50% 15 ths.GWH 30%
800.00 40% 12
20%
600.00 30% 9
400.00 20% 6
10%
200.00 10% 3
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 2015
140,000 18,000
48,600 3,882
120,000
100,000 13,000 2,624
80,000 61,391 8,530
8,000
60,000
40,000
3,000
20,000 10,407
0 (2,000)
Overhead lines (0.4 kV) Low voltage (0.4 kV)
92 MRSK Initiation
Equity Market
1400 35% 35%
RUB/MWh
1200 30% 30%
25% 25%
1000
20% 20%
800 15% 15%
600 10% 10%
5% 5%
400
0% 0%
200
2010
2011
2012
2013
2014
2015
-5% -5%
0 -10% -10%
2009
2010
2011
2012
2013
2014
2015
27,000 1.2x
0.81x
1.0x
22,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
17,000 0.6x
0.32x
0.29x
0.16x
0.4x
12,000
0.2x
7,000 0.0x
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
2,000
-3,000 2011 2012 2013 2014 2015

30,000 Stavropolenergo
25,000
2,997
20,000 Kabardino-
Balkaria branch
15,000
5,201 Karachaevo-
10,000
Cherkessia
5,000 branch
1,441 North Ossetia
0
branch
2011 2012 2013 2014 2015
Stavropolenergo Kabardino-Balkaria 954 Dagenergo
Karachaevo-Cherkessia North Ossetia 1,143
Dagenergo
MRSK Initiation 93
Equity Market
MRSK North Caucasus DCF valuation
Figure 234: MRSK North Caucasus DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 331 386 454 536 674 829 842 829 878 926 973 1,021
- % growth, y-o-y 35% 17% 18% 18% 26% 23% 2% -2% 6% 5% 5% 5%
- distribution revenues 316 386 454 536 674 829 842 829 878 926 973 1,021
- other 6 - - - - - - - - - - -
EBITDA 30 25 52 81 161 257 220 161 161 164 163 161
- % growth -11% -17% 110% 56% 97% 60% -15% -27% 0% 2% -1% -1%
- % margin 9% 6% 11% 15% 24% 31% 26% 19% 18% 18% 17% 16%
Operating income (EBIT) -16 -21 7 36 114 210 171 111 110 111 108 105
- % growth 738% 30% -132% 455% 216% 84% -18% -35% -1% 1% -3% -3%
- % margin -5% -5% 1% 7% 17% 25% 20% 13% 13% 12% 11% 10%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes -3 -4 1 7 23 42 34 22 22 22 22 21
NOPAT -13 -16 5 29 91 168 137 89 88 89 87 84
- % growth 29% 0% 0% -1% 3% 3% 3% 3% 3% 3% 3% 3%
Changes in WC -23 15 -18 2 12 15 -10 -14 -3 -2 -3 -3
CAPEX 52 53 43 43 44 45 46 48 49 51 52 53
- % of sales 16% 14% 9% 8% 7% 5% 6% 6% 6% 5% 5% 5%
Unlevered FCF 4 -39 27 29 82 155 149 105 93 94 92 90
Discount factor 1.0 0.9 0.7 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2 0.1
Terminal value 412
Total EV 304
Net debt, 2009 33
# of shares:
common 29.5
Implied EV/RAB 0.31

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 2%
Regulatory risk 4%
Liquidity 1%
Cost of equity 27%
WACC 21.8%
94 MRSK Initiation
Equity Market
MRSK North Caucasus condensed financials
Figure 236: MRSK North Caucasus condensed financial statements, $ mln

Revenues 245 331 386 454 536 674 829 842 829 878 926 973 1,021
Electricity distribution 233 316 386 454 536 674 829 842 829 878 926 973 1,021
Connection fees 3 9 - - - - - - - - - - -
Other 9 6 - - - - - - - - - - -
Operating expenses 247 347 406 448 500 560 620 671 718 768 815 865 917
Raw materials 16 22 24 25 27 29 31 32 34 36 37 39 41
Personnel costs 47 69 75 79 83 90 96 101 106 111 116 122 128
Payroll taxes 12 18 19 20 21 23 25 26 27 29 30 32 33
Depreciation 42 25 27 28 30 32 34 36 38 40 42 44 46
Other expenses 39 68 69 71 72 75 78 81 83 86 89 92 95
Operating income (EBIT) -2 -16 -21 7 36 114 210 171 111 110 111 108 105
EBITDA 33 30 25 52 81 161 257 220 161 161 164 163 161
Interest income 0 0 - - - - - - - - - - -
Other operating expenses 3 0 - - - - - - - - - - -
Pre-tax income (EBT) -6 -17 -28 -1 29 114 210 171 111 110 111 108 105
Profit tax 3 2 -6 -0 6 23 42 34 22 22 22 22 21
Income before minority interest -9 -19 -22 -1 23 91 168 137 89 88 89 87 84
Net income -9 -19 -22 -1 23 91 168 137 89 88 89 87 84
Margins, %
EBITDA margin 13.7% 9.0% 6.4% 11.5% 15.2% 23.8% 31.0% 26.1% 19.4% 18.4% 17.8% 16.7% 15.7%
Operating margin -0.8% -4.8% -5.3% 1.4% 6.7% 16.9% 25.3% 20.3% 13.3% 12.5% 12.0% 11.1% 10.2%
Pre-tax margin -2.5% -5.1% -7.2% -0.3% 5.4% 16.9% 25.3% 20.3% 13.3% 12.5% 12.0% 11.1% 10.2%
Net margin -3.7% -5.7% -5.7% -0.2% 4.3% 13.5% 20.2% 16.2% 10.7% 10.0% 9.6% 8.9% 8.2%
Inventories 34 33 40 43 50 56 63 68 73 79 84 89 95
PPE 543 537 549 512 509 506 504 501 499 496 494 491 489
Total assets 713 706 717 672 699 744 891 1,011 1,094 1,178 1,261 1,343 1,424
Current financial debt 56 52 18 16 11 - - - - - - - -
Non-current debt 12 13 68 48 33 - - - - - - - -
Share capital 1 1 1 1 1 1 1 1 1 1 1 1 1
Retained earnings -17 -36 -58 -56 -32 36 162 264 331 397 463 528 591
Total shareholders equity 516 485 466 436 459 528 653 756 822 888 955 1,020 1,083
713 706 717 672 699 744 891 1,011 1,094 1,178 1,261 1,343 1,424
equity
CF from operating activity -21 51 15 71 74 126 200 196 153 142 144 144 143
CF from investing activity 35 -52 -53 -43 -43 -44 -45 -46 -48 -49 -51 -52 -53
CF from financing activity 19 3 13 -27 -29 -70 -45 -34 -22 -23 -23 -22 -22
XR effect -2 - - - - - - - - - - - -
MRSK Initiation 95
Equity Market
Tomsk DisCo
Address: 36 Kirova st.,
Tomsk 634041, Russia
Tel: +7 (3822) 43 19 92
E-mail: zev@trk.tom.ru MRSK
Tyumen
Website: http://www.trk.tom.ru Tomsk region
Far East
DisCo
Management: managed by MRSK Siberia
Bloomberg Ticker TORS RU STRENGTHS AND OPPORTUNITIES

Reuters ticker TORS.RTS - The lowest regulatory risk – the company has already fully
Closing price $0.016 adopted RAB-based tariffs
Average daily volume $0.01 mln - Good transparency and disclosure through MRSK Siberia
Free float 20% - Possible merger into MRSK Siberia
52 week change 282% - One of the cheapest on EV/RAB
Shares outstanding, ord 3,819,315,580 - Net cash position
Shares outstanding, pref 576,693,000 WEAKNESSES AND THREATS
Market Cap, mln $67 - Low liquidity
12 M Target price, ord $0.024 - No IFRS financial statements
12 M Target price, pref $0.022
Upside, ord 48%
Recommendation, ord O/W
Upside, pref 101%
Recommendation, pref O/W

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 119 121 143 196 220 250 283
EBITDA, $ mln 17 22 10 14 51 56 63
Net Income, $ mln 12 1 4 33 36 41 49
EV/Sales, x 0.5 0.5 0.4 0.3 0.3 0.2 0.2
EV/EBITDA, x 3.4 2.7 6.2 4.2 1.2 1.1 0.9
P/E, x 5.5 100.5 16.7 2.0 1.9 1.6 1.4
EBITDA margin, % 14.5% 18.1% 6.7% 7.1% 23.2% 22.3% 22.3%
Net margin, % 10.2% 0.5% 2.8% 16.7% 16.4% 16.3% 17.3%
Net Debt/EBITDA -0.37 -0.18 0.41 0.32 0.50 1.11 0.54
EV/iRAB, x 0.32
96 MRSK Initiation
Equity Market
$0.025
$0.020
Other
22% $0.015
$0.010
MRSK
Holding $0.005
52%
$0.000
Rosneft's
structures
Tomsk DisCo RTSI$ Index Rebased
26%
400.00 50% 10 30%
$mln
350.00
40% 8 ths.GWH
300.00
20%
250.00 30% 6
200.00
150.00 20% 4
10%
100.00
10% 2
50.00
0.00 0% 0 0%
2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015
18,000 3,152 238 5,000
16,000
14,000 4,000 553
12,000 8,520
10,000 3,000 2,107 601
8,000
2,000
6,000
4,000 4,471 1,000
2,000
0 0
1 1
MRSK Initiation 97
Equity Market
600 45% 25%
RUB/MWh 40% 20%
500 35%
30% 15%
400 25% 10%
20% 5%
300
15%
10% 0%
200
5% -5%
100 0% -10%
-5%
2010E
2011E
2012E
2013E
2014E
0 -10%
2010E
2011E
2012E
2013E
2014E
2015E
2009
9,500 1.2x
0.81x
1.0x
7,500
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
0.32x
0.6x
0.29x
5,500
0.16x
0.4x
3,500 0.2x
0.0x
Tomsk DisCo
1,500
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
-500
2010 2011 2012 2013 2014
98 MRSK Initiation
Equity Market
Tomsk DisCo valuation
Figure 248: Tomsk DisCo DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 119 121 143 196 220 250 283 303 327 348 371 395
- % growth, y-o-y 13% 2% 18% 37% 12% 14% 13% 7% 8% 6% 7% 6%
- distribution revenues 116 121 143 196 220 250 283 303 327 348 371 395
- other 0 - - - - - - - - - - -
EBITDA 17 22 10 14 51 56 63 76 77 78 79 80
- % growth 27% -56% 47% 265% 9% 13% 20% 1% 1% 1% 2%
- % margin 16% 18% 8% 10% 26% 25% 25% 27% 25% 24% 23% 22%
- % growth 45% -94% 510% 723% 8% 13% 20% 1% 1% 1% 2%
- % margin 9% 11% 1% 4% 21% 21% 20% 22% 20% 19% 18% 17%
Tax rate 27% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 3 3 0 1 8 9 10 12 12 12 12 13
NOPAT 11 1 4 33 36 41 49 49 50 50 51 51
D&A 8 9 9 9 11 12 14 15 16 16 17 18
- % growth 6% 3% 2% 3% 15% 13% 20% 4% 4% 4% 4% 4%
Changes in WC -3 -1 -0 2 -0 -0 0 -1 -1 -1 -1 -1
CAPEX 12 17 21 50 50 85 21 22 23 23 24 25
- % of sales 10% 14% 14% 25% 23% 34% 8% 7% 7% 7% 6% 6%
Unlevered FCF 11 -6 -7 -9 -2 -31 42 43 43 44 44 45
Discount factor 1.00 0.92 0.78 0.66 0.56 0.47 0.40 0.34 0.28 0.24 0.20 0.17
Present value of FCF 11 -6 -6 -6 -1 -15 17 14 12 10 9 8
Assumed perpetual growth
0%
rate
Terminal value 245
Sum of PV of FCF 37
Total EV 79
Net debt, 2009 (8)
# of shares:
common 4,347
Implied EV/RAB 0.42

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 2%
Regulatory risks 0%
Liquidity 4%
Cost of equity 22%
WACC 18.3%
MRSK Initiation 99
Equity Market
Tomsk DisCo condensed financials
Figure 250: Tomsk DisCo condensed financial statements, $ mln

Revenues 105 119 121 143 196 220 250 283 303 327 348 371 395
Electricity distribution 102 116 121 143 196 220 250 283 303 327 348 371 395
Connection fees 3 3 - - - - - - - - - - -
Other 0 0 - - - - - - - - - - -
Operating expenses 96 106 120 138 155 175 199 222 242 265 286 308 331
Raw materials 3 4 4 4 4 5 5 5 5 6 6 6 7
Personnel costs 17 17 19 20 21 22 24 25 27 28 29 31 32
Payroll taxes 3 4 4 5 5 5 6 6 6 6 7 7 7
Depreciation 8 8 9 9 9 11 12 14 15 16 16 17 18
Other expenses 19 23 20 21 22 24 25 27 28 29 31 32 34
Other operating income - - - - - - - - - - - - -
EBITDA 17 22 10 14 51 56 63 76 77 78 79 80 81
Interest income 0 - - - - - - - - - - - -
Interest expense - - - 0 1 - - - - - - - -
Profit tax 3 3 0 1 8 9 10 12 12 12 12 13 13
Net income 8 12 1 4 33 36 41 49 49 50 50 51 51
Margins, %
EBITDA margin 16.4% 18.4% 7.9% 9.8% 26.0% 25.4% 25.2% 26.7% 25.3% 23.7% 22.6% 21.6% 20.6%
Pre-tax margin 9.8% 12.7% 0.7% 3.5% 20.8% 20.5% 20.4% 21.6% 20.3% 18.9% 17.9% 17.0% 16.1%
Net margin 7.1% 10.2% 0.5% 2.8% 16.7% 16.4% 16.3% 17.3% 16.2% 15.1% 14.3% 13.6% 12.9%
Inventories 3 3 4 5 6 7 7 8 9 10 11 12 13
PPE 85 87 95 101 142 181 253 260 267 274 281 288 295
Total assets 95 108 113 121 168 210 287 298 308 332 373 414 456
Current financial debt - - 0 2 5 8 19 12 4 - - - -
Non-current debt - - 1 6 15 24 56 35 12 - - - -
Share capital 73 71 72 68 68 68 68 68 68 68 68 68 68
Retained earnings 12 20 21 24 56 83 114 151 188 225 262 300 338
Total shareholders equity 86 92 93 92 124 151 182 219 256 293 330 368 406
Total liabilities and
95 108 113 121 168 210 287 298 308 332 373 414 456
shareholders equity
CF from operating activity - 24 10 13 41 47 53 63 65 66 67 68 69
CF from financing activity 429 -4 1 8 10 3 32 -41 -42 -29 -13 -13 -13
Cash at the beginning of the
- 0 8 2 3 4 4 5 6 6 21 51 83
year
100 MRSK Initiation

Equity Market
Kubanenergo
Address: 2 Stavropolskaya st.,
Krasnodar 350033, Russia
Tel: +7 (861) 219 63 79
E-mail: kruglovasi@kuben.elektra.ru
Website: http://www. kubanenergo.ru
CEO Eugeny Kryuchkov
CFO Tatyana Petrova
Kubanenergo
Investor Relations Svetlana Krouglova
Bloomberg Ticker KUBE RU STRENGTHS AND OPPORTUNITIES

Reuters ticker KUBE.RTS - Involvement in construction of infrastructure for 2014 Winter
Closing price $5.844 Olympic Games
Average daily volume $0.33 mln - High government support via equity structure
Free float 8% - Relatively liquid stock
52 week change 53% WEAKNESSES AND THREATS
Shares outstanding 77,254,204 - Regulatory risks – the company is still operating under “cost-
Market Cap, mln $104 plus” tariffs
12 M Target price $6.1 - No IFRS financial statements and low transparency
Upside 4% - Huge 2010 CAPEX prior to RAB-based tariffs introduction
Recommendation E/W
Figure 251: Financial data*

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 462 527 587 730 907 1,113 1,305
EBITDA, $ mln 72 81 78 143 236 360 482
Net Income, $ mln 57 -3 26 76 148 244 339
EV/Sales, x 0.9 0.8 0.7 0.6 0.4 0.4 0.3
EV/EBITDA, x 5.7 5.0 5.2 2.8 1.7 1.1 0.8
P/E, x 7.9 - 17.4 5.9 3.1 1.8 1.3
EBITDA margin, % 15.5% 15.4% 13.3% 19.6% 26.1% 32.3% 36.9%
Net margin, % 12.4% -0.5% 4.4% 10.5% 16.3% 21.9% 26.0%
Net Debt/EBITDA 5.51 4.33 5.95 1.98 0.86 0.20 -0.24
EV/iRAB, x 0.38
* Note: financial multiples are calculated based on post-money equity value (including ongoing share placement)
MRSK Initiation 101

Equity Market
Other MRSK $14

8% Holding $12
25% $10
$8
$6
$4
$2
$0
Rosneft Jun-09 Dec-09 Jun-10
structures Russian
Federation Kubanenergo RTSI$ Index Rebased
33%
*Note: After the ongoing additional share placement Source: Alfa Research
1,200.00 $mln 50% 20 30%
ths.GWH
40% 15
20%
700.00
30%
10
20% 10%
200.00 5
10%
2009 2010 2011 2012 2013 2014 2015 0 0%
-300.00 0% 2009 2010 2011 2012 2013 2014 2015
100,000 1,613 14,000
41,073 4,141
12,000
80,000
10,000
2,324
60,000 40,113 8,000
5,930
40,000 6,000
4,000
20,000
6,152 2,000
0 0
102 MRSK Initiation

Equity Market
1,600 35% 35%
RUB/MWh
1,400 30% 30%
1,200 25%
25%
1,000 20%
20%
800 15%
15% 10%
600
400 10% 5%
200 5% 0%
2010E
2011E
2012E
2013E
2014E
2015E
0 0%
2010E
2011E
2012E
2013E
2014E
2015E
2009
50,000 1.2x
0.81x
1.0x
40,000
0.51x
0.8x
0.47x
0.45x
0.44x
0.40x
0.39x
0.39x
0.38x
30,000 0.6x
0.32x
0.29x
0.16x
0.4x
20,000
0.2x
10,000 0.0x
Tomsk DisCo
MOESK
NC
Center
Urals
Kubanenergo
Center&Volga
Siberia
Lenenergo
South
Volga
Northwest
0
2011 2012 2013 2014 2015
-10,000
MRSK Initiation 103

Equity Market
Kubanenergo DCF valuation

Figure 262: Kubanenergo DCF model
2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 462 527 587 730 907 1,113 1,305 1,182 1,260 1,324 1,392 1,464
- % growth, y-o-y -11% 14% 11% 24% 24% 23% 17% -9% 7% 5% 5% 5%
- distribution revenues 448 588 610 776 936 1,113 1,305 1,182 1,260 1,324 1,392 1,464
- other 3 - - - - - - - - - - -
EBITDA 72 81 78 143 236 360 482 293 302 302 303 303
- % growth -46% 13% -4% 83% 65% 52% 34% -39% 3% 0% 0% 0%
- % margin 16% 15% 13% 20% 26% 32% 37% 25% 24% 23% 22% 21%
- % growth -64% 14% -23% 196% 94% 65% 39% -45% 2% -1% -1% -1%
- % margin 8% 8% 6% 13% 20% 27% 32% 20% 19% 18% 17% 16%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 7 8 6 19 37 61 85 46 47 47 46 46
NOPAT 29 34 26 76 148 244 339 186 190 187 185 182
- % growth 11% 13% 17% 4% 7% 7% 6% 6% 6% 5% 5% 5%
Changes in WC -189 -15 -24 -5 11 26 32 -70 -1 0 1 3
CAPEX 73 277 117 124 118 112 115 118 121 125 128 75
- % of sales 16% 53% 20% 17% 13% 10% 9% 10% 10% 9% 9% 5%
Unlevered FCF 180 -189 -22 5 70 162 250 199 134 130 127 179
Discount factor 1.0 0.9 0.8 0.6 0.5 0.5 0.4 0.3 0.3 0.2 0.2 0.2
Present value of FCF 180 -174 -17 3 38 73 95 64 36 29 24 28
Terminal value 932
Total EV 347
Net debt, 2009* (45)
# of shares:
common 77.3
Implied EV/RAB 0.33
* Net debt estimate includes expected cash proceeds from the ongoing additional share issue

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 2%
Regulatory risk 3%
Liquidity 2%
Cost of equity 24%
WACC 19.2%
104 MRSK Initiation

Equity Market
Kubanenergo condensed financials
Figure 264: Kubanenergo condensed financial statements, $ mln

Revenues 517 462 527 587 730 907 1,113 1,305 1,182 1,260 1,324 1,392 1,464
Electricity distribution 407 384 527 587 730 907 1,113 1,305 1,182 1,260 1,324 1,392 1,464
Connection fees 106 76 - - - - - - - - - - -
Other 3 2 - - - - - - - - - - -
Operating expenses 416 425 485 555 635 722 807 881 950 1,022 1,089 1,161 1,236
Raw materials 15 13 14 16 17 18 19 21 21 23 24 25 26
Personnel costs 46 50 53 57 61 67 71 76 79 83 87 91 95
Payroll taxes 12 12 13 14 15 16 17 18 19 20 21 22 23
Depreciation 31 35 39 46 48 51 55 58 61 64 68 72 75
Other expenses 89 88 91 98 105 114 122 129 135 142 149 156 163
EBITDA 132 72 81 78 143 236 360 482 293 302 302 303 303
Interest expense 28 29 45 - - - - - - - - - -
Profit tax 20 14 -1 6 19 37 61 85 46 47 47 46 46
Net income 84 57 -3 26 76 148 244 339 186 190 187 185 182
Margins, %
EBITDA margin 25.6% 15.5% 15.4% 13.3% 19.6% 26.1% 32.3% 36.9% 24.8% 23.9% 22.8% 21.7% 20.7%
Pre-tax margin 20.1% 15.5% -0.6% 5.5% 13.1% 20.4% 27.4% 32.5% 19.6% 18.8% 17.7% 16.6% 15.6%
Net margin 16.2% 12.4% -0.5% 4.4% 10.5% 16.3% 21.9% 26.0% 15.7% 15.1% 14.2% 13.3% 12.4%
Inventories 48 51 59 65 77 88 99 108 117 126 134 143 153
Other current assets - 9 9 8 8 8 8 8 8 8 8 8 8
Total current assets 251 425 414 401 352 427 513 668 789 910 1,023 1,135 1,245
PPE 541 619 863 879 955 1,022 1,079 1,136 1,193 1,250 1,306 1,363 1,420
Total non-current assets 551 629 874 890 968 1,037 1,097 1,156 1,212 1,269 1,327 1,385 1,443
Total assets 802 1,054 1,288 1,291 1,320 1,465 1,610 1,825 2,000 2,180 2,350 2,520 2,688
Current financial debt 32 68 - - 51 44 21 - - - - - -
Non-current debt 231 343 346 324 153 133 62 - - - - - -
Share capital 61 59 258 241 241 241 241 241 241 241 241 241 241
Retained earnings 15 -57 -60 -31 45 156 340 594 733 875 1,016 1,155 1,291
Total shareholders equity 358 277 526 518 595 706 889 1,143 1,282 1,425 1,565 1,704 1,841
Total liabilities and shareholders equity 802 1,054 1,288 1,291 1,320 1,465 1,610 1,825 2,000 2,180 2,350 2,520 2,688
Cash flow for the period 35 179 -46 -23 -117 4 4 80 154 86 83 79 76
XR effect -3 -2 -0 1 - -0 - - - - - - -
MRSK Initiation 105

Equity Market
Tyumenenergo (not listed)

Address: 4 Universitetskaya st.,
Surgut 628412, Russia
Tel: +7 (3462) 77 63 50
Tyumenenergo
E-mail: can@id.te.ru
Website: http://www.te.ru
CEO Eugeny Kryuchkov Far East
DisCo
CFO Tatyana Petrova

2009 2010E 2011E 2012E 2013E 2014E 2015E
Revenue, $ mln 1,137 1,347 1,647 1,975 2,253 2,442 2,636
EBITDA, $ mln 315 351 496 668 807 807 806
Net Income, $ mln 157 133 272 412 518 512 506
EBITDA margin, % 27.7% 26.0% 30.1% 33.8% 35.8% 33.0% 30.6%
Net margin, % 13.8% 9.9% 16.5% 20.8% 23.0% 21.0% 19.2%
Net debt/EBITDA 0.8 1.2 0.6 0.0 -0.4 -0.8 -1.2
106 MRSK Initiation

Equity Market
Figure 266: Shareholder breakdown Figure 267: Key financial figures

3,000.00 $mln 50%
2,500.00 40%
2,000.00
30%
MRSK 1,500.00
Holding 20%
1,000.00
100%
500.00 10%
0.00 0%
2009 2010 2011 2012 2013 2014
Revenue EBITDA EBITDA Margin
Figure 268: Electricity transmission and losses Figure 269: Grid length breakdown, km
80 ths.GWH 30% 60,000
70 50,000 6,995
60
20% 40,000 14,707
50
40 30,000
23,203
30 10% 20,000
20
10,000
10
0 0% 0
2009 2010 2011 2012 2013 2014 2015 Overhead lines (>110 kV) Overhead lines (6-35 kV)
Througput Losses % of losses Overhead lines (0.4 kV)
Figure 270: Transformer capacity breakdown, MVA Figure 271: Distribution tariff evolution
30,000 700 25%
23,312 1,080 RUB/MWh
25,000 600 20%
20,000 500
15%
15,000 400
10%
10,000 300
5%
200
5,000 2,032
100 0%
0
0 -5%
High voltage (>110 kV) Medium voltage (6-35 kV)
2010E
2011E
2012E
2013E
2014E
2015E
2009
Low voltage (0.4 kV)
MRSK Initiation 107

Equity Market
Figure 272: Distribution tariff vs. inflation Figure 273: Revenue breakdown, RUB mln
25% 100,000
20% 80,000
15% 60,000
10%
40,000
5%
20,000
0%
0
2010E
2011E
2012E
2013E
2014E
2015E
-5% 2011 2012 2013 2014 2015
Distribution tariff Ruble inflation OPEX RAB Depr. Return
108 MRSK Initiation

Equity Market
Tyumenenergo DCF valuation
Figure 274: Tyumenenergo DCF model

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue 1,137 1,347 1,647 1,975 2,253 2,442 2,636 2,868 3,075 3,248 3,433 3,623
- % growth, y-o-y 0% 18% 22% 20% 14% 8% 8% 9% 7% 6% 6% 6%
- other 22 - - - - - - - - - - -
EBITDA 315 351 496 668 807 807 806 850 859 859 858 857
- % growth 41% 11% 41% 35% 21% 0% 0% 6% 1% 0% 0% 0%
- % margin 28% 26% 30% 34% 36% 33% 31% 30% 28% 26% 25% 24%
- % growth 51% 16% 66% 49% 26% -1% -1% 6% 0% -1% -1% -1%
- % margin 16% 15% 21% 26% 29% 26% 24% 23% 22% 20% 19% 18%
Tax rate 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
Taxes 36 42 69 103 130 128 126 134 134 133 131 129
NOPAT 144 167 277 412 518 512 506 536 537 531 524 517
- % growth 30% 5% 5% 2% 4% 4% 4% 4% 4% 4% 4% 4%
Changes in WC -92 7 18 23 17 -7 -7 1 -6 -6 -7 -7
CAPEX 192 426 302 226 232 239 246 253 260 268 275 283
- % of sales 17% 32% 18% 11% 10% 10% 9% 9% 8% 8% 8% 8%
Unlevered FCF 179 -124 106 316 428 446 440 463 470 464 458 451
Discount factor 1.0 0.9 0.8 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2 0.1
Total EV 1,485
Net Debt, 2009 252
# of shares:
common 43,117
Implied EV/RAB 0.38

Cost of debt
Risk-free rate 6%
Cost of equity
Risk-free rate 6%
IFRS standards 2%
Regulatory risk 3%
Liquidity 5%
Cost of equity 27%
WACC 21.1%
MRSK Initiation 109
Equity Market
Tyumenenergo condensed financials
Figure 276: Tyumenenergo condensed financial statements, $ mln

Revenues 1,137 1,137 1,347 1,647 1,975 2,253 2,442 2,636 2,868 3,075 3,248 3,433 3,623
Connection fees 21 62 - - - - - - - - - - -
Other 26 19 - - - - - - - - - - -
Operating expenses 1,018 957 1,139 1,300 1,460 1,605 1,801 2,003 2,198 2,404 2,584 2,777 2,977
Raw materials 16 11 12 12 13 14 15 16 16 17 18 19 20
Personnel costs 112 128 139 147 155 167 178 188 197 207 217 227 238
Payroll taxes 19 22 23 25 26 28 30 32 33 35 37 38 40
Federal Grid charge 270 240 361 471 575 647 776 917 1,060 1,213 1,338 1,472 1,610
Depreciation 181 273 296 313 330 355 379 401 421 441 462 484 507
Other expenses 185 154 148 156 160 167 174 182 189 197 204 213 221
EBITDA 223 315 351 496 668 807 807 806 850 859 859 858 857
Interest income 1 - - - - - - - - - - - -
Interest expense 10 34 42 6 - - - - - - - - -
Profit tax 48 39 33 68 103 130 128 126 134 134 133 131 129
Net income 86 157 133 272 412 518 512 506 536 537 531 524 517
Margins, %
EBITDA margin 19.6% 27.7% 26.0% 30.1% 33.8% 35.8% 33.0% 30.6% 29.6% 27.9% 26.4% 25.0% 23.6%
Pre-tax margin 11.8% 17.3% 12.4% 20.7% 26.1% 28.7% 26.2% 24.0% 23.4% 21.8% 20.4% 19.1% 17.8%
Net margin 7.6% 13.8% 9.9% 16.5% 20.8% 23.0% 21.0% 19.2% 18.7% 17.5% 16.3% 15.3% 14.3%
Cash and cash equivalents 92 129 27 70 39 322 639 952 1,280 1,615 1,946 2,272 2,594
Inventories 57 67 68 76 89 98 111 125 137 151 163 175 188
Total current assets 473 413 333 421 464 799 1,160 1,517 1,895 2,276 2,646 3,014 3,379
PPE 2,459 2,583 2,889 2,856 2,929 3,002 3,074 3,147 3,220 3,292 3,365 3,438 3,510
Total assets 2,949 3,011 3,238 3,293 3,410 3,819 4,253 4,684 5,135 5,590 6,033 6,475 6,913
Current financial debt 54 - 14 - 4 - - - - - - - -
Non-current debt 261 381 426 360 12 - - - - - - - -
Share capital 93 91 91 86 86 86 86 86 86 86 86 86 86
Additional paid-in capital 1,989 1,938 1,954 1,831 1,831 1,831 1,831 1,831 1,831 1,831 1,831 1,831 1,831
Retained earnings 264 314 451 686 1,098 1,486 1,871 2,250 2,652 3,055 3,453 3,846 4,234
Cash flow for the period 100 40 -102 46 -30 282 317 313 328 335 331 326 321
XR effect -8 - - -1 - - - - - - - - -
Cash at the beginning of the year - 89 130 25 70 39 322 639 952 1,280 1,615 1,946 2,272
Cash at the end of the year 92 129 27 70 39 322 639 952 1,280 1,615 1,946 2,272 2,594
110 MRSK Initiation

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Alexander Kornilov, Ph.D.

Senior Analyst, Moscow

Russian Equity Research

RAB Roll-out Offers RABid Value

MRSK C&V $0.015 135% O/W

valuations seem out of sync with RAB-implied capital returns. 1.00x

renovation and modernization to enhance the reliability of electricity 0.40x

supply and remove bottlenecks. This will only materialize if regulated

RESEARCH DEPARTMENT research@alfabank.ru

Investment Summary ......................................................................................................4

MRSK Siberia ...............................................................................................................76

Figure 1: Current EV/RAB multiple Figure 2: Average daily turnover

• Pure domestic play with no currency exposure. Because their

Figure 3: MRSK valuation summary

Figure 4: % of iRAB approved by regulators Figure 5: % of branches with RAB tariffs

60% 54% 56%

Our Top Picks

SoP MRKH value 10%

customer base (the company operates in the Sverdlovsk, Perm,

Figure 8: Russian MRSKs on multiples vs. global peers

Figure 9: EV/RAB multiples of Russian MRSKs vs. global companies

MRSKs trade at discounts to foreign RAB-based regulated companies (we

Key events to watch

• Other regional networks removed from throughput and financials.

Figure 10: Valuation summary

Our DCF-derived EV/RAB multiple varies within a range of 0.3-0.8x,

WACC: The main factor affecting EV/RAB;

Figure 11: WACC build-up calculation

Source: Alfa Research Source: Alfa Research

Initial RAB: The main valuation factor is still

Figure 14: iRAB numbers assumed in our valuation

significant upside risk to this iRAB number, we nonetheless use it in our

MRSK Holding valuation

Figure 17: Blended target price calculation, MRSK Holding

Figure 18: MRSK Holding SoP valuation, $ mln

Figure 19: Five largest contributors to MRSK Holding’s value, $ mln

EV/RAB waterfall analysis

• D&A factor: This shows the discrepancy between accounting D&A

$4,000 $4,623 $2,000

Source: Alfa Research Source: Alfa Research

Source: Alfa Research Source: Alfa Research

$21 $1,500 $107

Source: Alfa Research Source: Alfa Research

$103 $1,500 $1,628

Source: Alfa Research Source: Alfa Research

Source: Alfa Research Source: Alfa Research

Source: Alfa Research Source: Alfa Research

Figure 32: Tyumenenergo EV/RAB reconciliation

Source: Alfa Research

Limited Impact on End-User

Generation Market infrastructure Generation component Market infrastructure

Figure 37: End-user tariff evolution, RUB/MWh

Generation component 1,016 1,182 1,357 1,510 1,621 1,692

Distribution Segment at a Glance

Figure 38: MRSK Holding structure

Figure 39: MRSK Holding geography

Source: Alfa Research

Source: Company data Source: Bloomberg, Alfa Research

16.0 13.4 2,110

MOESK MRSK MRSK Lenenergo MRSK

Source: Bloomberg, Alfa Research Source: Bloomberg, Alfa Research

The economics of the DisCo business

Figure 48: Current place of DisCos in sector value chain

pay generators' price electricity flows