INTER RAO: Business description

BASIC
INFORMATION
ABOUT INTER RAO

INTER RAO UES Today
The holding operates generation, engineering, distribution
and trading assets in Russia and abroad
• A diversified energy holding managing assets in Russia, Europe and CIS
• Presence in all key competitive segments of the Russian energy market
• Approximately 28 GW of installed power generation capacity
• More than 47 thousand employees
• Ambitious development plans—by 2020, INTER RAO is planning to become a top 10 energy company worldwide by installed
capacity
• Listed on MICEX-RTS and included in MICEX, MICEX Power and MSCI-Russia indices
• GDRs traded on International Order Book (IOB) of the London Stock Exchange
• Consolidated revenue of INTER RAO (Russian and international assets) was $18.25 bn in 2011.
Generation Engineering Sales Trading
Russia
• 22 TPPs – 22.9 GW
Abroad
• 4 TPPs – 4.9 GW
• 2 HPPs – 0.2 GW
• 1 wind farm – 0.03 GW
• INTER RAO — Engineering
• Quartz Group
• Dominanta Group
• Joint Venture with
WorleyParsons
• Joint Venture with Fenice
(EdF)
• Joint Venture with General
Electric and Rostekhnologii
• Joint Venture with Alstom
• Joint Venture with Rosatom —
Energy Efficiency Center
Russia
• Moscow Energy Sales Company
• Petersburg Energy Sales
Company
• Saratovenergo
• Altai Energy Sales Company
• Tambov Energy Sales Company
• Orel Branch
Abroad
• Telasi (Georgia)
• ESA (Armenia)
Combined export and import —
26.1 bn kWh :
• Scandinavia
• Baltic States
• CIS (Ukraine, Kazakhstan, Georgia,
Azerbaijan, Belarus)
• Turkey
• China (delivery via agency
agreements)
(1) Under control
3

DEVELOPMENT
STRATEGY

Vision of INTER RAO UES
in 2020
INTER RAO UES
is a global energy
company
and a key player in
the global energy
market
• A top 10 electricity company worldwide
by installed capacity and size of business
• Operates a diversified portfolio of assets in different segments of
value chain equally distributed between Russia and other countries
• Plays important part in integration of national energy systems into
supranational entities while being one of the largest global energy
traders
• Ensures sustainable
long-term added shareholder value
5

Strategic objectives
and initiatives
Strategic objectives
• Attain leadership in Russian energy
industry
• Expand international presence
• Secure leadership in energy efficiency
and practical innovations
• Establish foundation for energy security
of the Russian Federation
• Increase shareholder stock value
Strategic initiatives
• Ensure reliable, safe and efficient operation of existing assets
• Consolidate stakes in electricity companies fully or partially owned by the
Russian Federation
• Maintain growth in heat generation segment in Russia
• Increase quantity and capacity of international assets
• Develop international trade and strengthen ties between energy markets
• Diversify fuel balance
• Develop retail sales
• Develop fuel business
• Develop engineering, technology transfer and new machinery design and
production businesses
• Develop energy saving, energy efficiency and innovation activities
6

Target-oriented business model
with integrated approach
Increase shareholder value
at every segment of operations chain
Manufacture
machinery
Design and
construction
Fuel extraction
Generation
Retail sales
Large consumer sales
Export and import
segments we serve
segments we target
7

BUSINESS
DOMAINS
AND LINES OF BUSINESS

Generation:
Russian assets
22 THERMAL POWER PLANTS WITH 22,860 MW OF
COMBINED INSTALLED CAPACITY
Severo-Zapadnaya TPP
(Saint-Petersburg)
Kaliningradskaya TPP-2
(Kaliningrad Oblast)
Kashirskaya TPP
(Moscow Oblast)
Kostromskaya TPP
(Kostroma Oblast)
Pechora TPP
(Komi Republic)
Permskaya TPP
(Perm Krai)
Ivanovskiye CPP
(Ivanovo Oblast)
Cherepetskaya TPP
(Tula Oblast)
Moscow
Urengoyskaya TPP
(Yamalo-Nenets Autonomous
Okrug)
Nizhnevartovskaya TPP
(Khanty-Mansi
Autonomous Okrug)
Verkhnetagilskaya TPP
(Sverdlovsk Oblast)
6 cogeneration plants in
Omsk
and Tomsk Oblasts (TGK-
11)
Yuzhnouralskaya TPP
(Chelyabinsk Oblast)
Sochinskaya TPP
(Krasnodar Krai)
Iriklinskaya TPP
(Orenburg Oblast)
Gusinoozyorskaya TPP
(Republic of Buryatia)
Kharanorskaya TPP
(Zabaykalsky Krai)
As of July 1, 2011
(including assets of OGK-1, OGK-3 and TGK-11) 9

Generation:
Development Strategy
Goals and objectives in heat generation
• Asset acquisition and consolidation
• Run new construction projects
• Financially beneficial asset swaps with the largest
energy companies
• International expansion
Indicators up to 2015
Generation capacity to be commissioned
Installed capacity of newly acquired/consolidated heat generation
assets in Russia
Share of international generation capacities in overall capacity of the
company
Value
5.9 GW
20 GW
At least 25 %
Major steps
• Consolidation of electricity generation assets
owned by OGK-1 and OGK-3 within Inter RAO —
Electric Power Plants.
• Corporate integration of Bashkortostan
generation assets
• Construction of new generation assets, including
construction under power delivery agreements
• Acquisition of energy companies demonstrating
maximum synergies with INTER RAO facilities
• Merger of assets owned by different market
players
• Acquisition of private generation companies
• Improving economic efficiency of the business
• Generation of proposals for regulatory changes
affecting heat markets
In early 2012, the Group started reorganizing
generation companies and consolidating its assets
under a single management entity
10

Trading:
regions
Revenues from trading (electricity import, export and sales in the wholesale
electricity market) represent approximately 10 % in the total revenues of INTER
RAO Group
Export geography in 2011
Kazakhstan
9.73 %
Mongolia
1.16 %
Georgia
1.97 %
Ukraine
0.10 %
Belarus
13.97 %
Import geography in 2011
Georgia
17.19 %
Azerbaijan
11.43 %
Azerbaijan
0.19 %
Lithuania
24.41 %
China
6%
Ukraine
1.63 %
South Ossetia
0.58 %
Mongolia
0.63 %
Finland
42.43 %
Kazakhstan
69.12 %
We exported 22.7 bn kWh of electricity in 2011
We imported 3.4 billion kWh of electricity in 2011.
11

Trading:
Development Strategy
Goals and objectives of trading business development
• Create futures and options market in Russia to hedge risks at the
wholesale electricity market
• Develop regulatory landscape in the Common Economic Space (CES)
• Resolve issues with payments for international sales of electrical
power
• Establish rules for international power reserves market
• Ensure concurrent operation of power supply systems in all CIS
countries
Trading volume
Indicators up to 2015
Product portfolio within line of business
Value
At least 45 bn
kWh
At least 10
distinct products
Revenue from trading 2.2 bn €
Major steps
• Establish/acquire trading divisions in international
markets
• Establish joint ventures with nationwide operators
• Participate in construction of new power generation
facilities focused on international sales
• Establish strategic alliances with market leaders
• Efficiently manage risks associated with international
sales
• Work with international institutions and develop
international relationships
• Create proposals to streamline operation of Russian
Unified Energy Systems
• Contribute to development of a single energy market
in CIS countries
• Contribute to integration of the Wholesale Electricity
Market with Nord Pool, and to concurrent merger of
United Energy Systems with ENTSO-E
EBITDA from trading 150 million €
Number of countries — trading partners At least 20
12

International
business
• INTER RAO works in 27 countries of the world
• International assets of INTER RAO currently include generation and
trading companies as well as grid operators
• Our import and export combined exceeded 26 bn kWh in 2011
• International generation assets of INTER RAO produced 15 bn kWh
of electricity in 2011 (including Armenian NPP)
• INTER RAO owns grid operators in Georgia and Armenia. Our
transmission lines span 34 thousand kilometers and serve more than
1.4 million individual consumers.
• INTER RAO focused its strategy on expanding existing lines of
business and entering retail sales and engineering markets
INTER RAO UES is closely looking at
emerging markets of Asia, Africa, Latin America
and Middle East as well as mature European
markets
International generation assets
Name
Country
Installed
capacity
Razdan TPP Armenia 1,110 MW
Mtkvari TPP Georgia 300 MW
Khrami HPP-1 Georgia 112.8 MW
Khrami HPP-2 Georgia 114.4 MW
Ekibastuzskaya TPP-2 Kazakhstan 1,000 MW
Vydmantai Wind Park UAB Lithuania 30 MW
Moldova TPP Moldova 2,520 MW
Total for international assets
5,186.8 MW
Europe
Africa
Latin
America
Middle East
Central Asia
Far East
Southeast Asia
13

International Business
Development Strategy
Goals and objectives of international asset
development
• Expand presence in the international markets
• Ensure economically efficient asset management
Target market selection criteria
• Geostrategic interests of Russia
• Economic lucrativeness of the market
• Opportunity to arrange profitable import/export
• Opportunity to attain dominant position in the national market
• Opportunity to export Russian technologies
Major steps
• Establish representative offices
• Acquire assets or get them under management
and participate in privatization
• Run new construction projects
• Establish strategic alliances
• Participate in international discussion on energy
development
• Lobby state support of import-export
operations
• Sell international assets when economically
beneficial
Indicators up to 2015
Value
Net profits generated by international assets
Share of international generation capacities in overall capacity of
the company
At least 25 %
Share of EBITDA generated by international assets in the overall
corporate EBITDA
At least 30 %
14

Retail Operations Development
Strategy
Since March 2011, INTER RAO UES owns 6 electricity sales companies working in
Moscow, St. Petersburg, Altai Krai, Saratov Oblast, Tambov Oblast and Oryol
Oblast. Retail sales assets are operated by United Energy Sales Company
Goals and Objectives of Retail Business
• Increase company share in the electricity sales market
• Improve quality of consumer services
• Diversify sales business
Indicators up to 2015
Value
Increase company share in the electricity sales market from 15 % to 25 %
Retail sales in Russia
175 bn kWh
Major steps
• Acquire electricity retailers holding
guaranteeing-supplier status
• Acquire independent electricity retailers
maintaining long-term relationships with
large customers
• Develop energy saving and energy efficiency
service portfolio as well as energy service
contract system
• Develop and implement regional energy
development and energy efficiency
programs
Large consumer sales in Russia
75 bn kWh
Share of Russian retail market at least 25 %
Share of value added services in consolidated revenue at least 20 %
EBITDA from retail sales in Russia 300 million €
15

Engineering
Development Strategy
In 2011, INTER RAO acquired majority stakes Dominanta Engineering Group
companies focused on construction of small generators. This deal helped our
Engineering Division to secure competencies required to build both large
generators (through Quartz Group) and distributed generation facilities.
Goals and Objectives of Engineering Business
Development
• Establish full-cycle engineering infrastructure
• Optimize project timelines and costs
• Develop standardized project solutions
• Develop energy machinery manufacturing business
• Increase international sales
Indicators up to 2015
Share of Russian energy engineering, construction and equipment
supply market
Value
At least 20 %
Share of international sales in consolidated revenue At least 25 %
Major steps
• Establish and acquire lacking technology competencies
• Develop a unified facility design
and construction system
• Develop boiler and turbine manufacturing operations
• Acquire assets in Russia and abroad
• Establish equipment maintenance center
• Partner with the leading international engineering service
providers (such as GE and WorleyParsons)
• Develop innovations in INTER RAO Group
• Promote Russian products in the international
markets leveraging export support tools
• Establish turnkey equipment sales
Profitability of machinery export contracts At least 5 %
16

CONSOLIDATION
AND ADDITIONAL STOCK ISSUE

Asset management strategy
Fundamentals
Management strategy for shares acquired using proceeds from additional stock issue
Majority stakes
(> 50 %)
• maintain control and integrate companies into INTER RAO UES business model
• improve operational efficiency and attractiveness for investment
Significant stakes
(5-50 %)
• consolidate majority ownership
• use stakes in industry-specific businesses in asset swaps with Russian and international
companies in order to consolidate majority ownership
• make payments to authorized capital of joint ventures with other market players
Minority stakes
(< 5 %)
• participate in asset swaps
• sell assets to finance investment projects when a swap is not possible
18

Capital Structure
Minority
shareholders
16.2 %
INTER RAO
Capital
8.37 %
INTER RAO
2.35 %
Norilsk
Nickel Group
14.19 %
Russian Federation represented by
the Federal Agency for State Property
Management14.79 %
Rosatom Group
13.
42 %
VEB
5.45 %
RusHydro Group
5.28 %
FSK UES Group
19.95 %
As of July 18, 2012
Major steps
Implement best practices in corporate governance
Attain international credit rating
International listing in 2013–2014
List on international exchanges
19

APPENDICES

Operational Results
Generation Assets
Sales and grid assets
Indicator
2011
2010
%
Indicator 2011
2010
%
CAPACITY
ELECTRICITY SALES
Installed capacity MW 28,176.3 19,320.3
45.8 %
Number of consumers # 10,418,429 9,975,586
4.4 %
Capacity factor 51.1 % 50.6 %
ELECTRIC ENERGY
0.6 %
Electricity sales
Share of Russian market
(percentage of consumption)
million
kWh
143,128.1
14.02 %
146,146.2
14.47 %
-2.1 %
-3.1 %
Electricity production million kWh 116,917.1 85165.1
37.3 %
ELECTRICITY TRANSMISSION AND DISTRIBUTION
Electricity consumption for
internal needs
Electricity distribution from
transmission buses
5.1 % 5.2 %
million kWh 110,961.2 80,705.9
-3 %
37.5 %
Combined length of transmission
lines
Electricity delivery to grid
km 34,265 33,903
million
kWh
7,636.4
7,354.4
1.1 %
3.8 %
HEAT
Grid losses 13.1 % 13.7 %
-4.5 %
Heat distribution from boiler
heads
Trading
thousand
Gcal
19,770.2
19,681.1
0.5 %
• Generation improved due to acquisition of several generation assets
and launch of 2nd power generation unit at Kaliningradskaya TPP-2 in
December 2010;
Indicator
2011
2010
Electricity export million kWh 22,709 18,630
Electricity import million kWh 3,424 2,923
%
21.9 %
17.2 %
• Retail customer base grew by nearly half a million consumers, while
certain industrial consumers switched to wholesale market.
• Export increased primarily thanks to Belarus electricity supply
contract.
21

Financial Results
Indicator *
2011
2010
%
INTER RAO revenue structure
Revenue *
EBITDA
EBITDA margin
billion RUB
billion RUB
536.2
41.7
7.8 %
464.4
33.6
7.2 %
15.5 %
24.1 %
8.3 %
Other operations
4%
Trading
10%
Generation
18%
Net profit
billion RUB
41.5
18.6
123.1 %
Capital expenditures
billion RUB
32.5
16.5
97.0 %
Free cash flow
billion RUB
16.5
13.5
22.2 %
Total assets
billion RUB
531.9
249.1
113.5 %
Total equity
billion RUB
390.7
139.1
180.9 %
Debt finance
billion RUB
48.6
39.2
24 %
Net debt
billion RUB
-33.5
6.6
-
Sales
68%
• Growth of consolidated revenue was driven by increased demand for electricity in Russia and
internationally together with increased prices on the Russian wholesale electricity market.
• Sales: revenue growth (28.4 billion RUB) was driven by 9-16 % increase in electricity sales prices, and by
inclusion of Promyshlennaya Energetika in the Group in November 2010 .
• Generation: revenue growth (31.9 billion RUB) was driven by acquisition of OGK-3 and launch of the
second power generation unit at Kaliningradskaya TPP-2 .
• Trading: revenue growth (9.1 billion RUB) is primarily attributable to increased supply of electricity to
Baltic states, Belarus and Kazakhstan.
22

Debt portfolio
Debt portfolio structure
Currency composition
Current liabilities
7%
Other currencies
3%
EUR
9%
RUB
68%
Long-term
liabilities
93%
USD
20%
Consolidated debt of INTER RAO Group as of the end of 2011 was 48.6 billion RUB.
(including jointly controlled entities; approximately 48 billion RUB net of these entities)
Net debt of the Group (including short-term deposits) reduced by 40.2 billion RUB to (33.5
billion RUB) in 2011 demonstrating strong debt financing capability and ability to meet
investment objectives.
23

Investment Program
Investment program financing (million RUB) *
Structure
Financing
(million RUB
inclusive of VAT)
Retrofitt
ing and
moderni
zation *
New construction
2011-2015 (plan)
INTER RAO UES
(Russian subsidiaries)
23,000
14,049
8,951
INTER RAO UES
(international subsidiaries and
affiliates)
Moldova TPP (including
distribution unit overhaul)**
38,663
8,767
Ekibastuzskaya TPP-2 25,071
Armenia (electrical grid, etc.) 2,142
Georgia (electrical grid, etc.) 2,683
OGK-1 52,440
14,670
8,767
1,078
2,142
2,683
20,800
23,993
-
23,993
-
-
31,639
Nizhnevartovskaya TPP
47,016
1,812
45,204
Planned financing
in 2011-2015: 268,016 million RUB
Generation capacity scheduled for launch
in 2011-2015: 5,882 MW
OGK-3 87,955 7,719
TGK-11 18,943 9,881
TOTAL 268,016 68,930
* Includes upgrades, retrofitting and modernization
** Based on preliminary estimates
80,236
9,063
199,086
* CAPEX including assets of OGK-1, OGK-3 and TGK-11
24

Goals and objectives of HR
and social policy
Goals of HR and social
policy
• Create motivating environment
supporting maximum efficiency of
Group's human resources
• Design and implement a consistent
corporate responsibility system and
ensure its sustainable growth
Key steps
• Establish modern and efficient HR management system
• Attract efficient managers and highly qualified experts
• Provide competitive work environment and efficient motivation
system
• HR development
• Implement corporate social responsibility policy and integrate it into
corporate governance system
• Establish public social responsibility reporting
25

HR
and social policy
HR management
Quality management
Manage headcount
Manage costs
• Training and certification
• Professional development
• Succession planning
• Youth programs
• Coaching system
• Optimize headcount
• Work quotas
• Plan capacity
• Optimize business processes
Social policy management
• Optimize motivation and
remuneration system
• Manage employee benefits packages
• Reduce excessive personnel costs
Implement social
programs
• Corporate social investments
• Implementation of corporate and social
programs
• Monitor efficiency of social investments
Work
with stakeholders
• Manage relationships with internal
stakeholders
• Manage relationships with external
stakeholders
Corporate
and social reporting
• Public declaration of social policy
fundamentals
• Prepare social report
26