Overview of the Russian power generation industry

Обзор российской энергогенерирующей отрасли

Companies in the Russian electricity market can be conditionally divided into three categories: generating, network and marketing.

Generators produce electricity, network - deliver, and sales - are engaged in the sale to end consumers. In this review, I will talk about the first category using the example of the seven main representatives, which are traded on the Moscow Exchange.

But first, let me tell you a little about the current state of the market.. In 2020, electricity demand in Russia fell by 3%. Main causes: Coronavirus restrictions and OPEC+ deal to cut oil production. Things have improved a lot in 2021, and the Russian market managed to return to the pre-crisis level. According to the calculations of the Ministry of Energy, in 2021, electricity generation in Russia increased by more than 6% year to year.

Key Companies

RusHydro (MOEX: HYDR) is the largest hydro-generating company in Russia and one of the world leaders in the field of hydropower. The Issuer operates in all Russian price and non-price zones of the wholesale electricity market.

Composition and number of RusHydro facilities

Thermal power plants 30
Hydropower plants 23
Wind farms 5
Sales companies 4
Hydroelectric power plants under construction 3
Geothermal power plants 3
Electric grid companies 1
Solar power plants 1

30

Inter RAO (MOEX: IRAO) is a diversified energy holding with assets in Russia, European and CIS countries. In addition to the production of electricity and its sale, Inter RAO is also engaged in the export and import of electricity, engineering, service asset management, foreign business and many others.

Composition and number of Inter RAO facilities

Thermal power plants 41
Russian power supply companies 14
Hydropower plants 10
Small generating sets 6
Foreign power supply companies 4
Distribution grid companies 3
Wind farms 2

41

OGK-2 (MOEX: OGKB) — the largest Russian thermal generation company. The main owner of the company is Gazprom-Energoholding. OGK-2 divided its business into 12 branches.

Mosenergo (MOEX: MSNG) is the largest territorial generating company in Russia. The main owner of the company is Gazprom-Energoholding. The asset portfolio consists of 15 power plants in the Moscow region.

Unipro (MOEX: UPRO) - energy company, which was formed in 2005 on the basis of five power plants: Surgutskaya GRES-2, Berezovskaya, Shaturskaya, Smolenskaya and Yaivinskaya GRES. The composition of assets has not changed since 2005. The main owner is the German concern Uniper, one of the global leaders in the electricity generation sector., who owns 83,73% Shares.

TGK-1 (MOEX: TGKA) is a producer of electric and thermal energy in the North-West region of Russia, which unites 52 power plants in four constituent entities of the Russian Federation: St. Petersburg, Republic of Karelia, Leningrad and Murmansk regions, 19 of which are located beyond the Arctic Circle. The main owner of the company is Gazprom-Energoholding, belongs to him 51,79% authorized capital.

Enel Russia (MOEX: ENRU) — Russian generating company, which belongs to the Italian group Enel. The asset portfolio of the enterprise consists of three GRES, commissioned in 2021, the Azov wind farm and two wind farms under construction.

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I propose to understand the positive and negative features of each company., That, in my opinion, distinguish them from each other.

Key indicators of companies at the end of 2020

Installed capacity, GW Power generation, bln kWh Share of RES
RusHydro 38,060 151,431 81%
Inter RAO 31,088 106,079 1%
OGK-2 17,608 44,247 0%
Mosenergo 12,825 54,434 1%
Unipro 11,245 41,746 0%
TGK-1 6,912 28,258 41%
Enel Russia 5,629 18,087 0%

RusHydro

Arguments for. The main feature of the company is the dividend policy. Like many state enterprises, RusHydro pays 50% net profit, but unlike the rest, the company fixed the lower threshold of payments: the amount of dividends cannot be lower than the average level for the last three years. That is, shareholders received additional protection during periods, when the company's financial results decline sharply or go into negative territory.

RusHydro has a high share of RES in total production - 81%. Furthermore, the company is considered the Russian leader in the production of electricity based on renewable sources.

Arguments against. The main weakness of the company is the constant paper losses in 4 quarter due to the presence of Far Eastern assets. So, in 4 quarter of 2020, RusHydro recorded a write-off from impairment of fixed assets of subsidiaries of energy companies of the Far Eastern Federal District in the amount of 25.7 billion rubles, in 4 quarter of 2019 — by 22.9 billion rubles.

The second adverse factor follows from the first: Since 2008, RusHydro has already 8 additional issues. The company placed on the market more than 300 billion new shares. For comparison: current authorized capital consists of 439 billion securities. To be fair, we note, that accommodations are expensive: at face value 1 R per share.

Inter RAO

Arguments for. The company has a low valuation against the backdrop of a large amount of money, which are kept on the balance. In the end 3 the quarter of 2021, the net debt of Inter RAO is negative and amounts to −203.7 billion rubles. This is almost half of the company's capitalization.

In Russia, Inter RAO is a monopoly in the issue of export-import of electricity from abroad. Main foreign markets for the company:

  • Finland;
  • Belarus;
  • Lithuania;
  • Ukraine;
  • Georgia;
  • Azerbaijan;
  • South Ossetia;
  • Kazakhstan;
  • China;
  • Mongolia.

Arguments against. Inter RAO pays the total 25% arrived, unlike other public companies. Nothing is likely to change in the near future, therefore, shareholders can only come to terms with this fact.

Unipro

Arguments for. The main growth driver is consistently high dividend payments. The company's management announces the upcoming payments in advance, usually several years ahead. For example, over the next three years, Unipro plans to pay 0,317 P and ensure dividend yield 12%. You can read more about this in the analysis of Unipro.

The company also has a low level of market volatility.: the beta coefficient for the last year is 0,4. The parameter shows the degree of dependence of the asset on the overall market dynamics, stocks with a beta greater than one have more risk.

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Arguments against. The company is overvalued, and the valuation is 2-3 times ahead of the multiples of market competitors. Besides, you need to remember about the imminent end of the DPM: the final payment under this program for the last facility, the third power unit of Berezovskaya GRES, is scheduled for October 2024.

Enel Russia

Arguments for. The key driver of the company's growth is the highest dividend yield among the companies on our list. In case of a successful business plan, the shareholders will receive for 2 year, the total payment in the amount 0,232 R, or yield 28%. You can read more about this in our review..

In addition to dividends, the company decided to completely withdraw from coal generation and sold Reftinskaya GRES, which brought 1/3 of the company's total EBITDA. The management invested the proceeds in renewable energy: Azov, Kola and Rodnikovskaya wind farms.

The company also has an ambitious business plan, within which management predicts a strong growth in financial results as new capacities are commissioned under the CSA RES program. The plans include the launch of the Kola and Rodnikovskaya wind farms. Management plans to see EBITDA grow by 65% and an increase in net profit by 30% by the end of 2023.

Arguments against. The company has a high debt load, which can interfere with the implementation of an ambitious business plan. Management predicts, that the net debt / EBITDA multiplier will peak in 2021 and will be equal to 4,1 against the background of a significant increase in net debt due to large investments in renewable energy.

This may lead to, that management will abandon the planned dividend payments in favor of reducing the debt burden. Unfortunately, such a case in the history of the company has already been: last year, Enel Russia violated its dividend policy and postponed the payment to 2022.

TGK-1

Arguments for. The company has a major foreign shareholder, which can block any unfair decision of the main owner - Gazprom Energoholding. The current share of the Finnish Fortum in the authorized capital of TGC-1 is 29,99%.

The company is undervalued in comparison with other subsidiaries of Gazprom Energoholding. Current TCG-1 multipliers: EV / EBITDA — 1,9 against 3,05 in OGK-2 and 2,37 at Mosenergo, P / E — 3,98 against 4,4 And 7,88, P / BV — 0,28 against 0,45 And 0,24.

OGK-2

Arguments for. The main driver of the company's growth is payments under CSA. Increased payments will be received until 2022, and then gradually decrease: By the end of 2022, Adlerskaya TPP will complete its CSA program. By the end of 2024, this fate will befall the majority of OGK-2 facilities: Ryazan, Serovskaya, Cherepovets, Novocherkassk and Troitskaya GRES.

OGK-2 has low leverage, allowing the company to pay dividends. As of 30 September 2021 net debt of OGK-2 amounted to 37.932 billion rubles, and the indicator "net debt / EBITDA" - 1,09, which indicates a good level of business stability.

Mosenergo

Arguments for. The company's assets have a good geographical location. All Mosenergo facilities are located in the largest and most developed regions of Russia: Moscow and Moscow region. These regions demonstrate higher growth rates compared to the national indicators. For example, in 2021, electricity generation in the Moscow region increased by 14% - against the average Russian 6%.

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To offset the fall in IFRS results in 2020, the board of directors decided to pay out net profit under RAS, due to which shareholders received a higher payout. In 2021, the situation is still repeating: RAS indicators are much stronger than IFRS indicators, but not yet known, will management decide to repeat last year's experiment.

Arguments against TGC-1, OGK-2 and Mosenergo

At the end of 2019, the boards of directors of OGK-2, TGC-1 and Mosenergo joined the cash pooling system, according to which Gazprom-energoholding can withdraw money from these enterprises at any time using loans, bypassing all other shareholders. Besides, Mosenergo passed the peak of the CSA program in 2016-2017, and TGC-1 - in 2019-2020. Because of this, the financial results of enterprises show a gradual decline.

Current results

Sector representatives demonstrate sustainable performance, except for two companies: Mosenergo — against the backdrop of the end of the CSA program at most facilities — and Enel Russia — due to a radical business transformation.

With regard to dividends, then Russian energy generating companies follow different strategies in terms of payments to shareholders. "Foreign" representatives of Unipro and Enel Russia pay 100% net profit. RusHydro and subsidiaries of Gazprom Energoholding — OGK-2, TGC-1 and Mosenergo - 50%, and Inter RAO - a quarter.

Dividend history of companies

2017 2018 2019 2020 2021
RusHydro 0,026 R 0,037 R 0,036 R 0,053 R
Inter RAO 0,130 R 0,172 R 0,196 R 0,181 R
OGK-2 0,016 R 0,037 R 0,054 R 0,06 R
Mosenergo 0,166 R 0,210 R 0,121 R 0,179 R
Unipro 0,222 R 0,222 R 0,222 R 0,238 R 0,347 R
TGK-1 0,00049 R 0,00064 R 0,00104 R 0,00107 R
Enel Russia 0,145 R 0,141 R 0,085 R 0 R 0,085 R

EBITDA growth dynamics, billion rubles

2017 2018 2019 2020 9м2021
RusHydro 104,180 109,673 97,544 120,268 92,001
Inter RAO 97,6 121,3 141,5 122,3 119,4
OGK-2 26,817 27,053 31,203 31,569 29,610
Mosenergo 44,658 43,257 32,981 32,125 25,929
Unipro 27,000 27,924 29,284 26,198 21,953
TGK-1 20,444 20,926 22,500 21,935 17,830
Enel Russia 17,732 17,225 15,318 9,017 5,613

Comparison by multipliers

EV / EBITDA P / E net debt / EBITDA
RusHydro 3,69 7,94 1,17
Inter RAO 1,49 4,47 −1,31
OGK-2 3,05 4,40 1,09
Mosenergo 2,37 7,88 0,12
Unipro 5,45 10,02 −0,10
TGK-1 1,90 3,98 0,29
Enel Russia 7,65 10,30 3,54

What's the bottom line?

So which company to invest in? I believe, what to invest in companies based on the main growth drivers, because in this case, you immediately understand, What do you get in return for the purchased shares?:

  1. High dividends - Enel Russia or Unipro.
  2. Growth of financial results — Enel Russia or OGK-2.
  3. Strong underestimation - Inter RAO or TGC-1.
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