Diminishing marginal utility

Transcription

1 Utilities, Romania 30 January 2017 Romanian Utilities Diminishing marginal utility With earnings on a downward trend as the regulator is cutting tariffs, investment projects that are running behind schedule and are only going to contribute to the Regulated Assets Base (RAB) after 2020E and increased risks of a potential cut in the Regulated Rate of Return (RRR) as the new regulatory periods start, we do not really see any positive triggers for the regulated utilities in Romania. On a relative basis, however, they continue to trade at discounts to their peers and to provide decent dividend yields, even if these are smaller than in past years. As such, we are neutral on our valuation of the three companies. We note that eventual acquisitions (such as Electrica buying the minorities held by Fondul Proprietatea (FP) within its subsidiaries) could generate a rerating of the stock prices but we have not included these in our valuation. We maintain our HOLD recommendations on Transelectrica (new PT: RON 31.5, 4.1% upside) and Transgaz (new PT: RON 339, 10.3% upside) and also downgrade Electrica to HOLD (new PT: RON 15.4, 12.9% upside). Earnings on a downward trend. The recent cuts in tariffs operated by ANRE at all three companies are likely to translate into declining earnings. This comes after several years in which the actual rate of return on the asset base has been higher than the regulated one. As yields on government bonds, used by ANRE as a proxy for the risk free rate, have declined, we see a risk that the profit declines will continue in future years if RRRs are adjusted downwards by ANRE in the next regulatory periods (the earliest is Transgaz in September 2017E). Transgaz HOLD maintained Price: RON 307 Price target: RON 339 Transelectrica HOLD maintained Price: RON 30.3 Price target: RON 31.5 Electrica HOLD (downgrade from BUY) Price: RON 13.6 Price target: RON 15.4 Sector report RAB growth remains feeble. All the companies investment plans are running behind schedule, and even if completed, given the effect of depreciation, they would not add significantly to the RAB before 2020E. Thus, an eventual boost in profit is only likely post-2020e and does not provide a significant trigger. In some cases, we see a possible acceleration of the deployment of cash via acquisitions (e.g. Electrica buying out the FP minorities would add 25% to its net profit after minorities) but we have not incorporated these into our models at this time. Inefficient balance sheet structure. As natural monopolies and regulated utilities, the three companies would benefit most from using leverage to finance their investment plans, thereby lowering their effective WACC vs. the RRR. Still, the companies are net cash holders, with positions ranging from 60% of market cap in the case of Electrica, to 10% for Transelectrica. We see these as inefficient balance sheet structures and we believe that a distribution of a higher dividend (or eventually a special dividend) would benefit shareholders. Discounts to peers have narrowed, dividends remain attractive. As earnings expectations have moved lower, the discount at which the Romanian utilities trade to their peers in terms of P/E has narrowed. While all three companies trade at close to 40% discounts to their peers, on 2018E EV/EBITDA, due to the balance sheet inefficiencies mentioned above, only Transgaz and Transelectrica trade at a discount to 2018E P/E (at 9.3x and 10.8x). Electrica is at a 10% premium on a P/E of 13.3x. In terms of dividends, all three companies offer premiums, ranging from 16% for Transelectrica to 37% for Electrica. EQUITY RESEARCH Company Rating Last Price Upside P/E (x) EV/EBITDA (x) Div yield (%) Close Target 2017E 2018E 2017E 2018E 2017E 2018E Transgaz Hold % Transelectrica Hold % Electrica Hold % Analyst: Lucian Albulescu, CFA; Bram Buring, CFA Prague: ; lucian.albulescu@wood.cz; bram.buring@wood.cz Website:

2 Contents Investment summary... 3 Earnings on a downward trend... 4 Investments are running behind schedule, RAB growth is low... 6 Discounts to peers have narrowed, dividends remain attractive... 7 Risks... 8 Company sections... 9 Transgaz Transelectrica Electrica Important disclosures Closing Prices as of 26 January by WOOD & Company Financial Services, a.s. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means electronic or mechanical without written permission from WOOD & Company Financial Services, a.s. This report may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without written permission from WOOD & Company Financial Services, a.s. Requests for permission to make copies of any part of this report should be mailed to: WOOD & Company Financial Services a.s. Palladium, Namesti Republiky 1079/1a, Prague 1 Czech Republic tel.: fax: http//: Utilities, Romania 2 WOOD & Company

3 Investment summary With profits on a downward trend as the regulator is cutting tariffs, investment projects that are running behind schedule and are only going to contribute to the Regulated Assets Base (RAB) after 2020E and increased risks of a potential cut in the Regulated Rate of Return (RRR) as the new regulatory period starts, we do not really see any positive triggers for the regulated utilities in Romania. On a relative basis, however, they continue to trade at discounts to their peers and to provide decent dividend yields, even if these are smaller than in past years. As such, we are neutral on our valuation of the three companies. We note that eventual acquisitions (such as Electrica buying the minorities held by Fondul Proprietatea (FP) within its subsidiaries) could generate a rerating of the stock prices but we have not included these in our valuation. We maintain our HOLD recommendations on Transelectrica (new PT: RON 31.5, 4.1% upside) and Transgaz (new PT: RON 339, 10.3% upside) and also downgrade Electrica to HOLD (new PT: RON 15.4, 12.9% upside). Earnings on a downward trend. The regulator has cut tariffs for all three companies over the past 12 months, both in order to correct profits that have been above the regulated returns in the past three years, and also to incorporate expectations of higher volumes in certain cases. Still, with opex already adjusted downwards as managements have made efforts to cut costs, the decrease in revenues is likely to translate into lower earnings this year. Additionally, we see the risk of further profit cuts as the new regulatory periods start (the earliest is Transgaz in September 2017E). As the regulatory periods change, ANRE will set a new RRR (c.7.7% currently), starting from yields reported on government bonds, and will also partly take away the gains in efficiency registered by the three companies. As government bonds now have yields some bps below the values from three years ago, we expect the RRRs to follow the same trend, and the companies to have their regulated rates lowered to 6.5% on average. This would lead to a further decrease in profits until the regulator ends the cutting cycle, when earnings growth might restart. RAB growth remains feeble. While all three companies have significant investment plans, the actual implementation of the plans has been running behind schedule across the board. Moreover, after also adding in the effect of depreciation, the increase in RAB is not that high and is skewed towards the later years (2020E), when investments are forecast to pick-up, and ANRE is only likely to allow the companies to add these investments to RAB after completion. As a result, RAB is rising by less than 25% on average over the next three years and would not provide a trigger for profit growth. In some cases, we see a possible acceleration of the deployment of cash via acquisitions (e.g. Electrica buying out the FP minorities would add 25% to its net profit after minorities) but we have not incorporated these into our models at this time. Inefficient balance sheet structure. As natural monopolies and regulated utilities, the three companies would benefit most from using leverage to finance their investment plans, thereby lowering their effective WACC vs. the RRR. Still, the companies are net cash holders, with positions ranging from 60% of market cap in the case of Electrica, to 10% for Transelectrica. We see these as inefficient balance sheet structures and we believe that a distribution of a higher dividend (or eventually a special dividend) would benefit shareholders, while not significantly restricting the companies ability to continue with their investment plans. We attribute a low chance of a special dividend but we believe it is possible that we may see some higher dividend payouts, especially given the constraints that the state budget faces. Discounts to peers have narrowed, dividends remain attractive. Due to the cuts in tariffs and increased uncertainty related to how the rate of return will look in the new regulatory periods, earnings expectations have moved lower, reducing the discount at which the Romanian utilities trade to their peers in terms of P/E. On our 2018E EV/EBITDA forecasts, all three companies trade at close to, or more than, 40% discounts to their peers. However, due to the balance sheet inefficiencies mentioned above, only Transgaz trades at a significant discount, of 23% on a 2018E P/E of 9.3x on our forecasts. Transelectrica trades at a smaller discount of 10% on a 2018E P/E of 10.8x, while Electrica is at a 10% premium on a P/E of 13.3x. In terms of dividends, all three companies offer premiums, ranging from 16% for Transelectrica to 37% in the case of Electrica. Utilities, Romania 3 WOOD & Company

4 Earnings on a downward trend We expect to see declining earnings in 2017E due to the recent cuts in tariffs for all three companies. Furthermore, we expect to see more declines in the RRRs over the coming years, albeit relatively modest. The regulator has cut tariffs for all three companies over the past 12 months, both in order to correct profits that have been above the regulated returns in the past three years, and also to incorporate expectations of higher volumes in certain cases. We expect this to lead to declining profits for all three companies. Moreover, after this correction, the companies will begin negotiations with ANRE for a new rate of return, as well as an examination of the opex, as some of the efficiency gains obtained during the third period are likely to be taken away. First in line for the negotiations will be Transgaz, with its third period ending September 2017E. This will be followed by Electrica in December 2018E; and Transelectrica, with a new regulatory period starting in June 2019E. In terms of the RRR, we expect to see a cut of bps. ANRE uses government bonds issued during the particular year as a benchmark for the risk free rate used in calculating the rate of return. The latest ANRE rate of return that we have found was 7.7% at the end of 2014, when the yield on government bonds was around 5%. Currently, the yield is at 3.7%, although our expectation is that it should start increasing as inflation picks up to 1% at the end of 2017E and 2% at the end of 2018E. However, we still believe that the companies are likely to see a decrease in their RRRs, with our average estimate standing at 6.5%. Government bond yields vs. regulated rates of return 14% 12% 10% 8% 6% 4% 2% 0% Apr/05 Oct/06 Apr/08 Oct/09 Apr/11 Oct/12 Apr/14 Oct/15 Govt bonds Gas transport Gas storage Gas distribution Electricity distribution Electricity transport Sample calculation RRR E Risk free rate 12.2% 5.0% Profit tax 25% 16% Debt/capital 3/7 1/2 Beta Equity premium 6.7% 5.0% Debt premium 4.7% 1.4% Cost of equity 18.2% 7.2% Cost of debt 16.9% 6.4% WACC 16.6% 6.3% RRR 11.7% 7.5% Source: ANRE, Bloomberg, WOOD Research Opex at the three companies Actual vs. regulated rate of return % 14% 16% 14% % 12% % 8% 6% 4% 10% 8% 6% 4% 85 2% 2% E 2018E 2019E 2020E Transelectrica - transmission Transgaz Electrica distribution 0% Transgaz Transelectrica Electrica 2013E 2014E 2015E 2016E 2017E 2018E 0% Additionally, we see the current balance sheet structure as inefficient at all of the three companies. As natural monopolies and regulated utilities, they could use leverage to finance their expansion plans, thereby lowering their effective WACC in comparison to the RRR, at least until the regulator adjusts the rate of return to the new WACC. Still, all three companies hold net cash positions ranging from 60% of the market cap in the case of Electrica, to 10% for Transelectrica. Utilities, Romania 4 WOOD & Company

5 The inefficiencies could be solved, in our view, by paying out more dividends or accelerating the deployment of cash. An increase in the dividend payout is possible this year, given that the state budget is facing challenges after the high fiscal stimulus granted by the government, and therefore the state might wish to receive more cash from the state-owned companies. We believe this would make perfect sense, and should not hamper the companies investment plans. Cash inflow vs. outflows ( cumulated) Dividend yield 12% 10% 8% 6% 4% 2% 0 Transgaz Transelectrica Electrica 0% E 2018E 2019E CAPEX EBITDA Dividend Transgaz Transelectrica Electrica Utilities, Romania 5 WOOD & Company

6 Investments are running behind schedule, RAB growth is low After several years of stagnation, we expect to see some acceleration in the investment plans of the three companies, although the current pace does not justify a rerating of the stock prices. Over the past three years, all three companies have lagged behind their annual budgeted investment plans, largely due to technical reasons: 1) obtaining the authorisations to begin some of the investment projects takes a long time in Romania; and 2) companies usually budget for higher capex than they need, as exceeding their investment budget would require calling a shareholders meeting to approve the extra amounts. Most of the companies have seen capex below the level of depreciation, which has led to declines or stagnation in their RABs. Still, we expect to see an acceleration in investment plans in the coming years, as we believe some of the obstacles related to red tape should be lower (as the current managements have made efforts to speed up investments), and the necessity for investment projects is becoming more immediate. Even incorporating our estimated acceleration in the investment plans, however, we do not see the increase in the RABs being as fast as necessary to trigger a rerating of the stocks. RAB evolution (RONm) Capex vs. depreciation (cumulative, E) 1,600 1,400 1,200 1, E 2018E 2019E 2020E - Transelectrica Transgaz Electrica Transgaz Transelectrica Electrica CAPEX Depreciation Transgaz has the most extensive investment plan, at close to EUR 800m, in order to finance the BRUA interconnection project (between Bulgaria, Romania, Hungary and Austria). This comes on top of the regular maintenance capex. The first phase of the project has already received EUR 179m of financing from the EU. Implementing the entire project is likely to increase the company s RAB by more than 70% according to our estimates. While we doubt that the entire investment will be completed by 2020E, we believe the first phase, which represents more than 50% of the project, is likely to be implemented, given the grant from the EU. Construction is expected to start in 2017E. Transgaz decreased its payout ratio to 50% in order to conserve cash for the project, and also plans to use debt for the financing, a mix which we see as appropriate if the project goes ahead. ANRE has approved Electrica s investment plan for more than EUR 600m in distribution, and additional investments in smart grid and new connections. However, the approved plan is less than Electrica presented in its IPO prospectus, and the company still has a significant EUR 650m cash balance from the IPO. Thus, even accelerating the investment plan, it would still be unable to utilise the entire amount held as cash. An eventual buyout of the stakes in Electrica s subsidiaries held by FP would help the cash deployment. Transelectrica has an investment plan of EUR 700m for the next five years. Among the projects that need to be completed are: the revamping of several transformer stations; strengthening the 400kV transmission ring; developing interconnections with Serbia and Moldova; and strengthening the system where new capacities are being built (e.g. wind farms in Doborogea). Still, the plan is skewed towards later years, adding upside only in E. Execution of these investments has been rather sluggish so far, but we believe that once the red tape-related delays are eliminated, the company should be able to accelerate its plans. On the positive side, Transelectrica is the only company of the three that has issued any debt (which we see as a more efficient way of financing the balance sheet), although it still holds a significant amount of cash. Utilities, Romania 6 WOOD & Company

7 Discounts to peers have narrowed, dividends remain attractive Due to the cuts in tariffs and increased uncertainty related to how the rate of return will look in the new regulatory periods, earnings expectations have moved lower, reducing the discount at which the Romanian utilities trade to their peers in terms of P/E. Consequently, the estimated dividend yield on the companies has also decreased, narrowing the premium to their peers. The discount in terms of EV/EBITDA has not decreased, but the realisation of this discount depends on the utilisation of the cash that the companies hold, which is currently reflected in the EV values. While the companies do have some investment plans in order to utilise the cash, these are skewed towards later years and are unlikely to add significant value in the short term. Hence we do not see a reason for the discount to narrow over the next few periods. On our 2018E EV/EBITDA forecasts, all three companies trade at close to, or more than, 40% discounts to their peers. However, due to the balance sheet inefficiencies mentioned above, only Transgaz trades at a significant discount, of 23% on a 2018E P/E of 9.3x on our forecasts. Transelectrica trades at a smaller discount of 10% on a 2018E P/E of 10.8x, while Electrica is at a 10% premium on a P/E of 13.3x. In terms of dividends, all three companies offer premiums, ranging from 16% for Transelectrica to 37% in the case of Electrica. RO utilities: discount to peers on P/E and EV/EBITDA Dividend yield RO utilities vs. peers 0% 12-10% 10-20% 8-30% 6-40% 4-50% -60% Jul/13 Jan/14 Jul/14 Jan/15 Jul/15 Jan/16 Jul/16 Jan/17 2 Avg peers Avg RO utilities 0 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Peer comparison Company Country Market cap P/E (x) EV/EBITDA (x) Dividend yield (%) (EUR) 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Enagas SP 5, SNAM IT 13, Engie FR 28, Red Electrica SP 9, Terna IT 8, Elia BE 2, CEZ CZ 8, E.ON GE 14, PGE PD 4, RWE GE 7, Flyxys BE 1, n.a n.a n.a. Energa PD Average Transgaz RO Discount/premium -49% -41% -23% -54% -49% -43% 110% 56% 16% Transelectrica RO Discount/premium -41% -21% -10% -60% -52% -50% 15% -1% 18% Electrica RO 1, Discount/premium -26% -5% 10% -64% -53% -47% 54% 38% 37% Utilities, Romania 7 WOOD & Company

8 Risks Regulatory risk. The three companies have their tariffs set by the Romanian Energy Regulator, ANRE, which are based on various parameters like the RRR, a required efficiency factor and the RAB. The regulator can sometimes take decisions which are not in the best interests of the shareholders but rather in those of the clients. As a result, a deviation of the parameters from what we have estimated could result in different financial outcomes for the companies. Risk of changes in methodology and regulations. The regulator can also decide on changes in the regulations. Among the most recently introduced is an order that limits the ability of companies to switch between maintenance expenses and capex. In the pipeline, there is a regulation for switching both the electricity transmission and distribution tariffs to binomial tariffs, based on reservation of capacity and also volumes, but where implementation can result in a different financial results. Political risk. This remains high in Romania, with a new government having recently come into power. Our current assumptions are that the change in government should not trigger any interference in the life of the companies, but we do not exclude changes in managements or boards that could result in different strategies being pursued. The general state of the economy and interest rates. While we are expecting economic growth to remain high, we are also anticipating an increase in inflation, and consequently an increase in the level of interest rates. While we expect the increase to be relatively modest, we note that being high dividend payers, regulated utilities are very exposed to interest rate levels. Potential share overhangs. With the state still holding more than 50% of the shares of each company, we do not exclude that, at some point, it could decide to lower its holdings even further, which could create a share overhang. We do not see this a short-term threat. Romanian market liquidity risk. Trading volumes on the Bucharest Stock Exchange are relatively low (below USD 1.0m) for all three companies, which creates a risk of higher price fluctuations. Utilities, Romania 8 WOOD & Company

9 Company sections Utilities, Romania 9 WOOD & Company

10 Utilities, Romania 30 January 2017 Transgaz Hitting the gas on new investments This year, Transgaz is scheduled to begin a significant grid expansion: the BRUA project to connect Bulgaria, Romania, Hungary and Austria and, eventually, Petrom s Black Sea reserves. As the project now looks more realistic due to the receipt of partial EU funding, we have now incorporated it into our estimates. However, it is not expected to add to profits until after the actual gas flow commences, which we expect to happen after 2020E. In the short term, Transgaz s financials are likely to remain under pressure from the expected correction of regulated revenues at the next regulatory period, starting in 2017E. As a result, we have decreased our net profit estimates for the short term, but increased them over the long run. We maintain our HOLD rating with a new price target (PT) of RON 339 (+17.6% vs. our previous PT), implying 10.3% upside. Expected Events Hold Maintained Price: RON 307 Price target: RON 339 4Q16 results 15 February 2017 Analysts meeting 22 February 2017 Key Data Market cap RON 3.5bn Free float 42% Shares outstanding 11.7m Major shareholder RO State Bloomberg code TGN RO BET Index 7,271 Incorporating the BRUA project. Since Transgaz has already obtained an EU grant covering EUR 179m of the EUR 479m needed for the first phase of the project, we attribute a higher probability to BRUA and incorporate the first phase into our model. Another EUR 330m could be allocated in the second phase, in order to ensure interconnection with Petrom s Black Sea reserves if the Final Investment Decision (FID) is taken on these. We see the second phase as offering potential further upside, but note that the first phase adds significantly to Transgaz s capex over the next three years, while the first revenues may only be seen once the gas starts flowing in 2020E. Transgaz should, at that point, receive approval from ANRE to include the project in its RAB, and consequently get an extra profit allowance from the increase in the asset base at the new RRR level (which we estimate at 6.5%). New regulatory period to start in 2017E. The next five-year regulatory period will start in September 2017E. A new RRR will be calculated, while the efficiency gains obtained in the previous period will be taken away. As yields on government bonds have decreased by bps, we expect the RRR to decrease towards 6-6.5%. As a result, we see the new regulatory period triggering a decrease in regulated revenues at a 3Y-CAGR of 2% until 2019E, when we expect the declining trend to reverse. Price Performance 52-w range RON w performance 15% Relative performance -1% Jan-16 Apr-16 Jul-16 Oct-16 TGN RO BET Index rebased Dividend yield is decent but not extremely high. After another high yield for 2016E, estimated at 10%, our dividend yield estimates stand at 7.2% in 2017E and 5.4% in 2018E. As we expect the trend in falling profitability to reverse in 2019E, and lower capex needs after the completion of the BRUA project to allow more than the current 50% payout, we assume that the dividend could increase sharply by 2020E, perhaps to close to 10%. Discount to peers. On a 2018E P/E of 9.3x, Transgaz trades at a 23% discount to its peers. This has narrowed from 50% in 2015, due to deteriorating expectations regarding Transgaz s profits. While we believe the discount is too large, we do not see any trigger for a rerating until the completion of the BRUA project. EQUITY RESEARCH Year Sales EBIT Net Profit EPS EPS P/E EV/EBITDA ROE Dps Dividend (RON m) (RON m) (RON m) (RON) growth (x) (x) (%) (RON) yield , % % % , % % % , % % % 2016E 1, % % % 2017E 1, % % % 2018E 1, % % % Analyst: Lucian Albulescu, CFA; Bram Buring, CFA Prague: ; lucian.albulescu@wood.cz; bram.buring@wood.cz Website:

11 Transgaz snapshot - HOLD, PT RON 339 Hold SHARE PRICE PERFORMANCE COMPANY DESCRIPTION Bloomberg ticker TGN RO 320 Closing price (RON) Target Price (RON) Upside to TP 10.3% 290 Shares outstanding (m) MCAP (RON m) than 13,000km. Free float 41.50% 250 ADTV (USD m) Week Range (RON) Jan-16 Apr-16 TGN RO Jul-16 BET Oct-16 Index rebased RATIOS PER SHARE RATIOS E 2017E 2018E VALUATION RATIOS E 2017E 2018E EPS P/E BVPS P/CF DPS P/BV EV/EBITDA FINANCIAL RATIOS E 2017E 2018E EV/Sales Working capital to sales, days EV/EBIT Capex/depreciation Cash flow from ops, RON m Capex/net fixed asstes EV, RON m Op. cash flow/capex FCF, RON m EBITDA margin 46.9% 46.9% 44.9% 45.9% 44.1% FCF yield 13.8% 11.0% 13.9% 5.1% 0.7% EBIT margin 35.7% 35.2% 32.3% 32.2% 29.3% Dividend yield 7.1% 9.0% 10.3% 7.2% 5.4% Pre-tax margin 37.0% 36.5% 33.4% 33.2% 30.1% Net margin 30.3% 29.4% 28.0% 27.9% 25.3% ROE 15.6% 14.1% 12.8% 11.6% 9.9% ROCE (avg) 14.0% 12.6% 11.7% 10.7% 8.9% Net debt/(cash) to equity+minorities Net debt/ebitda COMPANY FNIANCIALS As the state-owned monopoly for natural gas transport, Transgaz operates the National Transportation System (NTS) under a concession agreement that is valid until 2032 and is responsible for the domestic transport (of some 90% of the country s total gas consumption) and transit of natural gas from Russia (via Ukraine) to Bulgaria and the Balkan Peninsula. Altogether, the grid covers more Transgaz and its domestic transport are regulated by the National Agency for Energy Regulation, (ANRE), which employs a five-year regulatory period and a revenue cap methodology (with the tariff set every June and lasting for one year) in order to determine the tariffs for natural gas INCOME STATEMENT (RONm) E 2017E 2018E BALANCE SHEET (RONm) E 2017E 2018E Total Revenues 1,655 1,663 1,655 1,555 1,542 Cash & cash equivalents domestic transportation 1,341 1,260 1,224 1,177 1,157 Receivables international transit receivable days other Inventories Grid loses inventory days Personel Total current assets 996 1,137 1,247 1,181 1,341 Maintenance Fixed assets 3,668 3,814 3,807 4,036 4,402 Royalty Total assets 4,663 4,951 5,054 5,217 5,743 Other ST Credits Total Costs Accounts payable EBITDA payable days Depreciation Other current liabilities EBIT Total current liabilities Financial income/loss Long-term credits Pre-tax profit Provision for employee benefit tax Deferred income ,020 1,020 1,020 Net profit Deffered tax liability Total liabilities 1,292 1,382 1,392 1,381 1,713 CASH FLOW STATEMENT (RONm) E 2017E 2018E Minority interests Operating cash flow Total equity 3,371 3,569 3,662 3,835 4,030 therof depreciation Total liabilities & equity 4,663 4,951 5,054 5,217 5,743 thereof changes in working capital Net debt Investing cash flow Net working capital thereof CAPEX Dividends, net Change in debt Total cash flow OPERATIONS AND MACRO ASSUMPTIONS PROFIT TRENDS E 2017E 2018E Gas transmitted % % change 5.8% 3.6% -1.2% 2.0% 3.0% 47% Regulatory period characteristics 700 Regulated rate of return 7.72% 7.72% 7.72% 7.72% 6.50% 46% Efficiency gain factor 3.5% 3.5% 3.5% 3.5% 3.5% % RAB (estimate) 2,738 2,805 2,797 3,026 3,393 44% Average tariff (volumetric only) % transport EBIT 68.3% 68.0% 64.8% 62.4% 58.4% 43% % tranzit EBIT 31.7% 32.0% 35.2% 37.6% 41.6% % Actual return on RAB 14.4% 11.5% 9.7% 9.7% 7.2% E 2017E 2018E EBITDA EBITDA margin USD/RON % 10% 8% 6% 4% 2% 0% E2017E2018E Net profit Dividend yield Transgaz 11 WOOD & Company

12 Transgaz: 4Q16E results preview (due 15 February) Transgaz is due to report its 4Q16E preliminary results on 15 February. We forecast net profit of RON 105m for 4Q16E, up 1% yoy and 38% qoq. We expect a decent quarter, with improving quantities and costs under control. Turnover: we expect volumes of gas transported to have grown by 20% yoy in 4Q16E (including gas sent to storage). While the volumetric tariffs have been lower, we expect flat reservation revenues. The last quarter is usually strong in terms of volumes due to the start of winter. We also expect a strong USD to help the transit revenues. Operating profit: we expect operating profit of RON 122m, down 5% yoy and up 31% qoq. We expect slightly higher operating expenses, driven by higher maintenance (usual for the last quarter). Financial expenses and taxes: we expect a low financial result and a tax level in line with previous quarters. Transgaz: 4Q16E results preview (RONm) 4Q15 3Q16 4Q16E yoy qoq Operating revenues % 16% Transport % 18% Gas transported (MWh) % 76% Transit % 3% Balancing n.m. n.m. EBITDA % 20% EBIT % 31% Financial result % -4% Pre-tax profit % 30% Net profit % 38% Transgaz: changes in estimates Transgaz: income statement changes RONm 2016E 2017E 2018E New Old Chg. New Old Chg. New Old Chg. Total revenues 1,655 1,537 8% 1,555 1,541 1% 1,542 1,557-1% - Domestic transportation 1,224 1,173 4% 1,177 1,183 0% 1,157 1,205-4% - International transit % % % - Other % % % EBITDA % % % Depreciation % % % EBIT % % % Financial income/loss % % % Pre-tax profit % % % Net profit % % % Dividend % % % Transgaz: Wood estimates vs. consensus 2016E 2017E 2018E WOOD Cons. Diff. WOOD Cons. Diff. WOOD Cons. Diff. Revenues 1,655 1,519 9% 1,555 1,494 4% 1,542 1,469 5% EBITDA % % % EBIT % % % Net profit % % %, Bloomberg Transgaz 12 WOOD & Company

13 Valuation Our valuation for Transgaz is based on an average of: i) our DCF calculations; and ii) a DDM valuation. DCF assumptions A risk free rate (RFR) of 4.5% An equity risk premium (ERP) of 4.5% and a beta of 1.0x. A terminal growth rate of 1.0%. DDM assumptions We use a cost of equity of 9.0%, a 4.5% RFR, a 4.5% ERP and a beta of 1.0x. To forecast the dividends, we have applied a payout varying from 50% to 90% (in 2020E at the end of the forecast period). A 1.0% terminal growth rate. Valuation summary Equity value (RONm) Per share 1. DCF 3, DDM 3, Average (50:50) 3, month PT (RON) 339 Current price (RON) 307 Upside 10.3% DCF valuation 2017E 2018E 2019E 2020E 2021E EBIT Corporate tax rate [T] 16.0% 16.0% 16.0% 16.0% 16.0% EBIT*(1-T)=NOPAT Depreciation & amortisation Cash from working capital Capex [I] Unleveraged free cash flow [FCF] Discount factor Present value of FCF [PV:FCF] Sum of [PV:FCF] -25 Long term FCF growth rate 1.0% Residual value at horizon 3,464 PV of residual value 2,258 Value of the transit business 710 Net debt (2016) -892 EV 3,835 Number of shares (m) Equity value per share (RON) 326 Valuation of transit activity 2017E 2018E 2019E 2020E 2021E 2022E EBIT Corporate tax rate [T] 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% Unleveraged free cash flow [FCF] Discount factor Present value of FCF [PV:FCF] Sum of [PV:FCF] 710 Transgaz 13 WOOD & Company

14 DDM valuation 2017E 2018E 2019E 2020E 2021E 2022E Dividends Discount factor Present value Sum 1,364 Long term FCF growth rate 1.0% Residual value at horizon 3,380 PV of residual value 2,119 EV 3,483 Number of shares (m) Value per share (RON) 296 Transgaz 14 WOOD & Company

15 Financials Transgaz: income statement RONm E 2017E 2018E 2019E Total revenues 1,516 1,655 1,663 1,655 1,555 1,542 1,561 - Domestic transportation 1,210 1,341 1,260 1,224 1,177 1,157 1,172 - International transit Other Total costs Grid loses Personnel Maintenance Royalty Other EBITDA EBITDA margin 47% 47% 47% 45% 46% 44% 44% Depreciation EBIT EBITDA margin 35% 36% 35% 32% 32% 29% 28% Financial income/loss Pre-tax profit Tax Tax rate 16% 16% 16% 16% 16% 16% 16% Net profit growth 2% 49% -3% -5% -6% -10% -3% Transgaz: balance sheet RONm E 2017E 2018E 2019E Cash & cash equivalents Receivables Receivable days Inventories Inventory days Total current assets ,137 1,247 1,181 1,341 1,330 Fixed assets 3,236 3,668 3,814 3,807 4,036 4,402 4,758 Total assets 3,938 4,663 4,951 5,054 5,217 5,743 6,088 ST Credits Accounts payable Payable days Other current liabilities Total current liabilities Long-term credits Provision for employee benefits Deferred income ,020 1,020 1,020 1,020 Differed tax liability Total liabilities 864 1,292 1,382 1,392 1,381 1,713 1,907 Minority interests Total equity 3,074 3,371 3,569 3,662 3,835 4,030 4,181 Total liabilities & equity 3,938 4,663 4,951 5,054 5,217 5,743 6,088 Net debt Transgaz 15 WOOD & Company

16 Transgaz: cash flow statement RONm E 2017E 2018E 2019E Pre-tax income Tax Depreciation & amortisation Other non-cash adjustments Changes in working capital Operating cash flow Disposal of fixed assets Purchase of fixed assets Other investing cash flow Investing cash flow Dividends, net Long-term debt issued (repaid) Stock issued Other financing activities, net Financing cash flow Cash balance changes Beginning cash change in cash flow Ending cash Transgaz: ratios E 2017E 2018E 2019E Number of shares (ave.) EPS (RON) EPS growth 2% 49% -3% -5% -6% -10% -3% Dividend (RON000) DPS (RON) Payout ratio 61% 51% 67% 80% 60% 50% 60% Dividend yield 5.7% 7.1% 9.0% 10.3% 7.2% 5.4% 6.3% BVPS (RON) ROE 11.1% 15.6% 14.1% 12.8% 11.6% 9.9% 9.2% PER (x) EV/EBITDA (x) P/BV Transgaz 16 WOOD & Company

17 Utilities, Romania 30 January 2017 Transelectrica Profit discharge Transelectrica had its tariffs cut by 10% in June 2016, and we expect another, albeit much smaller, reduction in June 2017E. We only see a limited amount of cost savings to be achievable this year and thus the decrease in tariffs is likely to be translated into a fall in profits, to a large extent. As such, we believe that 2017E will be see a trough in terms of profits, before they begin to rise again 2018E. We see some increase in profits in later years, generated by the rise in the RAB (we estimate a 25% RAB increase by 2020E), once the company embarks on a more ambitious investment plan, but the rise will be gradual, and not high enough to justify a more positive rating. As a result, we maintain our HOLD rating with a price target (PT) of RON 31.5 (up from RON 29.5), implying 4.1% upside. Investment plan remains challenging: After having seen several delays in the implementation of its investment plan, Transelectrica plans to accelerate its investments over the coming years. We thus expect to see a reversal of the decrease in the RAB. Among the projects that need to be completed are: the revamp of several transformer stations; strengthening the 400kV transmission ring; developing interconnections with Serbia and Moldova; and strengthening the system where new capacities are being built (e.g. wind farms in Doborogea). Earnings moving closer to the regulated return: After the 10% cut in tariffs applied in July 2016, and given only a limited possibility of further costcutting, in our view, we see a negative impact on profits, which have already been above the RRR for some time. As such, we believe that from 2017E, realised profit is likely to come in slightly below the RRR (5.5% vs. 7.7%). We then see profits recovering once more with an increase in the RAB (+25% by 2020E) but also see risks that Transelectrica s RRR is reduced in the new five-year regulatory period, starting in June 2019E, and of delays in the investment plan. Dividend yield to decline: With profits on a declining trend and the dividend payout set at 75% after deducing the interconnection revenues, we believe that 2017E and 2018 will be challenging in terms of dividend yields, at 4.5% and 5.0% respectively. While these yields are still decent compared with our full coverage universe, they would be towards the middle of the range among the utilities. Discount to peers is there: On a 2018E P/E of 10.8x, Transelectrica trades at a 10% discount to its peers. This represents a narrowing from 40% in 2015 due to deteriorating expectations for Transelectrica s profits on the back of lower tariffs. On a 2018E EV/EBITDA of 3.8x, the company trades at a 50% discount to its peers, which we believe is too wide, however we do not see any trigger for a significant rerating for the moment. Expected Events Hold Maintained Price: RON 30.3 Price target: RON Q16 results 15 February 2017 Analysts meeting 24 March 2017 Key Data Market cap RON 2.2bn Free float 58% Shares outstanding 73.3m Major shareholder RO State Bloomberg code TEL RO BET Index 7,271 Price Performance 52-w range RON w performance 8% Relative performance -8% Jan-16 Apr-16 Jul-16 Oct-16 TEL RO BET Index rebased EQUITY RESEARCH Year Sales EBIT Net Profit EPS EPS P/E EV/EBITDA ROE Dps Dividend (RON bn) (RON m) (RON m) (RON) growth (x) (x) (%) (RON) yield , % % 2.2 7% , % % 2.8 9% , % % 2.6 9% 2016E 2, % % 1.7 6% 2017E 2, % % 1.4 5% 2018E 2, % % 1.7 5% Analyst: Lucian Albulescu, CFA; Bram Buring, CFA Prague: ; lucian.albulescu@wood.cz; bram.buring@wood.cz Website:

18 Transelectrica snapshot - HOLD, PT RON 31.5 Hold SHARE PRICE PERFORMANCE COMPANY DESCRIPTION Bloomberg ticker TEL RO 33 Transelectrica is the Romanian Transmission and System Operator (TSO) Closing price (RON) which plays a key role in the Romanian electricity market. Transelectrica is Target Price (RON) responsible for electricity transmission, system and market operation, grid Upside to TP 4.1% 29 and market infrastructure development ensuring the security of the Shares outstanding (m) Romanian power system. All operations are regulated by the National MCAP (RON m) 2, Agency for Energy Regulation, (ANRE), which employs a five-year regulatory Free float 41.30% period and a revenue cap methodology (with the tariff set every July and 25 ADTV (USD m) 0.4 Jan-16 Apr-16 Jul-16 Oct-16 lasting for one year). The main profit driver is the electricity transmission, the 52 Week Range (RON) TEL RO BET Index rebased others being low allowed profit or no profit activities. RATIOS PER SHARE RATIOS E 2017E 2018E VALUATION RATIOS E 2017E 2018E EPS P/E BVPS P/Op. CF DPS P/BV EV/EBITDA FINANCIAL RATIOS 2014E 2015E 2016E 2015E 2016E EV/Sales Working capital to sales, days EV/EBIT Capex/depreciation Cash flow from ops, RON m Capex/net fixed asstes EV, RON m 2,322 1,960 2,031 2,151 2,358 Op. cash flow/capex FCF, RON m EBITDA margin 28.0% 25.7% 24.5% 22.9% 23.4% FCF yield 26.8% 26.5% 3.9% 0.8% -1.9% EBIT margin 15.9% 14.8% 12.1% 10.4% 10.6% Dividend yield 9.3% 8.8% 5.6% 4.6% 5.5% Pre-tax margin 15.2% 14.0% 11.2% 9.3% 9.3% Net margin 12.5% 11.6% 9.4% 7.8% 7.8% ROE 12.9% 11.7% 7.9% 6.2% 6.2% Net debt/(cash) to equity+minorities 3.7% -8.4% -5.9% -2.0% 4.2% Net debt/ebitda COMPANY FNIANCIALS INCOME STATEMENT (RONm) E 2017E 2018E BALANCE SHEET (RONm) E 2017E 2018E Total sales 2,822 2,985 2,613 2,549 2,615 Cash & cash equivalents 893 1, o/w transmission services 1,224 1,174 1,044 1,006 1,052 Receivables 1, o/w other 1,598 1,811 1,568 1,543 1,564 Inventories Expenses related to system operation Total current assets 2,006 1,848 1,976 1,782 1,617 Personnel Fixed assets 3,492 3,472 3,397 3,578 3,843 Repairs and maintenance Total assets 5,498 5,321 5,373 5,361 5,460 Materials and consumables Other operating expenses 1,482 1,684 1,462 1,456 1,496 Short term credits EBITDA Accounts payable Depreciation Other current liabilities EBIT Total current liabilities 1,244 1,062 1, Financial income/loss Credits due in more than 1 yea Pre-tax profit Other liabilities tax Total liabilities 2,658 2,249 2,179 2,069 2,086 Net profit Minority interests CASH FLOW STATEMENT (RONm) E 2017E 2018E Total equity 2,841 3,072 3,193 3,291 3,375 Net profit Total liabilities & equity 5,498 5,321 5,373 5,361 5,460 + Depreciation FX gain/loses Net debt /- Working capital change Net working capital Operating Cash Flow CAPEX Free Cash Flow share increase (mil shares) dividends paid /- increase in debt Change in Cash balance OPERATIONS AND MACRO ASSUMPTIONS PROFIT TRENDS E 2017E 2018E % 400 Electricity transmitted % % change -1.0% 2.2% 0.5% 2.5% 2.0% 300 Regulatory period characteristics 20% 700 Regulated rate of return 7.70% 7.70% 7.70% 7.70% 7.70% 15% 200 Efficiency gain factor 1.5% 1.5% 2.0% 2.0% 2.0% % RAB (estimate) 3,082 3,025 2,949 3,131 3, Average tariff (volumetric only) % Actual return on RAB 9.1% 8.6% 5.5% 5.5% 6.0% 400 0% 0 EUR/RON E2017E2018E EBITDA EBITDA margin 10-years bills yield 10% 8% 6% 4% 2% 0% E2017E2018E Net profit Dividend yield Transelectrica 18 WOOD & Company

19 Transelectrica: 4Q16E results preview (due 15 February) Transelectrica is due to report its 4Q16E results on 15 February. We expect it to report net profit of RON 32.8m, down 47% yoy and 54% qoq as a result of lower tariffs (-10% yoy), which are unlikely to be offset by a small increase in quantities yoy. Quantities of electricity are usually relatively high in the last quarter vs. 2-3Q, which should lead to a higher profit from transmission. On the other hand, we are estimating a lower profit on system services, which should be passed through to customers, but generated high profits in the previous quarters. An additional negative in 4Q16E is likely to be our forecast financial loss of RON 19m, related to the revaluation of its EUR-denominated debt. Transelectrica: 4Q16 results preview (RONm) 4Q15 3Q16 4Q16 yoy qoq Transmission revenues % 9% Volumes transmitted (extraction) % 8% Total revenues % 30% EBIT % -33% EBITDA % -16% Financial result % n.m. Pre-tax profit % -57% Profit tax % -78% Net profit % -54% Transelectrica: changes in estimates Transelectrica: income statement changes RONm 2016E 2017E 2018E New Old Chg. New Old Chg. New Old Chg. Revenues 2,613 2,664-2% 2,549 2,692-5% 2,615 2,654-1% Transmission services 1,044 1,077-3% 1,006 1,119-10% 1,052 1,095-4% EBITDA % % % Depreciation % % % EBIT % % % Net financial income % % % Pre-tax profit % % % Tax % % % Net income % % % Dividends % % % Transelectrica: Wood estimates vs. consensus 2016E 2017E 2018E WOOD Cons. Diff. WOOD Cons. Diff. WOOD Cons. Diff. Revenues 2,613 2,720-4% 2,549 2,689-5% 2,615 2,696-3% EBITDA % % % EBIT % % % Net profit % % %, Bloomberg Transelectrica 19 WOOD & Company

20 Valuation Our valuation for Transelectrica is based on an average of: i) our DCF calculations; and ii) a DDM valuation. DCF assumptions A risk free rate (RFR) of 4.5% An equity risk premium (ERP) of 4.5% and a beta of 1.0x. A terminal growth rate of 1.0%. DDM assumptions We use a cost of equity of 9.0%, a 4.5% RFR, a 4.5% ERP and a beta of 1.0x. To forecast the dividends, we have applied a payout varying from 50% to 80% (in 2020E at the end of the forecast period). A 1.0% terminal growth rate. Valuation summary Equity value (RONm) Per share 1. DCF 2, DDM 2, Average (50:50) 2, month PT (RON) 31.5 Current price (RON) 30.3 Upside 4.1% DCF Valuation 2017E 2018E 2019E 2020E EBIT Corporate tax rate [T] 16.0% 16.0% 16.0% 16.0% EBIT*(1-T)=NOPAT Depreciation & amortisation Cash from working capital capex [I] Unleveraged free cash flow [FCF] Discount factor Present value of FCF [PV:FCF] Sum of [PV:FCF] 73 Long term FCF growth rate 1.0% Residual value at horizon 2,735 PV of residual value 1,956 Net debt EV 2,215 Number of shares (m) Equity value per share (RON) 30.2 DDM Valuation 2017E 2018E 2019E 2020E 2021E Dividends Discount factor Present value Sum 522 Long term FCF growth rate 1.0% Residual value at horizon 2,294 PV of residual value 1,496 EV 2,018 Number of shares (m) Value per share (RON) 27.5 Transelectrica 20 WOOD & Company

21 Financials Transelectrica: income statement RONm E 2017E 2018E 2019E Revenues 2,495 2,822 2,985 2,613 2,549 2,615 2,685 Transmission services 1,128 1,224 1,174 1,044 1,006 1,052 1,100 Total costs 1,882 2,032 2,217 1,972 1,965 2,002 2,041 Expenses related to system operation Balancing market expenses Technological system expenses Personnel Repairs and maintenance Other operating expenses Materials and consumables EBITDA EBITDA margin 25% 28% 26% 25% 23% 23% 24% Depreciation EBIT EBIT margin 11% 16% 15% 12% 10% 11% 11% Net financial income Pre-tax profit Tax Net income growth 329% 72% -2% -29% -19% 3% 8% Transelectrica: balance sheet RONm E 2017E 2018E 2019E Total current assets 1,538 2,006 1,848 1,976 1,782 1,617 1,409 Total non-current assets 3,674 3,492 3,472 3,397 3,578 3,843 4,183 Total Assets 5,211 5,498 5,321 5,373 5,361 5,460 5,591 Current liabilities 1,010 1,244 1,062 1, ,082 LT liabilities Equity 2,641 2,841 3,072 3,193 3,291 3,375 3,443 No. of shares (m, ave.) Total Liabilities and Shareholders Equity 5,211 5,498 5,321 5,373 5,361 5,460 5,591 Transelectrica: cash flow RONm E 2017E 2018E 2019E Net profit Depreciation FX gain/loses /- Working capital change Operating cash flow capex Free cash flow share increase (mil shares) dividends paid /- increase in debt Change in cash balance Transelectrica: ratios E 2017E 2018E 2019E EPS (RON) EPS growth 329% 72% -2% -29% -19% 3% 8% Dividend (RON000) DPS (RON) Payout ratio 79% 58% 56% 51% 51% 59% 69% Dividend yield 7% 9% 9% 6% 5% 5% 7% BVPS (RON) ROE 8% 13% 12% 8% 6% 6% 6% PER (x) EV/EBITDA (x) P/BV Transelectrica 21 WOOD & Company

22 Utilities, Romania 30 January 2017 Electrica Needs to raid the piggy bank ANRE has cut Electrica s tariffs cut by 3-8% for 2017E. Thus, after performing relatively well recently due to cost-cutting, as well as one-offs reported in 2016E, we expect to see a decline in profits going forward. Additionally, Electrica continues to hold a significant amount of cash on its balance sheet that produces only a low return (1.3%) and which, in the absence of a faster deployment or investment opportunities, is being discounted by investors that require a higher return from equity investments. Buying out the FP minorities could represent upside to our price target (PT), but we have not incorporated this into our model at this point. As a result of the changes in earnings estimates, we downgrade our rating to HOLD with a new PT of RON 15.4 (up from RON 13.9), implying 12.9% upside. Lack of cash deployment remains an issue. At end-september 2016, the company held cash and equivalents of RON 2.9bn, unchanged from December The cash is a legacy from the IPO in 2014, when it raised almost RON 2bn, and is invested in government bonds and bills generating a low return. The RON 2.0bn capex plan for the next three years could be funded 50% from depreciation, according to our estimates, still leaving a large amount of cash available. We believe that the market price includes a discount of at least 20% for the unutilised cash held on the balance sheet. Potential deal with FP to help valuation. We would see any potential deal with FP as a trigger for Electrica s stock price, narrowing the discount applied by the market on the cash position. Buying out the FP minorities would imply an increase in the dividend yield of 25% according to our estimates (to 8.1% for 2018E) and would allow it to invest the cash, which is currently only generating 1.3%, to generate a return of close to 12% (at NAV value). Our PT would increase by nearly 20% in this event. Tariffs cut for 2017E. The company reported strong profits for 9M16 on both distribution and supply. For the trailing 12 months, it recorded distribution EBIT (excluding one-offs) of RON 398m, representing a 9% return on the asset base vs. the regulated 7.7%. Additionally, the 9M16 margin in energy supply stood at 5% vs. the company s guidance of 2% in the long term. The regulator implemented an average 5% cut in tariffs this year and we see an increase in 2018E as unlikely. In addition, incorporating a lack of one-offs for 2017E, we see a declining operating result for both 2017E and 2018E. We also believe there is an additional risk that the new regulatory period, starting in 2019E, could lead to Electrica s RRR being cut to match a lower RFR, given the decline in government bond yields over the past three years. Trading at a discount to its peers. On a 2018E EV/EBITDA of 4.1x, Electrica trades at 47% discount to its peers, while its P/E of 13.3x represents a 10% premium. The discount on EV/EBITDA is generated by the high cash position held by the company, which produces a low return, as seen in the high P/E ratio. Any faster deployment of the cash could lead to the P/E dropping and EV/EBITDA increasing. Expected Events Hold Downgrade from Buy Price: RON 13.6 Price target: RON Q16 results 15 February 2017 Results call TBC Key Data Market cap RON 4.6bn Free float 51% Shares outstanding 345.9m Major shareholder RO State Bloomberg code EL RO BET Index 7,271 Price Performance 52-w range RON w performance 16% Relative performance 0% Jan-16 Apr-16 Jul-16 Oct-16 EL RO BET Index rebase EQUITY RESEARCH Year Sales EBIT Net Profit EPS P/E EV/EBITDA ROE Dps Dividend (RON m) (RON m) (RON m) (RON) (x) (x) (%) (RON) Yield , % % , % % , % % 2016E 5, % % 2017E 5, % % 2018E 5, % % Analyst: Lucian Albulescu, CFA; Bram Buring, CFA Prague: ; lucian.albulescu@wood.cz; bram.buring@wood.cz Website:

23 Electrica snapshot - HOLD, PT RON 15.4 Hold SHARE PRICE PERFORMANCE COMPANY DESCRIPTION Bloomberg ticker EL RO 15 Closing price (RON) Price Target (RON) Upside to PT 12.9% 13 Shares outstanding (m) MCAP (RON m) 4, Free float 51.20% 12 ADTV (USD m) Week Range (RON) RATIOS Jan-16 Apr-16 Jul-16 Oct-16 EL RO BET Index rebased Electrica is the holding company for three electricity distribution companies and one supply company in Romania. Fondul Proprietatea holds minority stakes in some of the companies held by Electrica SA. In July 2014, Electrica completed an IPO, which led to the company cashing in RON 1,876m (EUR 430m). The state s participation was diluted from 100% to 48.8% in the IPO. Distributions are regulated by the National Agency for Energy Regulation (ANRE), which employs a five-year regulatory period and a revenue cap methodology. Supply is only partly regulated and is to be liberalised completely by PER SHARE RATIOS E 2017E 2018E VALUATION RATIOS E 2017E 2018E EPS P/E BVPS P/Op. CF DPS P/BV EV/EBITDA FINANCIAL RATIOS E 2017E 2018E EV/Sales Capex/depreciation EV/EBIT Capex/net fixed asstes Cash flow from ops, RON m Op. cash flow/capex EV, RON m 2,714 2,725 2,915 3,324 3,778 EBITDA margin 16.3% 17.3% 18.8% 16.5% 16.6% FCF, RON m EBIT margin 10.1% 10.3% 11.8% 9.4% 9.2% FCF yield 9.5% 5.7% 7.5% 0.0% -1.0% Pre-tax margin 10.4% 10.7% 12.1% 9.7% 9.4% Dividend yield 5.3% 6.3% 7.5% 6.4% 6.4% Net margin 5.7% 6.6% 7.8% 6.4% 6.3% ROE 4.6% 5.6% 6.3% 5.2% 5.1% Net debt/(cash) to equity+minorities -39.5% -38.7% -36.2% -31.1% -25.7% Net debt/ebitda COMPANY FNIANCIALS INCOME STATEMENT (RONm) E 2017E 2018E BALANCE SHEET (RONm) E 2016E 2017E 2018E Total revenues 5,044 5,503 5,361 5,480 5,624 Cash & cash equivalents 2,850 2,881 2,802 2,487 2,124 o/w distribution 2,475 2,613 2,371 2,248 2,276 Receivables ,040 o/w supply 4,133 4,488 4,317 4,487 4,619 Inventories o/w others Total current assets 3,765 3,843 3,797 3,536 3,220 o/w eliminations -1,519-1,638-1,369-1,299-1,315 Fixed assets 4,382 4,549 4,690 5,113 5,590 EBITDA , Total assets 8,148 8,392 8,487 8,649 8,810 o/w distribution o/w supply Short term credits o/w others Accounts payable Depreciation Other current liabilities EBIT Total current liabilities 1,250 1,408 1,326 1,340 1,357 Financial income/loss Credits due in more than 1 yea Pre-tax profit Other liabilities tax Total liabilities 1,859 1,949 1,866 1,880 1,897 Minorities interests Net profit after minorities Minority interests ,040 1,131 Total equity 6,289 6,443 6,621 6,769 6,913 CASH FLOW STATEMENT (RONm) E 2017E 2018E Total liabilities & equity 8,148 8,391 8,487 8,649 8,810 Net profit Depreciation Net debt -2,802-2,815-2,742-2,427-2,064 +/- Working capital change and others Net working capital Operating Cash Flow CAPEX Free Cash Flow share increase (mil shares) 1, dividends paid /- increase in debt Change in Cash balance 2, OPERATIONS AND MACRO ASSUMPTIONS PROFIT TRENDS E 2017E 2018E Electricity distributed , % % change 5% 1% 2% 1% 1,000 Electricity supplied % % change -5% 9% 3% 3% 2% % Regulatory period characteristics % Regulated rate of return 7.7% 7.7% 7.7% 7.7% 7.7% 600 RAB (estimate) 4,168 4,423 4,553 4,767 5, % Actual return on RAB 12.3% 12.9% 13.9% 10.8% 10.3% years bills yield % E 2018E EBITDA EBITDA margin % 6.0% 4.0% 2.0% 0.0% E 2018E Net profit Dividend yield Electrica 23 WOOD & Company

24 Electrica: 4Q16E results preview (due 15 February) Electrica is due to report its 4Q16E numbers on 15 February. We expect the company to report net profit after minorities of RON 50m, up 16.7% yoy but down 49.6% qoq. We expect the results to be influenced positively by an increased EBITDA in distribution (+20.7% yoy to RON 148m) as we expect a continuation of the trend of lower costs which was visible in 1-3Q16. Generally, the last quarter is weaker than the previous ones. We expect some decline in supply (EBITDA down 28.4% to RON 35m). We also expect the net financial result to include a positive contribution from the interest received on the money from the IPO, in line with previous quarters. Electrica: 4Q16 results preview (RONm) 4Q15 3Q16 4Q16E yoy qoq Revenues 1,549 1,314 1, % 4.1% Supply 1,202 1,029 1, % 3.9% Distribution % -1.4% Others % 3.2% Eliminations % -6.4% EBITDA % -34.7% Supply % 15.2% Distribution % -38.5% Others % 35.3% Depreciation % -9.8% Operating profit % -51.6% Net financial result n.m. 0.0% Profit before taxes % -50.1% Net profit % -48.3% Owners of the company % -49.6% Minorities % -44.2% Electrica: changes in estimates Electrica: income statement changes RONm 2016E 2017E 2018E New Old Chg. New Old Chg. New Old Chg. Total revenues 5,361 5,546-3% 5,480 5,783-5% 5,624 5,930-5% Distribution 2,371 2,452-3% 2,248 2,475-9% 2,276 2,495-9% Supply 4,317 4,530-5% 4,487 4,757-6% 4,619 4,895-6% Others % % % EBITDA 1, % % % Distribution % % % Supply % % % Others % % % Depreciation % % % EBIT % % % Financial income/loss % % % Pre-tax profit % % % - tax % % % Minority interests % % % Net profit after minorities % % % Electrica: Wood estimates vs. consensus 2016E 2017E 2018E WOOD Cons. Diff. WOOD Cons. Diff. WOOD Cons. Diff. Total revenues 5,361 5, % 5,480 5, % 5,624 5, % EBITDA 1, % % 931 1, % EBIT % % % Pre-tax profit % % % Net profit after minorities % % %, Bloomberg Electrica 24 WOOD & Company

25 Valuation Our valuation for Electrica is based on an average of: i) our DCF calculations; and ii) a DDM valuation. DCF assumptions A risk free rate (RFR) of 4.5%. An equity risk premium (ERP) of 4.5% and a beta of 1.0x. A terminal growth rate of 1.5%. DDM assumptions We use a cost of equity of 9.0%, a 4.5% RFR, a 4.5% ERP and a beta of 1.0x. To forecast the dividends, we have applied a payout varying from 85% to 95% (in 2020E at the end of the forecast period). A 1.5% terminal growth rate. Valuation summary Equity value (RONm) Value per share (RON) 1. DCF 5, DDM 4, Average (50:50) 4, month PT (RON) Current price (RON) Upside 12.9% DCF valuation 2017E 2018E 2019E 2020E EBIT Corporate tax rate [T] 16.0% 16.0% 16.0% 16.0% EBIT*(1-T)=NOPAT Depreciation & amortisation Cash from working capital capex [I] Unleveraged free cash flow [FCF] Discount factor Present value of FCF [PV:FCF] Sum of [PV:FCF] 401 Long term FCF growth rate 1.5% Residual value at horizon 5,593 PV of residual value 3,979 Minorities 1,189 Net debt 2016 (discounted by 20%) -2,331 EV 5,521 Number of shares (m) Equity value per share (RON) 16.0 DDM valuation 2017E 2018E 2019E 2020E 2021E Dividends Discount factor Present value Sum 1,288 Long term FCF growth rate 1.5% Residual value at horizon 4,311 PV of residual value 2,949 EV 4,237 Number of shares (m) Value per share (RON) Electrica 25 WOOD & Company

26 Financials Electrica: income statement RONm E 2017E 2018E 2019E Revenues 5,383 5,044 5,503 5,361 5,480 5,624 5,780 - growth 2% -6% 9% -3% 2% 3% 3% Total costs -4,705-4,221-4,549-4,352-4,576-4,693-4,829 EBITDA , EBITDA margin 13% 16% 17% 19% 16% 17% 16% Depreciation EBIT EBIT margin 6% 10% 10% 12% 9% 9% 9% Net financial income Pre-tax profit Tax Net income growth -24% 31% 17% 11% -16% -1% -2% Net profit after minorities (adj.) Electrica: balance sheet RONm E 2017E 2018E 2019E Total current assets 4,116 3,765 3,843 3,797 3,536 3,220 3,225 o/w cash 651 2,850 2,881 2,802 2,487 2,124 2,091 Total non-current assets 4,307 4,382 4,549 4,690 5,113 5,590 5,749 o/w RAB 4,058 4,168 4,423 4,553 4,767 5,043 5,056 Total Assets 10,200 8,148 8,392 8,487 8,649 8,810 8,975 Current liabilities 1,366 1,250 1,408 1,326 1,340 1,357 1,376 LT liabilities Equity 6,446 6,289 6,443 6,621 6,769 6,913 7,059 No. of shares (m) Total Liabilities and Shareholder s Equity 8,423 8,148 8,391 8,487 8,649 8,810 8,975 Net debt ,802-2,815-2,742-2,427-2,064-2,031 Electrica: cash flow E 2017E 2018E 2019E Net profit Depreciation /- Working capital change and others Operating cash flow capex Free cash flow share increase (mil shares) dividends paid /- increase in debt Change in cash balances 95 2, Electrica: ratios E 2017E 2018E 2019E No of shares (m, ave.) EPS (RON) EPS growth -32% -12% 1% 15% -16% 0% -3% Dividend (RON 000) DPS (RON) Payout ratio 5% 87% 82% 85% 85% 85% 85% Dividend yield 0% 5% 6% 8% 6% 6% 6% BVPS (RON) ROE 3% 5% 6% 6% 5% 5% 5% PER (x) EV/EBITDA (x) P/BV Electrica 26 WOOD & Company

27 Important disclosures This investment research is published by Wood & Company Financial Services, a.s. ( Wood & Co ) and/or one of its branches who are authorised and regulated by the CNB as Home State regulator and in Poland by the KNF, in Slovakia by the NBS, in Italy by the CONSOB and in the UK by the FCA as Host State regulators. Wood s ratings and price targets history for Transgaz Rating Price target 22/10/2015 HOLD 22/10/2015 RON /01/2017 RON 339 Wood s ratings and price targets history for Transelectrica Rating Price target 22/10/2015 HOLD 22/10/2015 RON /01/2017 RON 31.5 Wood s ratings and price targets history for Electrica Rating Price target 03/03/2015 BUY 02/06/2015 RON /01/2017 HOLD 30/01/2017 RON 15.4 Explanation of Ratings BUY: The stock is expected to generate total returns of over 15% during the next 12 months as measured by the target price. HOLD: The stock is expected to generate total returns of 0-15% during the next 12 months as measured by the tnarget price. SELL: The stock is expected to generate a negative total return during the next 12 months as measured by the target price. RESTRICTED: Financial forecasts, and/or a rating and/or a target price is restricted from disclosure owing to Compliance or other regulatory/legal considerations such as a blackout period or a conflict of interest. NOT RATED: Suspension of rating after 30 consecutive weekdays where the current price vis-à-vis the target price has been out of the range dictated by the current BUY/HOLD/SELL rating. COVERAGE IN TRANSITION: Due to changes in the Research team, the disclosure of a stock s rating and/or target price and/or financial information are temporarily suspended. Equity Research Ratings (as of 30 January 2017) Buy Hold Sell Restricted Not rated Coverage in transition Equity Research Coverage 50% 41% 9% 1% N.A.% 7% IB Clients 1% 1% N.A. N.A. N.A. N.A. Securities Prices Prices are taken as of the previous day s close on the home market unless otherwise stated. Valuation & Risks Analysis of specific risks to set stock target prices highlighted in our investment case(s) are outlined throughout the report. For details of methodologies used to determine our price targets and risks related to the achievement of the targets referred to in the main body of the report or at in the Section Corporate Governance or via the link Users should assume that the investment risks and valuation methodology in Daily news or flash notes not changing our estimates or ratings is as set out in the most recent substantive research note on that subject company and can be found on our website at Wood Research Disclosures (as of 30 January 2017) Company Disclosures AT&S 5 BRD 5 BZ WBK 5 CD Projekt 5 CETV 5 CEZ 5 Conpet 1 DO&CO 1 Erste Group Bank 5 Enea 5 Energa 5 Fortuna 5 S.C. Fondul Proprietatea S.A. 1, 4, 5 Getin Noble Bank 5 GTC 5 ITG 1, 3 Immofinanz 5 IPF 5 JSW 5 KGHM 5 Komercni 5 mbank 5 Millennium 5 Netia 5 Orange PL 5 Pekao 5 PGE 5 Philip Morris 5 PKO BP 1, 2, 3, 5 PKN 5 PZU 5 RC2 4 Romgaz 5 SIF2 10 SNP 3, 5 O2 CR 1, 4, 5 Transilvania 5 Transgaz 1 WSE 1 Warimpex 1, 5 # Description 1 The company currently is, or in the past 12 months was, a client of Wood & Co or its affiliated companies for the provision of investment banking services. 2 In the past 12 months, Wood & Co or its affiliated companies have received compensation for Corporate Finance/Investment Banking services from this company. 3 In the past 12 months, Wood & Co or any of its affiliated companies have been lead manager, co-lead manager or co-manager of a public offering of the company s financial instruments. 4 Wood & Co acts as corporate broker to this company and/or Wood & Co or any of its affiliated companies may have an agreement with the company relating to the provision of Corporate Finance/Investment Banking services. 5 Wood & Co or any of its affiliated companies is a market maker or liquidity provider in relation to securities issued by this company. 6 In the past 12 months, Wood & Co, its partners, affiliated companies, officers or directors, or any authoring analyst involved in the preparation of this investment research has provided services to the company for remuneration, other than normal course investment advisory or trade execution services. Utilities, Romania 27 WOOD & Company

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29 CONTACTS Czech Republic namesti Republiky 1079/1a Palladium Praha 1 Czech Republic Tel Fax Romania Metropolis Center Grigore Alexandrescu St Bucharest 1 Tel.: Research Co-Head of Research/ Head of Research Poland Marta Jezewska-Wasilewska marta.jezewska-wasilewska@wood.com Poland Skylight Zlote Tarasy Zlota Warszawa Poland Tel Fax Co-Head of Research/Head of Greek Research Alex Boulougouris alex.boulougouris@wood.com UK City Point, 15 th Floor 1 Ropemaker Street London EC2Y 9HT Tel Head of Turkey/Industrials Oytun Altasli oytun.altasli@wood.com Italy Via Vittor Pisani, Milan Italy Tel Macroeconomics Kristen Andrasko/ Sadiq Razak Co-Heads of Equities / kristen.andrasko@wood.com sadiq.razak@wood.com Bloomberg page WUCO Raffaella Tenconi raffaella.tenconi@wood.com Consumer/Industrials Lukasz Wachelko lukasz.wachelko@wood.com Energy Jonathan Lamb jonathan.lamb@wood.com Romania Lucian Albulescu lucian.albulescu@wood.com Utilities/Mining/Pharma Bram Buring bram.buring@wood.com Financials/Turkey Can Demir can.demir@wood.com Non-banks financials Jerzy Kosinski jerzy.kosinski@wood.com Metals/Mining Andy Jones andrew.jones@wood.com Consumer/Industrials Gabriela Burdach gabriela.burdach@wood.com Real Estate Jakub Caithaml Consumer/Industrials Maciej Wardejn maciej.wardejn@wood.com Poland Pawel Wieprzowski pawel.wieprzowski@wood.com Poland Piotr Raciborski piotr.raciborski@wood.com Ondrej Slama ondrej.slama@wood.com Jakub Mician jakub.mician@wood.com Sales Head of Sales Kristen Andrasko kristen.andrasko@wood.cz Jan Koch jan.koch@wood.com Piotr Kopec piotr.kopec@wood.com Ioana Pop ioana.pop@wood.com Vinay Ruparelia vinay.ruparelia@wood.com Grzegorz Skowronski grzegorz.skowronski@wood.com Jan Thomson jan.thomson@wood.com Kostas Tsigkourakos kostas.tsigkourakos@wood.com Markus Ulreich markus.ulreich@wood.com Tatiana Sarandinaki Enclave Capital in association with WOOD & Company tsarandinaki@wood-enclave.com Sales Trading and Execution Services Ashley Keep ashley.keep@wood.com Jennifer Ewing jennifer.ewing@wood.com Jan Jandak jan.jandak@wood.com Zuzana Mora zuzana.mora@wood.com Ermir Shkurti ermir.shkurti@wood.com Martin Stuchlik m.stuchlik2@wood.com Vladimir Vavra vladimir.vavra@wood.com RECENTLY PUBLISHED REPORTS Date Company/Sector Title Analyst 26/01/17 Cypriot Banks The boys are back in town! Alex Boulougouris, Can Demir 25/01/17 OPAP VLTs not yet priced in Lukasz Wachelko, Jakub Mician 24/01/17 Ciech No splash in soda ash Maciej Wardejn, Lukasz Wachelko 24/01/17 Synthos Long-awaited bounce back Maciej Wardejn, Lukasz Wachelko 20/01/17 Polish Banks 4Q16E previews Jerzy Kosinski 18/01/17 Wirtualna Polska Virtually no upside left Piotr Raciborski, Lukasz Wachelko 10/01/17 Fourlis Ain t nuthin but a G (rowth) thang Jakub Mician, Lukasz Wachelko 05/01/17 DO&CO Turkish risks priced in Maciej Wardejn, Oytun Altasli 04/01/17 The Rear-View Mirror CEE markets All EME stock markets up in December Research Team 20/12/16 Petrol Group Ready, steady steady Ondrej Slama, Jonathan Lamb Although the information contained in this report comes from sources Wood & Company believes to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.