RESEARCH January 30, RusHydro Favorable conditions. Target: USD (-19.70%), SELL. Bullet moments. Principal estimates

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1 RESEARCH January 30, 2014 RusHydro Favorable conditions Bullet moments +7 (495) Target: USD (-19.70%), SELL Analyst: Alexander Kostyukov Principal estimates Re-estimating the model. We conducted re-estimation of common shares of RusHydro considering the 2013 FY operation results and the expected changes in the industry the forthcoming freezing of tariffs. The fair price of one common share of RusHydro, which we calculated basing on the discounted cash flow method (DCF), as of late 2014 forms USD, which provides for the 19.70% reduction. Due to these reasons, we set the recommendation SELL. 0,10 0,00-0,10-0,20-0,30-0,40 Dynamics of company s stock price vs MICEX index Operation results. For the year 2013, RusHydro showed alltime high operation results, which generally matched our expectations. Thus, power energy output by the HEPS grew 16.3% (hereinafter yoy), including Boguchanskaya HEPS by 14.5%, and considering the added capacities of RAO ES East by 10.4% vs the 16%, 22.5% and 9.2% respectively that we expected. Generally, we assume that the year was successful for the company. Increased water rate of the rivers was favorable for building up the load of HEPS nearly all year long, especially in 1-2Q at the Far East and Center, and also in 2-4Q in Siberia. Introduction of new units at Sayano-Shushinskaya HEPS, total reconstruction of which is expected to be finalized until the end of 2014, was the additional factor of the significant increase of output volumes. -0,50 янв.13 апр.13 июл.13 ноя.13 HYDR MICEX MICEX POWER Source: market s data; Estimation: Veles Capital Dynamics of power energy output in Russia Electricity generation by hydropower in 2012 Electricity generation by hydropower in 2013 Total electricity generation in 2012 Total electicity generation in 2013 Source: System operator; Estimation: Veles Capital Financial results. Positive dynamics in output of power energy at the back of the favorable weather conditions will play the first fiddle in growth of the financial estimates. For 2013 FY, we expect growth of sales of RusHydro by 13.8% to bn RUR (10.48 bn USD) which growth of operation spending of the company the priority load of Far East HEPS vs heat generation. We expect upping of the spending for fuel by 1.7% to 46 bn RUR.

2 We forecast adding of the EBITDA estimate by 67% up to bn RUR (2.24 bn USD). We also expect that the company closes the year with bn RUR profit (1.06 bn USD) vs loss of bn RUR the year earlier. In mid December, the head of the company announced that the consolidated EBITDA forms about 70 bn RUR, which is comparable to our target. We do not expect such favorable weather conditions in 2014 as indicated in At the expense of tariffs freezing, we expect sales growth by 6.4% (only at the expense of introduction of new capacities for 2014 (370 MW) and incomplete year of operation of capacities, introduced in 2013) and reduction of EBITDA by 8.1% down to bn RUR and bn RUR. At that, we forecast reduction of the net profit of the company by 25.3% to bn RUR. Assets for sale. RusHydro is consolidating at its balance a number of shares of power energy companies: Inter RAO (4.92%), Russian Grids (0.78%) and FNC (0.13%). By the end of the year, the sum cost of the given portfolios dropped 9.6 bn RUR, which would be reflected by the company in its consolidated report. Due to the forthcoming freezing of tariffs, the shares of companies might continue losing in price, which is extremely unfavorable for RusHydro. We assume that the portfolio of Inter RAO is likely to be sold. Considering the intention of the government to consolidate Inter RAO at the balance of Rosneftegas the chances of successful selling do actually rise. However, we do not believe that selling will be significantly above the market. We expect that the company might gain a bit less than 6 bn RUR from selling the portfolio, which likely will be directed to the investment projects. Financial estimates, mn USD (П) 2014 (П) 2015 (П) Выручка, млн долл EBITDA, млн долл Чистая прибыль, млн долл Норма EBITDA, % 14,6 21,4 18,5 21,8 Норма чистой прибыли, % отр. 9,4 6,6 8,7 EV / S 0,73 0,65 0,66 0,65 EV / EBITDA 4,99 3,06 3,56 2,99 P / E отр. 6,29 9,01 6,75 ROIC, % 4,2 5,8 5,3 6,9 ROE, % отр. 6,1 4,5 6,1 Source: company s data; Estimation: Veles Capital We expect the company to gain a bit less than 6 bn RUR from selling the shares of Inter RAO and likely direct the given money to investment projects. Dividends. According to the dividend policy of RusHydro, the company is to direct not less than 5% of the consolidated net profit to dividend payment for the FY. However, in late November, the chair of the board of RusHydro announced being ready to pay dividends calculated as 25% of the IAS net profit. We assume that the moment of FY dividends announcement (respective to our targets) might be used as a strategy for speculative buying of shares in the moment. Moreover, MED is also positive about the given volume of dividends and intends to obligate all the state companies to pay dividends in the volume of 25% of the IAS profit. Concluding from out target of the net profit, RusHydro might pay 4.36 kopeks per share, which provides yield of the dividends at 7.8% level. Given payments might turn into one of the most attractive offers in the energy industry. Considering our net profit forecast, RusHydro might payoff 4.36 kopeks per share, which provides for dividend yield at 7.8%. Given payments might turn out to be the most attractive in the sector. January 30, 2014 page 2

3 Financial model and estimation of RusHydro, mn USD (F) 2014 (F) 2015 (F) (F) 2014 (F) 2015 (F) P&L statement WACC Sales Risk-free rate, % 7,2 6,3 6,3 6,3 Operating expenses (excl. Amortization & (8 058) (8 238) (8 505) (8 221) Income tax rate, % 20,0 20,0 20,0 20,0 EBITDA Cost of equity (cs), % 14,9 14,1 14,0 15,1 Amortization and depreciation (584) (640) (620) (618) Market risk, % 5,0 5,0 5,0 5,0 EBIT Beta leveraged 1,0 1,0 1,0 1,2 Non-recurrent items (881) Specific risk, % 2,8 2,8 2,8 2,8 Interest expenses (204) (230) (131) (122) Cost of debt, % 7,7 6,8 6,7 6,7 Non-operation expenses (347) (314) (251) (320) Specific risk, % 0,5 0,5 0,4 0,4 EBT (641) WACC, % 12,7 11,8 11,9 13,1 Income tax (171) (265) (186) (248) Minority interest 60 (79) (55) (74) Free cash flow estimate Net income (752) NOPAT Amortization and depreciation Balance sheets CapEx (2 873) (2 554) (1 212) (1 365) Non-current assets Changes in working capital (125) (399) (542) 173 PPE &IA Free cash flow (2 141) (1 032) (84) 771 Other non-current assets WACC, % 12,7 11,8 11,9 13,1 Current assets Discount factor 0,94 0,84 0,75 0,94 Current assets Discounted free cash flow (2 017) (866) (63) 726 Short-term investments Cash and equivalents Common stock valuation Total assets TGR, % 3,0 Shareholder's equity Discount cash flow sum (+) Shareholder's capital Discounted terminal value (+) Minority interest EV Long-term liabilities Net debt (-) Long-term debt Minority interest (-) 243 Other long-term liabilities Financial investments (+) Current liabilities MC Short-term debt Fair value of common stock, USD 0,013 Current liabilities Total liabilities and shareholder's equity Sensitivity, % TGR WACC -3,0-2,0-1,0 curr. 1,0 2,0 3,0 Cash flow statement 1,0 +15% +7% +1% -5% -9% -13% -17% Operating activity ,0 +19% +11% +3% -3% -8% -12% -16% Net income (752) ,0 +25% +15% +7% +0% -6% -10% -14% Amortization and depreciation ,0 +33% +20% +11% +3% -3% -8% -13% Changes in working capital (125) (37) (205) (387) 5,0 +43% +27% +16% +7% -0% -6% -11% Other cashflows from operating activity Investment activity (3 885) (3 327) (935) (1 309) Multipliers, 1x CapEx (2 875) (2 554) (1 212) (1 365) EV / Sales 0,7 0,7 0,7 0,7 Purchase/sale of subsidiaries and EV / EBITDA 5,0 3,1 3,5 3,0 Other cashflows from investing activity (1 011) (773) EV / EBIT 8,7 4,3 5,2 4,1 Financial activity (202) (776) P / E отр. 6,3 9,0 6,7 Changes in debt (30) (547) P / BV 0,3 0,4 0,4 0,4 Changes in shareholder's equity EV / FCF отр. отр. отр. 8,9 Dividends paid 0 (245) (172) (229) Other cashflows from financing activity Changes in cash and equivalents (301) (560) Ratios EBITDA margin, % 14,6 21,4 18,5 21,9 Net income margin, % neg. 9,4 6,6 8,7 EBITDA / interest expenses, 1х 6,7 9,7 14,7 18,8 CapEx / Sales, % 30,5 24,4 11,6 13,0 ROE, % neg. 6,1 4,5 6,1 ROIC, % 4,2 5,8 5,3 6,9 Debt / EBITDA 4,5 2,8 2,6 1,8 Net debt / EBITDA 3,5 2,1 1,7 1,4 Debt / Shareholder's equity 0,3 0,4 0,3 0,3 Source: company, estimates: Veles Capital January 30, 2014 Стр. 3

4 Information disclosure The statement of an analyst and confirmation of the responsibility withdrawal r e s e a r c h The given report is prepared by the analyst (-s) of the Investment Company Veles Capital. The given estimations in the present report reflect personal opinion of the analyst (-s). The award of the analysts does not depend, never depended and will not depend upon the specific recommendations or estimations, provided in the present report. The award of the analysts depends upon the general efficiency of the business of the Investment Company Veles Capital, determined by the investment benefit of the company s clients and also upon the incomes from other types of activity of the Investment Company Veles Capital. The given report, prepared by the Research Department of the Investment Company Veles Capital, is basing on the public information. The present review was prepared independently from other Departments of the Investment Company Veles Capital, and any recommendations and judgments, presented in the given report reflect only the view point of the analyst (-s), participated in making of the present review. Due to that consideration, the Investment Company Veles Capital considers being necessary to state that the analysts and the Company are not responsible for the content of the given report. The analysts of the Investment Company Veles Capital do not take overall responsibility to regularly up-date the information, contained in the present report, and also to announce about all changes, introduced to the present review. Provided analytical material of the Investment Company Veles Capital could be used only with information aims. The company does not guarantee the completeness and preciousness of provided information in the given report and its reliability, and also is not responsible for direct and indirect losses from using of the given materials. This document cannot serve as a basis for purchase and selling any securities, and cannot also be considered as an offer from the part of the Investment Company Veles Capital. The Investment Company Veles Capital and (or) its subsidiaries along with the staff, directors and analysts of the Investment Company Veles Capital have the right to purchase and sell any securities, mentioned in the given review. The Investment Company Veles Capital and (or) its subsidiaries can serve as a market-maker or have the liabilities for underwriting of companies securities, mentioned in the given review, can purchase or sell them for clients, and also make any actions, which do not contradict the Russian law. The Investment Company Veles Capital and (or) its subsidiaries can also be interested in the possibility of providing the companies, mentioned in the present review, with the investments and bank or any other services. All rights for the given bulletin belong to the Investment Company Veles Capital. The reproduction and/or distribution of the analytical materials of the Investment Company Veles Capital are prohibited without the written permission of the Company. Veles Capital The principle of recommendation assignment The investment recommendations are given based on the evaluation of the company s share yield. The basis for the calculation of the expected company s cost is the evaluation by the discounted cash flows method (DCF). In some estimations the method of comparable coefficients, and also the mixed estimation (by DCF method and by comparable coefficients method) are applied. All recommendations are assigned based on the determined by us the fair cost of the shares within the nearest 12 months. At the present moment the investment scale of the Investment Company Veles Capital is the following: BUY corresponds to the growth potential of the shares within the nearest 12 months by 15% or more. ACCUMULATE corresponds to the growth potential of the shares within the nearest 12 months for 5-15%. HOLD corresponds to the growth (reduction) potential of the shares within the nearest 12 months from -5% to 5%. REDUCE corresponds to the reduction potential of the shares within the nearest 12 months from 15% to 5%. SELL corresponds to the reduction potential of the shares within the nearest 12 months by 15% or more. In some cases the deviations from the evaluation scale given above, based on which the recommendations are assigned, are possible. That fact relates to the high volatility of some securities in particular, and market in the whole, and also to the individual characteristics of one or another issuer. In order to get additional information and specifications please contact the Research Department of the Investment Company Veles Capital. January 30, 2014 Стр. 4

5 Trade Department Evgeni Shilenkov Director of Trade Department Denis Sarantsev Managing Director of Trade Department Mikhail Vasiliev Deputy Managing Director of Trade Department Alexander Antipov Head of Equity Sales Department Alexey Nikogosov Vyacheslav Bezzubenko Alexander Cvetkov Artem Moskovsky Equity Research Department Ivan Manaenko Head of Department Airat Khalikov Metals&Mining, Machinery Vasiliy Tanurkov Oil and gas Yury Kravchenko Banking, Money Market Anna Soboleva Debt Markets Alexander Kostyukov Utilities, Consumer goods Yulia Frumkina Consumer goods VIP Clients Department Yury Pavlov Director (VIP clients) Arseniy Valitov Corporative Clients Russia, Moscow, , Krasnopresnenskaya nab. 12, Entr. 7, floor 18 Tel.: 7 (495) , Fax: 7 (495) Ukraine, Kiev, 01025, B. Zhhitomirskaya, 20 Tel.: 38 (044) Fax: 38 (044) January 30, 2014 Стр. 5