Zorlu Enerji Report

·    Domestic market: ZOREN has ~4% share in the Turkish market. Electricity demand growth is expected to be 2pps higher over GDP growth, therefore, 7-8% growth is expected in the coming period.  However, CFO states that private sector is not willing to invest in the sector due to weak pricing environment. Delays in the liberalization process is worrisome since government continues to be price setter and is willing to bear losses in the market instead of increasing electricity prices due to political reasons. Currently, spot (DUY) market is hardly covering NGPP costs. ZOREN sells electricity mainly via trading in the domestic market. The company keeps the maturity of its bilateral contracts as short as three months to maintain its flexibility to switch to the spot market anytime.

Some European players are interested in the Turkish market but financing side does not seem bright and the liberalization process takes longer than expected. In the last decade, many domestic companies outside of the electricity sector has come in, therefore, consolidations are projected in the coming period. 12-14% IRR for the new projects is achievable while the payback period is 10 years at least. Ongoing liberalization process offers significant opportunities for the energy market.

·    Pakistan WPP: to be fully operational by YE2013. This is a one-off project, not a strategic one; financing and government purchasing guarantee was quite attractive.

·    Israel: High demand growth – industrial driven. ~60% of the US$1.1bn Dorad investment has been completed. Israeli Bank has been providing the financing, therefore, there is no currency exposure. TL150mn EBITDA is projected from Israeli operations by YE14.  

·    Russia: Legal conflict between ZOREN and Invar is still on. CAPEX that has reached above US$800mn is significantly higher than initial projections. Capacity (340MW in total) is quite small for Russian market but the plant is highly efficient. In order to make meaningful profits, the plant needs to sell electricity to “new capacity market” in Russia but restricted to do so by current regulations. Zorlu wants to divest these assets but will probably write significant losses from the sale.

·    Additional rights issue: not foreseen at the moment but depends on the market conditions.

·     Costs: The company states that 10% hike is needed in NG tariffs to be effective in 4Q12.   

·      The company is interested in generation privatizations especially in lignite-fired power plants.

 

BGC Partners