Daily analyst comments

UES BoD held a regular meeting on March 2. The most important decision adopted at this meeting is related to the second (final) stage of the company’s reorganization. As a matter of fact, the first stage of holding’s reorganization, at which WGC-5 and TGC-5 are to be unbundled, was predetermined. Meanwhile, the second stage was not coordinated with the government and signing of the state directive for voting at UES BoD’s meeting was rolled back for quite a long period of time. However, it was announced several hours before the meeting that the state directive had been received.

The scheme of final reorganization approved by the BoD on Friday provides for completion of structural modifications of UES assets and unbundling all companies of the target industry model from UES (FGC, System Operator, WGCs, TGCs, etc.) and termination of operations of parent company UES in 2007-2008. In addition, the power holding’s shareholders will receive shares in industry entities commensurate with their stake in the parent company’s charter capital.

UES’ final reorganization is to be implemented using the technology of the so-called “combined” reorganization, i.e. by unbundling “intermediary” companies with their simultaneous merger with corresponding target industry entities. In order to achieve that, as was the case with UES’ first reorganization, intermediary companies will be unbundled which will own shares in companies from the target industry model. At the same time, a number of unbundled companies are to be merged to respective target companies.

For details of the proposed reorganization scheme, see the power holding’s website: http://www.rao-ees.ru/ru/news/news/pr/show.cgi?pr020307sd.htm. Among other decisions adopted at the meeting, we would like to point to adjustment of the previously adopted program of preparation and placement of additional shares in TGC-1. According to the previously adopted decision, in addition to the new share issue, UES could also sell off its own stake in TGC-1. What’s more, these two processes could have various timeframes, which is upbeat for UES shareholders.

It’s noteworthy that the new version of the Standard for management of the debt positions of UES’ subsidiaries and affiliates was adopted. The new version targets unlocking credit potential of the power holding’s companies with simultaneous valuation of their leverage while attracting investment credits and loans. Taking into account that the cost of borrowed resources is half as much as the cost of equity, increased leverage will lead to a lower cost of capital than in the event of excess focus on attracting investments via the IPO mechanism.

We are upbeat on the decisions adopted by the power holding’s BoD and investors are advised to make use of the recent correction in order to launch long positions in the power holding’s shares. We assign a Buy recommendation to UES with a target price of $1.33 per common share and $1.20 per preferred share.