Daily analyst comments

On May 14, 2007, Kamchatskenergo common and preferred shares will be included in RTS Board, RTS Stock Exchange said in its press release. Thus, another Far East utility enters the stock market.

Kamchatskenergo is the main electricity supplier on the territory of the Kamchatka region and generates more than 50% of thermal energy for the needs of Petropavlovsk-Kamchatsky. In addition, since the mid-1990s, the company’s financial standing has been critical and the utility posted losses. The reason behind Kamchatskenergo’s problems is expensive fuel. The utility’s power plants are powered by fuel oil and its price is $300 per ton, taking into account transportation costs. Therefore, at present, cost of electricity generated by Kamchatskenergo is the most expensive in the country.

UES has offered to switch Kamchatka TPPs from fuel oil to gas. This could be done after a gas pipeline in built and Kamchatka’s gasfields are tapped. Should this be the case, Kamchatskenergo’s cost of electricity output will seriously decrease and the company will turn into one of the most appealing utilities in the Far East. In line with the power holding’s plans, Kamchatskenergo is to acquire a controlling interest in Kamchatskgazprom with a subsequent sale of Kamchatskenergo to a strategic investor. Gazprom could act as such investor. Although the Industry and Energy Ministry approved this project, the final decision was not adopted due to the position of the Russian Federal Property Management Agency, one of the utility’s shareholders. The Russian Federal Property Management Agency did not issue a directive to its spokespersons on Kamchatskgazprom’s BoD to accept UES’s offer. As a result, the merger of Kamchatskenergo and Kamchatskgazprom is rolled back for an indefinite period of time.

We believe that the Russian Federal Property Management Agency will approve the merger of Kamchatskenergo and Kamchatskgazprom, since the RF government is interested to speed up Kamchatka’s gasification and the region stands to gain from UES’s project. In the event that the project is approved, the investment appeal of Kamchatskenergo shares will strengthen. At present, according to our estimates, the fair price of Kamchatskenergo is $0.0048 per common share and $0.0043 per preferred share.