Daily analyst comments

FSS has registered TGC-1's additional share issue, Interfax reported Friday. As reported previously, TGC-1's shareholders adopted the decision at the April EGM to issue additional shares in order to finance the company's investment program. The additional share issue is slated for July 2007.

At present, TGC-1's charter capital is represented by 29,522,454,644 shares and the additional share issue accounts for 64% of the company's charter capital before the placement and 39% after the flotation. The stake of UES, TGC-1's core shareholder, will ease from 55.7% to 38.3-43.5% as a result of the flotation depending on the placement price. The company projects the proceeds to reach up to Rub 32.4 bln ($1.26 bln). This amount corresponds to the amount of financing needed for the priority projects of the investment program.

As part of utility sector reform, TGC-1 has merged power plants located in the Leningrad region, the Murmansk region and the Republic of Karelia. In terms of installed capacity, TGC-1 ranks third among Russia's territorial generating companies. Gazprombank, Group E4, Complex Energy Systems and Fortum have already announced their interest in the utility's shares. Fortum VP Kari Kautinen said his company plans at least to maintain its blocking stake in TGC-1. We believe that NorNickel could also buy out additional shares, since the metal maker's business structures own 7.4% of the utility.

For the time being, it is unclear whether TGC-1 will place additional shares in favor of a strategic investor or among many investors. However, we believe that given such a number of investors interested in raising their stakes in the utility's charter capital, TGC-1 will most likely opt for the first scenario.

At present, Fortum owns 25.45% in TGC-1. In order to maintain its equity position, the Finnish company will have to buy out around 16% of the additional share issue. The remaining part of the increased charter capital will account for nearly 29% of the increased charter capital. In our opinion, NorNickel could become the most likely potential buyer of the remaining part of the additional share issue. Thus, the metal maker could raise its stake in TGC-1 to 33%.

Although TGC-1 remains a promising investment instrument, investors are advised to pay attention to other gencos, since TGC-1 is currently overpriced: $792 per kW of installed capacity. According to our estimates, TGC-4, 6, 13, Tomskenergo and Kuzbassenergo currently remain the top picks.

According to our estimates, the fair price of TGC-1 is $0.0011 per share and we assign them a Sell recommendation.