Daily analyst comments

UES will auction off stakes in Bashkirenergo and Novosibirskenergo by year-end 2007, Interfax reported quoting Deputy Head of Project Center to Divest UES Assets Ekaterina Novokreshchenykh. The starting price of Bashkirenergo (21.27%) should be in the range of $500-600 mln and Novosibirskenergo (14.18%) should fetch nearly $120 mln. Previously, the power holding considered the swap of its stakes in the two utilities for their grid assets and property of regional dispatcher units offered by FGC. However, the power holding finally opted for a public auction without limitations to bidders.

It's noteworthy that UES has come out with plans to divest its assets. While sales companies, repair and service units, i.e. segments which allow 100% participation of minority shareholders, could be sold off, the sale of stakes in regional energos, although independent of UES, which include both distribution and trunk grids, will help strengthen the positions of shareholders of these companies in the areas of their operation. We believe that the power holding's shareholders will oppose the sale of these assets.

We view as the best option for UES's shareholders and the restructuring ideology the swap of genco assets in the power holding's stakes for power grid assets in these companies. The current market cap of Bashkirenergo is $2.2 bln and Novosibirskenergo $870 mln. Thus, based on the current market, UES's stakes could be valued at $467 mln and $123 mln. The stake in Bashkirenergo could be purchased by AFK Sistema, Gazprom or, less likely, the government of the Republic of Bashkortostan. The stake in Novosibirskenergo will most likely be acquired by Group E4 controlled by ex-deputy of Anatoly Chubais Mikhail Abyzov.

The sale of the power holding's stakes in Bashkirenergo and Novosibirskenergo could act as a growth driver for the market caps of these utilities and overall, unbundled regional energos which market participants value lower than other assets. Specifically, the average market cap/installed capacity ratio for the regional energo segment is $305 per kW, while the similar value for WGCs and TGCs tops $500. In addition, regional energos have power grids, sales and maintenance segments. We assign a Hold recommendation to Novosibirskenergo and Bashkirenergo shares.