Daily analyst comments

Interfax reported quoting UES CFO Sergey Dubinin as saying Wednesday that the power holding rescheduled WGC-6's IPO due to unfavorable conditions on global markets. He added that the timing of the offering will depend on the situation on the domestic and global markets. Placement in favor of a strategic investor could also be at issue and the national power utility is actively negotiating with potential strategic investors.

The decision to reschedule WGC-6's additional stock offering is justified. Investors have yet to recover from the global liquidity squeeze and are skeptical about additional risks right now. In addition to operating on an emerging market, the company is going through reorganization, which entails even higher risks. The power holding's decision to roll back the additional stock offering underscores that UES is well aware of the risks and is in no hurry to get rid of its assets as soon as possible.

Specific features of WGC-2 and WGC-6 are that Gazprom has accumulated controlling interests in these WGCs before these utilities were spun off from UES as a result of asset swap as part of its stake in UES with other minority shareholders. As a result, strategic investors, which are prepared to pay a premium for a controlling stake, are not interested in WGC-2 and WGC-6 additional shares. In the absence of strong demand on the part of portfolio investors, Gazprom accounts for the bulk of bought out shares. Gazprom only needed to buy out 33% of WGC-2's additional share issue in order to gain control over the utility, while, according to our estimates, the gas giant will have to buy out up to 50% of additional shares in WGC-6, which will be floating 44% of the initial charter capital.

Earlier it was reported that WGC-6 intends to sell the Russian government's stake after an additional stock offering. We attributed this decision to UES's system position to roll back its asset sale to ongoing problems on the credit market. At present the utility's capitalization is $3.6 bln, i.e. the market values the installed capacity of WGC-6's power plants at $430 per kW, including net debt. This is a downbeat result, since average the market valuation of WGC assets is $517 per kW. WGC-6 dropped over 15% since July 2007.

We believe that WGC-6 shares will be floated in December 2007, at the earliest, if the liquidity squeeze is over by then. According to our estimates, the fair price of WGC-6 is $3.9 mln, which corresponds to $460 per kW and is 6% higher than current market valuations. We view the upside of WGC-6 stock valuations as limited and our recommendation is Hold.