Daily analyst comments

Moscow Integrated Electricity Distribution Co. (MSRS), and Lenenergo, (LSNG), the power distribution grid companies of Moscow and St. Petersburg, respectively, do not plan to switch to a new system of electricity tariff regulation, based on regulated returns on investment, as of 2009. Payments for technical connections to the two companies' networks are to remain in place after 2011, Interfax announced, referring to the first deputy CEO of the Federal Grid Company (FSK).

The decision was triggered by the wide-scale investment programs adopted by these companies. If all investments are included in the tariff, its growth would be too steep. For this reason, payment for technical connections to the companies' networks are to remain in place after 2011, while in all other Russian regions such payments are to be repealed. How long the payment will continue to be applied will hinge on growth rates in the regions.

In our opinion, regulation of electricity tariffs for Moscow Integrated Electricity Distribution Co. and Lenenergo under the previous system of economically substantiated expenses may have an adverse effect on the predictability and amounts of cash flows via the two companies, which could find themselves at a disadvantage to other Russian distribution grids.

We estimate the fair price of one share in Moscow Integrated Electricity Distribution Co. at 0.052, which corresponds to a SELL recommendation. We also assign a SELL recommendation on Lenenergo shares and estimate the fair price of one share at USD 1.57.