Daily analyst comments

On July 8, 2008, RusHydro (RTS: HYDR) released its audited consolidated financials calculated to IFRS for FY 2007.

RusHydro: the main items of the consolidated profit and loss report, mn USD

A more than twofold increase in revenue is linked with investments in capacity construction and the effect of the new tariff rules on the wholesale electricity market, enacted in September 2007.

The table contains the standard financial indicators for comparison purposes. The indicators take into account the restoration in 2007 of a reserve fund against depreciation of fixed assets, worth USD 964 million, and the USD 227 million profit tax related to this reserve.

RusHydro: changes in expenses, mn USD

Indicator	2006	2007	2007/2006
Expenses on electricity purchases	155	389	150%
Amortization of fixed assets	129	304	137%
Payroll expenses, Unified Social Tax	119	185	55%
Expenses on outside services	184	326	77%
Taxes, excluding profit tax	71	98	38%
Expenses on purchases of materials	23	39	72%
Expenses on water consumption	36	31	-12%
Social expenses	9	22	134%
Loss from retirement of fixed assets	93	2	-98%
Write-downs and calculation of losses from depreciation of receivables	9	18	93%
Other expenses	31	43	38%
Operating expenses	860	1457	70%

Source: company data, Finam estimates

The largest expense item is "electricity purchases", which accounted for 27% of the total expenses in 2007. The respective expenses soared by 150% in the surveyed period, due to the necessity to meet obligations on the regulated market. The 137% surge in expenses under the ‘Amortization of Fixed Assets' item, to 21% of the total, reflects the re-evaluation of fixed assets in 2007. The payroll expenses jumped by 55%, to 13% of the total, as the company financed its executive incentive program, expanded its staff and indexed its wages. The management referred to the conspicuous rise in most of the expenses as due to extraordinary one-off payments, adding that the company's expenses will grow at a much slower pace this year.

RusHydro: profit margins

The company saw its profit margins widen due to the changes described above. However, given that it is impossible to show the external changes that occurred between 2006 and 2007 in the financial statement, we regard it as not very informative.

We are neutral about the company's financials and believe that the company's value will subsequently hinge on its management's ability to control operating expenses and capital investments and play a major role in forming the company's status in the power industry. We do not expect the financial statement to have a tangible effect on the company's stock valuations in the face of the massive sell-offs of shares given to former UES shareholders.

Our fair price for RusHydro (RTS: HYDR) is USD 0.114 per share, which corresponds to a BUY recommendation.