On July 21 the Federal Grid Company (Russian acronym: FSK; RTS: FEES) held a meeting between its management and analysts. Three issues were discussed at the meeting: the company's investment program, its corporate governance practices and the prospects for the regulation of electricity tariffs under an RAB method. The latter issue is of most interest from the standpoint of the company's prospects.
There remains uncertainty over the parameters for the regulation of FSK tariffs under an RAB methodology. A number of issues yet to be resolved may produce a tangible impact on the company's value. To begin with, the issue of including the state's share in FSK capital in a regulatory asset base remains unresolved. Non-inclusion of these funds would negatively affect the amount of the tariff, which could impair the company's cash flows. Secondly, uncertainly remains over such tariff regulation parameters as payback period and the rate of return on invested capital. Finally, the company is in the dark about the amount of its start-up capital. More exact information on these issues will be released in March 2009 at the earliest, while the approval of these parameters by regulatory bodies may take place in May of next year at best. This means that the market will be left without benchmarks on the most important constituents of the company's value.
As a result, the uncertainty surrounding the company's tariffs in the mid and long-terms makes it difficult to estimate the company's fair value, which may negatively affect its stock valuations and increase their volatility until key decision on the company's activities are adopted.
We currently have no official recommendation on Federal Grid Company shares (RTS: FEES).
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