Research Notes

Power reform is altering the landscape of the industry, and UES will no longer be the same effective 2006-2007, since WGCs and TGCs will have been spun off from the company. UES shareholders will become shareholders in the unbundled companies. In this Desk Note we have performed what could be our final revaluation of this unique holding in its current structure, which has remained virtually unchanged for the last 13 years.

• At present UES is the world's largest company engaged in the generation, transmission and distribution of electric power, ensuring central control over these processes. The power monopoly has over a 70% share in the installed capacity of power stations and cumulative volume of energy produced in the country;

• As a result of the RF government's decision adopted in December, 2005, on the implementation of plans to unbundle 2-4 gencos from UES in 2006, it will no longer be possible to compare the power holding's financials with its previous results. For this reason, it is not feasible to use DCF methodology, while the forecasting could be skewed by an inordinate number of unknowns, unquantifiable statistical and other unwarranted assumptions.

• In our valuation model, we have estimated the fair price of UES as the cumulative value of each type of business of the power holding's utilities, such as electricity generation, transmission and distribution, on the basis of the specific company characteristics, as well as economic and financial information;

• We believe that horizontal integration based on types of activity, which is in progress, will encourage greater joint operational efficiency of integrated assets, and we expect to see a 30-40% premium assigned to their current market prices once the new power industry structure is solidified, due to lower restructuring risks. However, this premium depends on final power market parameters and the results of the power industry reform process.

Simon Birg

* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.