Research Notes

At present, utility industry reform has reached an important investment phase: new gencos have launched procedures of equity financing, the primary source of investment resources for upgrading obsolete fixed assets at thermal gencos. WGC-5 has emerged as the forerunner in the cash-raising process. On October 31, 2006 the company will close its IPO book and determine the stock placement price.

The bookbuilding range set by the company is $0.076 to $0.095 per share. By the final bell on October 24 the market price of the utility concern's shares was $0.088, which represents the mid-range of the announced IPO price. According to our estimates, the fair price of the company's shares is $0.076, which is the lower end of the bookbuilding range.

In our opinion, the placement of additionally issued stocks at the upper end of the bookbuilding range is of no interest either to strategic investors (as after flotation UES' interest will be 75%) or portfolio investors, since there is a host of no less alluring investment vehicles in the Russian power industry. However, we believe that WGC-5 will manage to float all its shares scheduled for placement at the lower end of the bookbuilding range, thereby kick-starting investments in the Russian energy sector.

It's noteworthy that despite the rosy prospects of WGC-5, there are quite a lot of more undervalued entities on the Russian energy market.Even now stocks of more than 10 newly established gencos (WGCs and TGCs) trade on Russian exchanges. Six other energy concerns intend to attract investments via IPOs by the end of 2007. The appearance of new investment instruments, in our view, will reduce the premium in WGC-5's stock valuation against other Russian gencos.

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Simon Birg

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