Research Notes

WGC-5’s recent IPO and upcoming IPOs by a number of other generating companies in Russia’s thermal energy segment are to spark investor interest in the industry. Average target prices of Russian energy companies topped the important psychological threshold of $300/kW of installed capacity in fall 2006 and WGC-5’s initial public offering showed that investors expect that the company’s value will be some $340 per kW of installed capacity, once its ongoing upgrade program is completed. It seems that smaller generating companies within TGCs are stealing investor attention as the latest auction to sell shares of Petersburg Generating Company showed that generating assets of TGC-1 are valued at $357 per kW of installed capacity, which is far beyond most upbeat expectations.

It is evident that the Russian generating companies are seeing new valuation benchmarks both in electric power and heat generation segments. This research note is focused on prospects of the following territorial generating companies: WGC-5, WGC-6, TGC-6 and TGC-13. In our opinion, all the essential prerequisites are in place for the market capitalization of Russian electric power generating assets to pick up and growth will be shaped in the long-run by Western portfolio and Russian strategic investors. The main factors which are likely to impact valuations of Russian energy companies are consistent implementation of all reform stages, compliance with corporate governance standards and improved operating efficiency among gencos.

According to the results of our DCF models, TGCs and gencos under their control hold the strongest investment appeal. Stakes in these companies are held by a number of regional strategic investors who are ready and willing to consolidate bigger stakes. In our opinion, assessing the market value of TGCs one should apply a premium to those of WGCs, since TGCs usually run additional non-core heat generation business and are typically located within a specific region which also adds to their market strength.

Out of all recommended entities, liquid shares are held by Krasnoyarsk Generatsia, WGC-6 and TGC-6, which we rate as Buy. We advise investors to turn their eye to these stocks in the first place. In our opinion, in 2006, as energy sector reform picks up traction, stocks of Russian energy companies will gain in value in early 2007 there will be some 10 or 12 new generating companies (WGCs and TGCs) trading on the stock market, which are likely to deserve close attention of investors.

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Simon Birg

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