Research Notes

MosEnergo is the second-largest electric power producer by installed capacity within UES and the largest heat producer in the world. Furthermore, MosEnergo is currently Russia's largest TGC which accounts for 5% of installed capacity of the entire Russian energy sector, 6% of the heat generating segment and 7% of the electric power segment.

Gazprom which currently holds 33% in MosEnergo will wrap up the acquisition of the company's additional issue of 11.5 bln shares for at least $2.1 bln by April 2007. By that time the gas monopoly will own 52.4% in MosEnergo, UES 36.3% and the Moscow government 5.4%. We believe that, MosEnergo's upcoming additional share issue and an ambitious energy strategy of its largest shareholder Gazprom will give a fresh impetus to the company's development in the coming years.

• MosEnergo could have raised more proceeds, in case a greater number of investors had been authorized to take part in its additional share issue, and a greater demand could have made it possible for the company to float its shares at higher prices. In our opinion, it is in Gazprom's interests to spin the idea that the stock market is upbeat about Gazprom's intention to buy out the entire additional share issue and become a controlling shareholder. Consequently, we expect that MosEnergo's stock will be moving north.

• Furthermore, we believe that the investor interest in MosEnergo, Gazprom's cornerstone asset, will grow in the long-run as the gas monopoly is planning to step up its presence in the global energy market and will kick off a number of investment projects in 2007 aimed at upgrading electric power stations in Russia and abroad.

According to our estimates on MosEnergo, including those using the DCF method, the company is fundamentally underestimated by the stock market. Moreover, we are increasingly inclined to believe that MosEnergo's business expansion will go on much more rapidly than in other Russian energy companies, since Gazprom's ambitions in the energy sector, its powerful lobbying leverage and ample opportunities in the Moscow region market, etc. lay a strong framework for that.

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Simon Birg

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