Research Notes

UES is one of the world's largest power utilities companies. In light of the ongoing industry reform process, the holding is no longer viewed as a single operational entity, bit as a holding company combining assets that will be spun off at a later time. In our opinion, UES shares hold strong upside potential and offer an excellent investment opportunity in the Russian energy sector.

• In 2006 investors took a fresh look at the companies operating in various segments of the Russian energy sector, i.e. thermal power generation, hydro generation, distribution grids, trunk grids, service and repair companies, energy marketing entities, etc. As a result, shares in bellwether UES, a holding company which controls enterprises from a number of segments in the energy sector, advanced last year as the stock market became increasingly upbeat about the prospects of the Russian electric power utility segment.

• The gist of UES' restructuring program can be recapped as follows: in 2008 the reform process will be over and legal entity RAO UES will be wound up and its assets will be split between the government and minority shareholders in proportion to their stakes. This asset distribution will play into the hands of minority shareholders.

• In our valuations, we reviewed 370 electric power companies and calculated the fair values of companies in the following eight groups: nuclear power, hydro generation, generating companies which are part of WGCs, thermal power generating companies which are part of TGCs, distribution grids, energy marketing companies, transport grid companies and other companies. The aggregate fair value of UES reflects the sum of its stakes in subsidiaries.

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Simon Birg

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