Russian Utilities – Gencos: Buoyant Generation

A Troika Dialogue note

With 2012 end-user electricity price growth approved by the government, regulatory uncertainty is partially addressed and the risks are more than priced in now. We account for measures recently proposed by the Economics Ministry to limit genco electricity price growth, cut our aggregate 2011E-18E EBITDA forecasts by 14-23% (less for TGK-7) and raise the WACCs, and still our new DCF-based valuations mostly suggest significant upside from current levels. TGK-1, OGK-1, Mosenergo and E.ON Russia offer the most upside at present. Russian genco stocks are down on average 40% YTD versus the MICEX Index's 20% drop. Meanwhile, the negative impact from regulatory change on certain valuations (e.g. top pick E.ON Russia) is limited.

The European Bank for Reconstruction and Development (EBRD) has bought 10 year maturity bonds worth 800 million roubles from Federal Grid Company (FGC) to demonstrate its commitment to the Russian power sector and in the development of the country’s domestic capital market. The 10 billion rouble issue is also the first 10 year tenure bond in Russia’s corporate history.

FGC owns and operates Russia’s high voltage transmission networks. The publicly traded company is majority owned by the Russian government and its shares are traded on Russia’s MICEX and RTS stock exchanges.