Research Notes

Kuzbassenergo: strong majority shareholder brings fuel synergy

19.05.09

We begin our coverage of OJSC ‘Kuzbassenergo’, a thermal genco with low leverage and a strong majority shareholder that is keen to expand its energy assets and enhance their cost-effectiveness. Demand for thermal power, one of the company’s main sources of revenue, is steadier than for electricity and our estimates show that Kuzbassenergo shares have strong investment appeal amid the crisis.

Fuel costs: Fuel costs constitute roughly half the total production costs in the thermal power generation segment. Siberian Coal Energy Company (Russian acronym: SUEK), the genco’s majority shareholder and its prime coal supplier, may achieve significant synergy by optimizing its coal prices.
Low leverage: The genco’s D/E ratio stood at 13% at the end of 2008. Such low leverage enables Kuzbassenergo to secure sizable credit resources for its investment program.
Adjustment of the investment program: Given that the preconditions for the genco’s investment program have failed to stand the test of time, we expect a downward revision of the program in the mid term. In the current economic climate, the rejection of commercially unviable investment projects may well benefit the company’s fundamental value.
Transfer pricing: This poses one of the prime risks to the company’s fundamental value: it is possible that SUEK, as a majority shareholder, could assume the role of a profit generation center by charging Kuzbassenergo overstated prices for coal.
Potential revenue losses: In 2007 and 2008, Kuzbassenergo lost over RUB 2.0 billion in potential revenue as a result of the current tariff regulation system. We expect electricity market deregulation to go ahead, as earlier planned, meaning that the risk of further losses should decrease.

The company’s fair price under a DCF method is USD 0.0059 per common share as of year-end 2009. We assign Kuzbassenergo shares a BUY rating.

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Sectors: Power Utilities, Heat Generation
Company: Kuzbassenergo

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