Research Notes
FGC: new horizons
| 26.11.09 |
Tariffs may triple over 3 years after transition to RAB. Federal Grid Company management has suggested that the company switch to the RAB-based tariff regime and adopt new tariff regulation parameters in 2010. If the Federal Tariff Service approves management’s suggestions, which is quite likely to happen, rates for FGC electricity transmission services could rise by as much as 53% in 2010, 45% in 2011 and 40% in 2012. Therefore, FGC tariffs could triple in the first regulatory period (2010-2012).
Investment program for 2010-2012 may be expanded. The August 2009 accident at RusHydro’s Sayano-Shushenskaya HPP revealed the dilapidated state of Russian grid infrastructure. In order to improve the reliability of electricity transmission, FGC management has suggested expanding the company’s capex program. The Federal Grid Company’s 2010-2012 investment program could be increased by RUB 64 billion, from RUB 455 billion to RUB 519 billion. If the company adopts RAB, the expansion of the investment program should have just a neutral impact on the company’s fair value.
Top-management reshuffle. In late October 2009, the post of FGC CEO was taken up by ex-governor of Taymyr Autonomous District, Oleg Budargin. Before his new appointment, Budargin had never worked at any utility companies; however, in our view, he has powerful administrative leverage potential. In addition, some key seats on the company board were also occupied by other new managers. We expect that the arrival of the new management team will help the FGC reinforce its lobbying positions.
New target price. We have updated our target price for the FGC mainly to account for the new tariff regulation parameters after the company’s potential transition to RAB, as well as more optimistic macroeconomic forecasts and the adjusted size of the company’s capex program.
We raise our DCF-based target for the FGC by 43% and reiterate our BUY rating for the security. The target price for the FGC on 31 December 2010 is USD 0.0193 per share.* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.
Sectors: Power Utilities, Distribution GridsCompany: Federal Grid Company of Unified Energy System JSC