OREANDA-NEWS. March 15, 2010. Two government meetings on the Russian utilities sector took place this week: the price cap on long-term power capacity market for 2011 was approved at RUB110,000/MW/month in the European price zone and at RUB120,000/MW/month in the Siberian price zone. We believe this cap concerns only prices for existing capacity and expect an official announcement soon, reported the press-centre of OTKRITIE Financial Corporation. 

The Capacity Delivery Agreements and the generation sector investment program were discussed. By the end of May the gencos should begin signing new CDAs, with finalized new long-term investment program figures expected by mid-2010.

View: Our estimate of 2011 tariffs for existing capacity imply a RUB139,000/MW/month average for the sector (see Table below), hence the announced price cap is 15% lower (on average), negatively affecting capacity sales estimates for the companies for next year (this accounts for 23% of the total revenues, on average). We believe that gencos most affected will be those that delayed implementation of their capex programs and therefore are not in a position to fully benefit from the high tariffs for new capacity that will be announced soon.

Valuation: Russian thermal gencos trade at an average EV/installed capacity of USD234/kW, reflecting a 77% discount to EM peers.

Action: We view the news negatively for the generation sector overall, and particularly for shares of OGK-3, TGKs -2, -4, -9, -10, and -11.