OREANDA-NEWS. August 24, 2010. A failure at the Federal Grid Company’s two 330 kV substations – Vostochnaya and Severnaya – located just outside St Petersburg caused a 40 minute blackout in the city, affecting 7 city districts. The failure at the substations is likely connected to the heavy storms that hit the region early last week. There are no details available regarding the extent of the damage caused by the blackout, reported the press-centre of OTKRITIE Financial Corporation.

View: Earlier last week the Energy Ministry was estimating the damage to the power sector of the storms in the Northwest of Russia at RUB1bn. We believe this damage chiefly concerns the grid companies – FGC and Holding MRSK – however the exact breakdown and extent of damage is currently unavailable. Following the 2005 blackout in Moscow, the share of repairs in total operating expenses of MOESK doubled from 7.5% to 15% in subsequent years. For 2010 we forecast RUB11bn repair budget for FGC (13% of opex) and RUB34bn repairs for Holding MRSK (7.5% of opex). Higher repair costs is the main risk to our valuation.

Valuation: FGC trades at an EV/RAB of 0.68x, Holding MRSK trades at 0.49x (using our assumption that the IRAB base will be cut by 15% vs. initial expectations), while on average EM peers trade at 1.2x.

Action: We view the news negatively for the stocks in the grid segment, particularly FGC. We still retain our view that Holding MRSK represents the best investment in the Russian grids and prefer it over FGC.