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State Keeps Control in UES Sell-Off

Unified Energy Systems has changed its breakup plan, inserting an interim phase of state control that analysts said could put off full privatization of the power sector for another five years.

"Our decision marks a very important balance, a compromise, taking into account our minority shareholders and our major shareholders," UES chief Anatoly Chubais said during a conference call Friday evening.

The new reform plan, which was approved Friday by the UES board of directors, amounts to an extremely complicated asset swap between the government and two UES subsidiaries. The change will allow the state to maintain its grip on the Federal Grid Company and the country's biggest producer of hydroelectricity, Hydro-OGK, even after UES ceases to exist in 2008.

Investors have broadly welcomed the change as clearing some of the final legal obstacles to the long-awaited reform of the electricity sector, and one that will help the government raise an estimated $118 billion required to overhaul the country's antiquated power system.

According to the original reform laws, passed in 2003, the Federal Grid Company and Hydro-OGK are strategic assets and must therefore be in the hands of the government after UES spins off all its subsidiaries.

But simply buying control of these companies would put too much strain on the federal budget. So large stakes in both companies will be transferred to the state in exchange for the state's stakes in 18 power generation companies, or gencos.

The state-held shares in these gencos will be placed into two new holdings, one dominated by the grid company, and the other by Hydro-OGK.

UES has not yet decided how it will split things up between the two.

Under the original reform plan, UES was to sell the gencos directly to investors.

Now the grid company and Hydro-OGK will take charge of these sales, which are intended to help them make money for their own development. The grid company alone needs $50 billion to fix outdated power lines.

To prevent mismanagement, UES will draw up documents "spelling out exactly what can and cannot be done with these shares," Chubais said.

But analysts criticized the plan Friday for its complexity, which they said might scare away investors, and more importantly, for not putting a time limit on this "interim" phase.

"The main risk is that [the two holding companies] will have very little stimulus to sell these generating assets," said Dmitry Tsaregorodtsev, senior analyst at FIM Financial Services. "It will make sense to withhold them until their market price gets much higher, and then to sell them bit by bit, instead of flooding the market all at once."

"It could take four or five years," he added.

UES spokeswoman Tatyana Melyayeva said it would take two or three years for these assets to be sold.

But until they are, 18 out of UES's 20 power producers will have a new state insider on their management board.

OGK-4, a genco that owns five power stations across Russia, welcomed the partnership.

"Even without the new plan, all of our projects depend on the approval of [the Federal Grid Company] because you can't install new capacity if you don't have a grid to run it through," OGK-4 spokeswoman Elmira Bobryakova said.

Neither Hydro-OGK nor the grid company will be able to dominate any of the gencos, because their stakes will be too small.

In each case, their stake in a genco will amount to roughly half of what UES now controls. The other half will go pro rata to UES's minority shareholders.

This means that the grid company or the Hydro-OGK will own at least 25 percent of each genco, but in no instance will it be a controlling stake of more than 50 percent.

OGK-6 will give over the most. UES owns 93.5 percent of this genco, which runs six power stations across Russia, and will therefore have to give almost 47 percent to either the federal grid company or the Hydro-OGK.

Sergei Karaulov, chief spokesman for OGK-6, said they had long-standing relations with the grid company in the technological sphere, but not in regard to finance.

He added that if there were some disagreement, the state-owned Systems Operator, which controls the dispatching of electricity from the power stations through the grid, could step in.

"Hypothetically, in case of anything, it would put us in our corners and calm us down," he said.

As for the new reform plan, Karaulov said his company would do what UES said. "We don't have much choice," he added.

The decision must still get shareholder approval, but UES has said any investors who disagree with the plan could simply trade their shares in for cash.

Local banks agreed that the new reform plan presented no danger for minority investors.

Also at Friday's conference, Chubais said UES shareholders could get their choice of UES spin-offs when stakes in these spin-offs are parceled out pro rata to the shareholders next year.

"I think it is in principle very possible for shareholders to get this choice, if they can come to an agreement among themselves," Chubais said. He added that no formal decision on this had been made, however.

(The Moscow Times 05.iii.07)

 
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