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Gazprom Secures 2 Power Producers

At Friday's UES board meeting, it began to seem almost axiomatic: What Gazprom wants, Gazprom gets.

The prize Gazprom had set its eyes on this time was control of two of the country's largest electricity generating companies, and after putting up a dogged fight, Unified Energy System could not resist the pressure.

The UES board voted to give Gazprom the exclusive right to swap its stake in state-owned Hydro-OGK, Europe's largest producer of hydroelectricity, for control of OGK-2 and OGK-6, which jointly produce more than 8 percent of the country's non-nuclear electricity.

Once the swap is complete, Gazprom will own 52 percent of OGK-6 and 55 percent of OGK-2, UES chief executive Anatoly Chubais said. After both generating companies hold share sales this year, Gazprom's stakes will be diluted to about 42 percent, but analysts said it would easily regain control by buying up shares in the sales.

"As you know, we had a very long and difficult discussion on this issue, but we have finally concluded it, and now the matter is fully clear," Chubais said during a conference call Friday evening.

The picture that has emerged flies in the face of Chubais' plan for liberalizing the power sector through carefully managed sell-offs. UES has been trying for the last five years to welcome a range of foreign and local investors that would compete to make the sector more efficient and help provide $120 billion in investments needed to revamp it.

Instead, Gazprom has steadily moved toward its goal of controlling the country's entire energy market. With the largest single holding of electricity generating assets in its hands, it will be very well placed to influence prices, investment and other strategic issues.

Alexander Branis, a member of the UES strategy and reform committee, said in an e-mailed response to questions that he hoped there would still be room for Western investors in the power sector. "We don't like acquisitions by Gazprom, as Gazprom is a very inefficient and corrupt company," Branis said in his response.

UES has so far only been able to stall Gazprom's takeovers, not stop them. The gas giant already controls Mosenergo, the country's largest fossil-fuel generating company and the provider of power to the capital, along with various smaller generation and distribution stakes worth more than $10 billion.

Gazprom also struck a deal in February to pool its power assets with the Siberian Coal and Energy Company -- which owns significant stakes in 27 energy companies and a 2 percent stake in UES -- to form a $12 billion electricity holding, the country's largest by far.

Ahead of the UES board meeting, Renaissance Capital on Wednesday attacked the proposed stake swaps, saying they were "not market-friendly," and "operate to the disadvantage of other UES minority shareholders."

"The message possibly to be gleaned from Friday's UES board meeting is not whether power sector reform is beginning to lose its market credentials ... but how seriously," the bank said in a note to investors.

However serious the outcome for minority stakeholders, it could have been worse. Chubais and other UES officials succeeded in preventing Gazprom from swapping its shares in the Federal Grid Company for generation assets, which would have brought it even closer to dominating the entire power sector.

The previous two board meetings ended in a stalemate over the question of stake swaps.

"To put it off further would have jeopardized the time frame of the reforms," said Yelena Yushkova, an electricity analyst at Finam brokerage. The reforms are to be concluded by next July, when UES will cease to exist after selling off all its assets.

"I have to say we expected this outcome in favor of Gazprom," Yushkova said. "Because of its influence, it probably couldn't have turned out any other way."

OGK-2 and OGK-6 will be the biggest losers from the decision to allow the swaps, Yushkova added, as the shares being given to Gazprom would otherwise have been sold to investors, potentially earning the companies billions of dollars.

If the swaps had been prevented "the price of the upcoming share emissions would have been significantly higher," she said. "Now they will not get this money. ... The market's interest in these companies will go down after such a decision."

But OGK-6 spokesman Dmitry Filatov said the generating company should still make enough to carry out its construction plans.

"If that's what [UES] decided, that's what we will do," Filatov said Saturday. "Of course you won't hear any criticism of Gazprom from us. Who would want to criticize their future master?"

Gazprom spokesman Denis Ignatyev declined to comment on the stake swaps Saturday.

Chubais has quadrupled his personal stake in UES to 0.0082 percent of the ordinary shares, according to data posted Friday on E-disclosure.ru. At current prices, the stake is worth $4.55 million.

The board also decided to penalize the owners of gencos that fail to meet their investment commitments in terms of new capacity. Other gencos will have to provide the capacity, and the cost will be charged to companies that failed to do so, board member Yury Udaltsov said during the conference call.

(The Moscow Times 30.vii.07)

 
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